Monday, 2 October 2017



Some decent background reading from a slightly out of date broker note…

The current business model consists of 2 divisions – Advanced Biomass Solutions (ABS) which consists of the CoalSwitch product and Timberlands which aims at becoming a Timberland Management Company targeting Newfoundland
For the purposes of my investment case I will focus on the ABS arm as it is easier to value however the Timberlands is true blue sky potential and very exciting!

Advanced Biomass Solutions ABS

This is the main reason I’m investing. What they have developed is the only “drop-in” direct replacement for coal in coal fired power stations. Coal is ground to a fine powder and then blasted into the furnace of these power stations. All other biomass pellets cannot be ground to a fine enough powder to enable this to be done as they are too fibrous. For all other pellets to be used in an existing coal fired power station, a very expensive retrofit must be carried out. You may be familiar with the DRAX power station in the UK providing 4% of our power. They have spent upwards of £100mill on the retrofit. The DRAX pellet journey can be read here

Some more reading on CoalSwitch

The business model needs various advantages to be in place for the CoalSwitch product to be used…
1      Easily made and sourced
2      Easily transported to end use
3      Can be ground and blasted by the same machinery already existing
4      Produces a high calorific value like coal and greater than other pellets.
5      A large market need for biomass power

Lets look at each of them in turn.

1.     Easily made and sourced
Part of the process that makes these pellets explodes the wood/plant matter, hence being less fibrous. This part of the process also has the added advantage of working on just about any old off cut of wood or plant matter. They can utilise previously discarded wood offcuts from forestry and palm oil husks. This means they have a plentiful supply of extremely low cost source material compared to competitors. They are currently planning production plants of 20-30 tonnes/hour with a yearly production of 1.5mill tonnes from the initial 8 plants in asia.

2.     Easily transported to end use
CoalSwitch pellets are significantly denser than all other competitors meaning shipping and transport costs are reduced. They are also hydrophobic, meaning they don’t pick up moisture that adds to transport costs and then needs to be dried out before they can be used.

3.     Can be ground and blasted by existing machinery
As previously explained, a hugely expensive retrofit is usually needed to use all the other pellets as they can’t be ground to a fine enough pellet. CoalSwitch avoids this saving many many £millions. What it also enables is the pellets to be mixed with the coal at various % mixes. All countries want to reduce their carbon emissions. 20% of the coal for example in a large power station can be replaced with CoalSwitch, dramatically reducing the emissions and bringing them under the countries standard. The USA is very keen on this mixed approach. Again, no other product can be mixed like this.

4.     Produces a high calorific value like coal and greater than other pellets.
Coal contains 25Gj/tonne, CoalSwitch 23, Torrefied 22, black 19.5, white pellets 17.5

5.     A large market need for biomass.
Well there is! Have a read of that broker note at the top for the specifics. Single power plants that want to change to pellets from coal need 1.5mill tonnes a year. The forecast need for biomass pellets is forecast to grow from 22.5mill tonnes in 2017 to 43.5mill tonnes in 2025. These estimates are likely to be conservative. The nuclear disaster in Japan for instance has greatly increased to likely demand for biomass power in Asia. Europe is the largest demand currently due to clear air policies but increasing legislation in the USA and Canada is again going to drastically increase biomass demand. - On the potential of Coalswitch

Economics of CoalSwitch

There are a couple of similar revenue estimations that can be made for the CoalSwitch product. In this RNS
the company state that the pilot production plant will produce 35,000 tonnes a year and that will create $6.3mill in revenues. This equates to $180/tonne.
In the broker report at the top, they suggest a sale price of $160/tonne. To be conservative I will use this lower value.

The company announced that the initial 8 plants in Asia will produce 1.5mill tonnes of product = $240mill in revenues.

The exact details of the JV with Lumino Capital aren’t known but I assume there will be a 50% split (again as was suggested in the broker note). = $120mill

Again to use the broker note calculations they come out with an end Net profit post tax of 16-20%. Using the lower 16% figure gives us a profit after tax of $19.2mill a year on these initial 8 power plants.

On a PE of 12 = an MCap of $230.4mll. x10 from the current MCap

Brian Evans-Jones CFO of Active Energy Group #AEG & CEO of Advance Biomass Solutions

Future growth

The company stress these are just the initial deals with more plants planned in Asia, Europe and North America. They have had a large amount of interest from across the globe in the CoalSwitch tech. Rocky Mountain Power (a Buffett Utility in the USA) is about to start trials mixing CoalSwitch with coal

Every 1.5mill tonnes of production they achieve is a x10 to the current MCap and if they continue to do these deals via debt then there won’t be any undue shareholder dilution.

My 5-year forecast

If they have the initial 8 plants up and running and similar in Europe and North America then I would be looking at a post-tax profit of $60mill a year, an MCap of $700mill+ and an SP of 60p+

Additional reading
Enviva Biomass are a $700mill MCap USA Biomass wood pellet company. Have a look at their presentation for more market size info. Also you can see how CoalSwitch and easily eat into their and everyone elses business.


As previously stated, I’m investing primarily for the ABS/CoalSwitch but that’s not to say the Timberlands part of the business is crap. Its in fact, potentially brilliant. I first invested in AEG in 2014/2015 when they were going to commercialise 108,000 hectares of Native American owned forestry for $300mill That created a nice big spike and was my first intraday bagger! That deal has stalled for various political reasons.

Their latest forestry venture is to manage 1,211,000 hectares of forest in Newfoundland and Labrador. It is a Crown timber licence and proposed 20-year forestry management agreement (the "Agreement") to harvest and utilise up to 140,000 solid cubic metres of wood annually. CEO tells us about the deal

Having worked closely with the Canadian government they have now submitted the final application for the Crown Timber License
Michael Rowan, Active Energy Non-Executive Chairman said, "This marks the next milestone for the development of commercial activities for TIL in Newfoundland.  TIL and Active Energy are extremely excited about the prospect of revitalising the forestry activities on the Northern Peninsular, facilitating new investment into the Province and continuing to grow positive working relationships between the Province, its relevant ministries and TIL for the benefit of all. I look forward to providing shareholders with further updates regarding the applications for the CTL and the FMAs in due course."

If that deal comes off with x10 the hectares of forest you can imagine the value. They would instantly become one of the top 10 Forestry Management Companies in the world. The rest are MCaped in the $hundreds of millions.


1) Crown Timber license - probably worth a few hundred million!!
2) More Coalswitch plants in Europe and North America with funding in place
3) Pilot plant constructed and shipped to Utah to start production
4) Start of trial with Rocky Mountain Power (Buffet company)

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