FORESTA GROUP HOLDING LIMITED GORDON CAPITAL PTY LTD Ph: (03) 9507 2651 http://www.gordoncapital.com.au/www.gordoncapital.com.au
LEAF RESOURCES LIMITED (LER)Leading US developer of biofuels technology to evaluate the GlycellTM process
DIRECTORS
Dr Jay Hetzel, Chairman
Ken Richards, Managing Director Charles Wilson, Non-Executive Director Matt Morgan, Non-Executive Director
ASX Code: LER
Current Price $0.09.5
52 Week Range: $0.04 - $0.095
Market Capitalisation: $8.7 million
Economic Value: $7.9 million
Shares on Issue: 88.7 million
Unlisted Options: 4.8 million
$'000 | 2012-13 (A) | 2013-14 (E) |
Net Profit | (718) | (1,528) |
Net Cash | 475 | 478 |
Total Assets | 893 | 623 |
Shareholders Equity | 676 | 81 |
October 2014
KEY POINTSZeaChem, a developer of advanced biofuels technology is to evaluate Leaf Resources' GlycellTM biomass pre-treatment process.
Successful evaluation likely to lead to licensing opportunities.
INVESTMENT PROPOSITION
Production testing and independent modelling of Leaf Resources' new biomass pre-treatment process point to a substantial reduction in the cost of extracting cellulose and the potential to transform the economics of biomass as a green alternative to fossil fuels as an energy and industrial feedstock. Accordingly, Leaf Resources is gaining the attention of key industry players including processors, manufacturers, engineers and media.
The market valuation is yet to reflect the validation of the company's technology let alone potential success of its commercialisation strategies. This will change as the business is further de-risked over the next year.
Recent M&A and funding transactions in Europe and the USA point to rising valuations for companies seen
to be adding real value to the biomass/cellulose/sugars production cycle and Leaf Resources is expected to benefit from this trend as key development/commercialisation milestones are met
over the next 12 to 18 months.
Gordon Capital Pty Ltd Page 1 of 6
Leaf Resources has signed a Collaboration Agreement with ZeaChem Inc. of Lakewood, Colorado covering the evaluation by ZeaChem and Leaf Resources of the Leaf Glycell TM process for the production of fermentable sugars at ZeaChem's demonstration plant at Boardman, Oregon. The trials will use Poplar as a feedstock.
ANALYSIS
This collaboration agreement is a major step forward for Leaf Resources in the commercialisation of its Glycell TM process. A successful evaluation will validate the process at commercial scale and provide a clear pathway for prospective licensors who may require plant modifications.
We understand that an initial test at Andrtiz' Springfield, Ohio facility will be used to provide a clear understanding of the modifications that ZeaChem will require to its demonstration plant, whilst the subsequent trial at ZeaChem's plant will handle about four times the throughput of Springfield. Inasmuch as the ZeaChem's Boardman plant utilizes Andritz equipment and is very similar in configuration to the Andritz trial facility at Springfield, Ohio where Leaf Resources has been running development trials and has successfully tested the process at 5 tonnes per day, we would think that there is little reason to doubt that the Glycell TM process will perform to expectations. The use of poplar should not pose any issues as the process has already been tested on a variety of timbers, including eucalyptus which is a hardwood not dissimilar to Poplar. We expect that a successful evaluation will be generate significant licencing opportunities.
ZeaChem is commercialising its own technology and has established a 250,000 gallons pa biofuels demonstration plant at Boardman, Oregon and is currently seeking funding to build a full scale 25 million plus gallons pa plant at the same location. The company has been rated in the 50 Hottest Companies in Bioenergy: 2013/14, #30 and won the Biofuels Digest 2012 Best Project (demonstration) Award.
According to Biofuels Digest "ZeaChem incorporates biochemical and thermochemical processes to deliver the highest theoretical yield of any biorefinery technology, a 40% advantage compared to other processes. Naturally occurring bacteria, acetogen, do not produce CO2 during fermentation. This significant yield advantage leads to competitive economics. ZeaChem uses proven technology and process components integrated in a new and novel way, which significantly reduces scale-up risk."
ZeaChem apparently see the Glycell TM process as an opportunity to markedly extend its competitive advantage over existing technologies. The company's CEO said "We are impressed with the results that Leaf Resources has achieved in pretreatment and saccharification, which, if replicated at Boardman, would be of significant economic benefit to ZeaChem's proposed operations. Based on Leaf's data, its Glycell TM process has the potential to deliver 30-40% more sugars in half the time at standard enzyme loadings, which would translate into significant efficiencies with limited effect on operations".
Accordingly, ZeaChem would seem to be an ideal partner for Leaf Energy and potentially a significant source of licensing agreements in the medium to long term.
Whilst ZeaChem is still to secure funding for its full scale plant, a successful evaluation will nonetheless represent a further step in de-risking the Glycell TM process and send powerful messages to other companies that are reviewing and evaluating the technology.
Gordon Capital Pty Ltd Page 2 of 6
Leaf Resources owns the IP (for which it has two provisional patents) for a new pre-treatment process to extract cellulose from biomass that has the potential to reshape the economics of using large scale renewable biomass as a feedstock into the chemicals, plastics and downstream industries. Production tests have validated the process and independent modelling points to a markedly lower cost of processing biomass with the prospect of unblocking the major barrier to widespread use of cellulose as an alternative for fossil fuels in the manufacturing chain.
Biomass is biological material derived from living, or recently living organisms and most often refers to plants or plant-based materials. Typical sources of biomass are wood, agricultural crops, forest and agricultural residues, as well as urban organic waste. Whilst biomass can be combusted to generate heat, it is typically processed to release cellulose as a feedstock into the manufacturing chain.
A complex pre-treatment process is required to break down the plant walls by destroying the tight lignin wrapping enclosing the biomass. Once this is achieved, sugars are extracted using enzymes. Cellulose maybe directly used as a feedstock into a wide range of agricultural, pharmaceutical, food and other industrial products or more commonly further processed and converted into (cellulosic) sugars as another feedstock route to an even wider range of products. Pre-treatment processes typically in use are either steam explosion or chemical based, which usually require substantial capital expenditure, large amounts of energy and or toxic chemicals.
Pilot production tests of Leaf Resources's GlycellTM process point to substantially lower capital and operating costs, thereby breaking through cost barriers that have inhibited the development of bio- industries. The process uses established engineering technology, but much less energy and glycerol, a low cost, waste reagent, as a catalyst.
Leaf Resources has been undertaking production tests of the GlycellTM process at the Andritz (a leading global engineering group servicing the pulp and paper industries) facility in the US and from the results of that testing has concluded that when compared to other pre-treatment processes, such as acid hydrolysis and/or steam explosion it (GlycellTM):
produces more cellulose with less degradation products; converts more cellulose to sugars; does it considerably quicker, and; produces clean sugars faster.
Importantly testing has been undertaken with a variety of biomass feedstocks and the process has been shown to be effective with both woody and non-woody feedstocks. The implications are that a wider range of biomass can be economically processed for cellulose including low grade plantation waste. Moreover, it opens the way for the use of low value marginal agricultural land to be used for growing biomass, specifically for industrial use.
A scoping study undertaken for the company in mid-2014 estimated the base plant and infrastructure capital cost at A$18.4m when co-located at a site that can provide the ability to draw on utilities, including steam. The total capital cost including construction, engineering, commissioning and other costs was estimated at $32.8 million. Such a plant would have a capacity to produce 20 dry tonnes per hour of cellulose. Plants using other processes with a similar capital costs have a production rate of only 1 ton per day. This scoping study estimated the base case IRR for the process at 42%.
Gordon Capital Pty Ltd Page 18 of 6
The capital cost is highly competitive due to the use of "off the shelf" equipment. Moreover, the equipment can be retrofitted to existing engineering infrastructure which will make the GlycellTM process viable for existing biomass processors.
A key assumption of the study was that the glycerol used as the catalyst would be a waste product. However, the glycerol can be recycled (at additional capital cost) and potentially converted to other saleable products which will further reduce the cost of producing cellulose and significantly increase the IRR.
The GycellTM process has been validated with production runs of 5 dry tonnes per day and current work is now focussed on fine tuning the process to maximise the economics, particularly the balance between capital cost and processing speed. The process has gained industry attention and management is now pursuing early stage discussions with a range of industry leading downstream manufacturers regarding potential scenarios for the commercialisation of the process.
The next steps and milestones for the company are:
Scale up pre-production volumes
Identify demonstration plant location and biomass supply
Engage downstream partners
Engage companies needing cellulosic sugars and companies needing renewable chemicals
These steps should be concluded by the middle of calendar 2015.
The pathway to commercialisation will most likely be through two streams. Having a clear competitive advantage in producing cellulose, Leaf Resources is likely to seek to maintain interests in the production value chain where cellulose is to be sold directly as a feedstock. This may involve partnerships, co- investment or other joint relationships. Alternatively, the technology may be licenced to third parties in the sugars stream, seeking to add value to their own technologies. Leaf Resources has already attracted interest from major agri-chemical, bio-chemical, bio-energy and bio-engineering companies and early discussions with some of these groups will ensure that multiple options for moving forward will emerge.
We expect first commercial partnerships to occur during CY 2015.
Cellulose has long being hailed as the industrial material of the 21st century and as the replacement for oil
as the primary source of energy to drive economic growth. The process of converting biomass into cellulose has long been understood. Food grade sugar production, pulp for paper manufacturing and ethanol fuel production are well established examples of the conversion of biomass.
Rising wealth and increasing consumer and industrial demand in China, India and elsewhere coupled with the limited ability of the oil industry to meet this demand, as well as fears of energy security in North America and Europe have driven the search for alternative sources of energy. Concerns about climate change have also contributed to the pressure for a "green" renewable energy source for industrial use.
Whilst oil will remain the primary industrial feedstock for a long time, plateauing (if not falling) production and rising marginal costs of production will create an widening gap in the supply chain which is capable of being filled by biomass.
Gordon Capital Pty Ltd Page 19 of 6
Whilst the potential of biomass and more specifically cellulose as a source of renewable feedstock into the industrial supply chain has been well understood there have been a number of major barriers to progress. Firstly, the sharp increase in demand for ethanol in the early years of the new century, typically underpinned by government subsidies and mandates, highlighted the tension between the food chain and energy chain. Clearly there are global risks in diverting land and raw materials used in the food chain to energy production. Secondly, cellulose production costs have generally been too high to replace oil as the primary feedstock in industrial processing.
SAPPI, one of the world's leading producers of pulp and paper estimated (2011) global production capacity of chemical cellulose at only 5.8 million tonnes, of which about half was used by the textile industry. By way of comparison, the capacity of the market pulp industry exceeded 55 million tonnes. SAPPI points out that due to the persistent decline in area sown to cotton and the forecast 22% reduction in sown area by 2030 an expanding gap in raw material source is emerging as demand for textiles continues to rise. Industry is already moving to fill this gap with additional chemical cellulose production capacity.
Morgan Stanley in a 2012 report on the Bioplastics industry reckoned that bio-based products represented less than 0.5% of the plastics market. But with an increase in penetration to around 5% share by 2020, representing annual sales growth of about 40%, the risks were on the upside.
Further, various groups, including Lenzing, Markets and Markets, Lux Research, European Forum for Industrial Biotechnology and others, have forecast substantial increases in demand and supply of cellulose derivatives, bioplastics and green chemicals over the next few years.
Academic and industry research into all aspects of the biomass/cellulose industrial chain is at high levels. However, the pre-treatment process to break down the biomass into cellulose is widely seen as a barrier to the development of the industry. High capital costs, high energy usage and toxic chemicals generally mean that economic viability is dependent on high grade biomass and high value downstream products.
Leaf Resources' GlycellTM process has the potential to markedly lower pre-treatment costs and fundamentally change in the economics of biomass opening the way to major expansion in this renewable
industry.
Gordon Capital Pty Ltd Page 20 of 6
All investment decisions are subject to risks. Past performance should not be taken as an indication of future performance. Any 'forward looking statements' contained in this Report are based on current expectations about future events. Words such as "anticipate", "believe", "expect", "project", "forecast", "estimate", "likely", "intend", "should", "could", "may", "target", "plan" may identify forward looking statements. Such forward looking statements are based on views held at the date of publication of this Report and are not guarantees as to
future events. Forward looking statements are subject to risks, uncertainties and other factors beyond the control of Gordon or Pearce. Therefore, actual results may differ from those referred to in such statements.
Main St, Greensborough, VIC 3088.
Please note that Gordon Capital has been retained by Leaf Resources Limited to provide this report for a fixed fee, which includes shares in Leaf Resources. Gordon Capital does not provide specific investment recommendations and does not receive any additional benefit for the provision of this report. Gordon Capital aims to provide a balanced and objective analysis in this report.
Gordon Capital Pty Ltd Page 6 of 6
|
distributed by
|
