ACTIVE ENERGY
Some decent background reading from a slightly out of date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 http://www.draxbiomass.com/plant-port-journey-compressed-wood-pellet-2/
Some more reading on CoalSwitch
http://www.modernpowersystems.com/features/featurecoalswitch-is-it-the-holy-grail-5749037/
Some more reading on CoalSwitch
http://www.modernpowersystems.com/features/featurecoalswitch-is-it-the-holy-grail-5749037/
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.
https://www.youtube.com/watch?v=kyfcaauUR_Y - On the potential of Coalswitch
https://www.youtube.com/watch?v=kyfcaauUR_Y - 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 http://www.active-energy.com/sites/default/files/files/CoalSwitch%20Update%2028.11.16%20Final%20CLEAN.pdf
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.
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 https://polaris.brighterir.com/public/active_energy_group/news/rns/story/xo6709x
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 https://audioboom.com/posts/6322350-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 http://www.active-energy.com/sites/default/files/files/CoalSwitch%20Update%2028.11.16%20Final%20CLEAN.pdf
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
http://ir.envivabiomass.com/sites/envivabiomass.investorhq.businesswire.com/files/doc_library/file/Enviva_Investor_Presentation_Aug__2017vFinal.pdf
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.
Timberlands
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 http://www.active-energy.com/sites/default/files/files/CoalSwitch%20Update%2028.11.16%20Final%20CLEAN.pdf.
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.
https://polaris.brighterir.com/public/active_energy_group/news/rns/story/xz1e9ow
https://www.youtube.com/watch?v=yleciuDjgwU 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 http://www.lse.co.uk/share-regulatory-news.asp?shareprice=AEG&ArticleCode=pi1rykq3&ArticleHeadline=Final_Application_to_Crown_Province_Newfoundland
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."
https://www.youtube.com/watch?v=yleciuDjgwU 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 http://www.lse.co.uk/share-regulatory-news.asp?shareprice=AEG&ArticleCode=pi1rykq3&ArticleHeadline=Final_Application_to_Crown_Province_Newfoundland
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.
UPCOMING NEWSFLOW
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)
