Algae.tec abid report - 06 sep11

Due Diligence and Valuation Report
Arrowhead Code: 10-01-03
Coverage initiated: 23 March 2011
This document: 06-09-2011 Company: Algae.Tec Limited
Fair share value bracket: AU$1.51 to AU$ 2.15i
Ticker: ASX:AEB, OTCBB:ALGXY
Share price on date: AU$0.33ii
Headquarters: Perth, Australia
Analyst Team
Thomas Renaud Rashmi Shah Executive Chairman: Mr. Roger Sydney Stroud
thomas.renaud@arrowheadbid.com Website: www.algaetec.com.au
+1 (212) 619 6889

Algae.Tec tapped into international capital
Market Data markets with a public offer and listed on the
52-Week Range: AU$0.17 to AU$0.67iii Australian Stock Exchange and Frankfurt Stock
Average Daily Volume: 32,496iv Exchange. On 28thApril 2011, the company’s
Market Cap. on date: AU$81.81MM American Depositary Receipts (ADR) commenced
trading on the USA OTC market under the ticker
Financial Forecast Data (in AU$) ALGXY.
‘12E ‘13E ‘14E ‘15E 16E ‘17E ‘18E
Algae.Tec has developed the McConchie-Stroud
High profit/
(loss) MM
(6.9) 27.2 58.6 59.2 60.3 61.6 63.0 System which cultivates and economically
High EPS harvests high yield algae. The system is scalable,
(2.77) 10.99 23.63 23.87 24.33 24.86 25.39
AU$ has minimal land footprint and water usage. The
Low profit/
(6.9) 17.9 39.0 39.4 40.2 41.1 42.1
technology provides competitive advantages in
(loss) MM terms of low capital and operating costs, minimal
Low EPS
(2.77) 7.21 15.73 15.89 16.22 16.59 16.97 requirement of land, low water evaporation and
AU$
better recycling of water amongst other specifics
Fiscal Year (FY) which make it commercially viable.

1stJuly – 30thJune The global market for algae is poised for
explosive growth in the next 10 years, demand is
Summary expected to reach 61MM gallons/year of bio-fuel
Algae.Tec Limited is involved in the production of and a market value of AU$1.3B by 2020
algae to manufacture sustainable fuels such as representing a CAGR of 72%, roughly on par with
biodiesel and green jet fuel. Management has early development in the biodiesel industry.
core competencies in biofuel technologies, energy Globally, the United States (US) is poised to ramp
markets, project commercialization and business up production the earliest among world markets
management. The company has successfully with 50% of all algae activity. The European
demonstrated the algae oil and biomass yield in Union, accounting for about 30% of algae activity,
the experimental stages. The company is now will be limited initially by the industry’s focus on
building a demonstration facility with Malindra to university research, and later by insufficient
prove its commercial viability, which is expected access to water, land, and nutrient sources. It is
to be completed in Q1-2012. believed that the US and Europe cannot grow
enough corn, soy, or rapeseed to meet their bio-
Algae.Tec is in the process of establishing fuel targets. Latin America and Asia Pacific, which
strategic partnerships and alliances with have fewer projects in operation today, are set to
investors, venture partners, customers and gain significant market share in the long run.
suppliers to accelerate achievement of the
company’s goals and objectives. In addition, the Arrowhead believes that Algae.Tec has enormous
company has recently set up the 18,200 square growth potential with a medium risk profile.
foot Algae Development & Manufacturing Centre Based on intrinsic revenue capacity from 500
in Atlanta where the photo-bioreactors will be modules, Arrowhead believes that the company’s
assembled for shipping around the world. fair share value lies in the AU$1.51 to AU$2.15
bracket.

Algae.Tec Limited – Arrowhead BID 1 OTCBB:ALGXY; ASX:AEB
Due Diligence and Valuation Report See important disclosures on page 26 of this report.

Table of Contents

Algae.Tec Presentation ..................................................................................................... 3

News .................................................................................................................................7

Listing Information ........................................................................................................... 8

Contacts ............................................................................................................................8

Major Shareholders ........................................................................................................... 8

Management and Governance ...........................................................................................9

Assets and Projects ......................................................................................................... 10

Technologies and Markets ............................................................................................... 13

Porter’s Five Force Analysis for the Biofuel industry in Australia ....................................17

Project Risk Profile Analysis............................................................................................ 18

Peer Profile .....................................................................................................................19

SWOT Analysis ................................................................................................................ 22

Value ............................................................................................................................... 23

Analyst certifications ...................................................................................................... 26

Valuation ......................................................................................................................... 27


Algae.Tec Presentation
Algae.Tec is an Australian biofuel company focused on commercializing technology that produces algae
to manufacture sustainable fuels such as bio diesel and green jet fuel. Founded in 2008, Algae.Tec has
conducted scores of laboratory, bench-scale and pilot tests and product trials, assessed competitive
algae technologies, and applied the results to detailed engineering evaluations of commercial plant
operations. These activities have led to the development of unique proprietary technology and know-
how for high efficiency production of microalgae via a novel modular photo-reactor system and improved
algae harvesting and product refinement technologies.
The company’s unique technology has demonstrated sustained performance, providing step-change
improvements in productivity, product yield, carbon dioxide sequestration, plant footprint requirements
and substantial capital/cost savings versus agricultural crops and other competitive algae processes in
the industry. The company is now building a demonstration facility with Malindra to prove its commercial
viability, which is expected to be completed in Q1-2012.

Algae.Tec’s Asset Portfolio
Algae.Tec plans to construct modules that would cultivate Algae in efficient manner.

The most important application of algae technology is likely to be in the generation of biodiesel, which is
registered and used as a direct diesel fuel substitute and fuel additive. Biodiesel provides important
environmental advantages and has the highest “energy balance” of any transportation fuel. The total
global in-place production capacity of biodiesel is 37B liters per year, with price driven by and dependent
on crude oil, government subsidy and price of biodiesel feedstock.
It is estimated that algae produces more oil than any other oilseeds currently in use. For instance, where
soybeans and sunflower yield 48 and 102 gallons of oil per acre year, microalgae’s could range from
5,000 to 15,000 gallons. The 125Mtpa vegetable oil market is set to witness a growth rate of 3%-5%.
After oil extraction, algae biomass could be used as feedstock, agricultural fertilizer, biomass power
generation, etc. The animal feed market alone is an AU$80B per year market; the primary source high
protein soybean meal is currently priced at approximately AU$450/T. The residual algae biomass with
high carbohydrate and protein contents offers a direct substitute for agriculture-based protein sources.
Other key useful forms of algae are fatty acids, glycerine and ethanol – ingredients for the
pharmaceutical and consumer industries.
For more detail on Assets, see the Assets and Projects section of this report.


Algae.Tec’s Portfolio and Company Premiums
Advantages of Algae: Algae are a group of aquatic estuarine and marine plant organisms, which may
range from microscopic (microalgae) to many meters in length. Largely found in damp places and bodies
of water, approximately 1,000 algae species show the potential for production of biofuels. These
organisms contain chlorophyll and with water, carbon dioxide and sunlight, produce complex carbon
chain molecules such as hydrocarbons and polysaccharides and proteins.
Subject to each product’s composition, Algae’s carbon content could range anywhere between 45%-
80%, in the form of lipids/oils, carbohydrates, proteins and hydrocarbons.
The advantages of algae, as a source of renewable fuel are noteworthy:
– Efficient and fast production cycle; converts solar energy and carbon dioxide into renewable and
sustainable fuels.
– Effectively sequesters atmospheric carbon dioxide, balances greenhouse gas production and reduces
impact of global warming.
– Provides environmental solutions for recovery of toxic stack gas pollutants and remediation of
polluted water streams.
– Hydrocarbons derived from algae production can be used to produce renewable biofuels for direct
substitution of fossil fuels.
– Algae-derived biofuels provide a significant reduction in vehicular exhaust emissions versus standard
fossil fuels.

Technology - McConchie-Stroud System
Algae.Tec produces high-yield algae growth and harvesting technology through the McConchie-Stroud
System. The McConchie-Stroud System is designed to facilitate algae cultivation anywhere, including
marginal land or industrialized areas. The system also incorporates scalability, minimal land footprint
and water usage.
The company has developed and utilized process simulation models for evaluation of the algae process
and its downstream biofuels, including detailed material and energy balances, process flow diagrams,
unit and equipment design and specifications, plant lay-out and turnkey capital estimates. The
production comprises a series of critical processing steps, including gas treatment, supply systems for
carbon dioxide, light energy and nutrients; harvesting of biomass and refinement of algae products.
The advantages of the McConchie-Stroud module include:
– Reduction of capital and operating costs, due to the possibility of sharing infrastructure as modules
in close proximity can be grouped, relocated and re-used.
– Minimal requirement of land, vis-à-vis peers, thereby reducing land leasing and purchase costs.
– Reduced water evaporation and better recycling of water, nutrients and heat, and reduced risk of
contamination of algae from external sources.

Algae.Tec’s Portfolio and Company Risks
Intellectual Property: Algae.Tec, so far, has not obtained a patent in relation to the McConchie-Stroud
System, and there is no certainty that the current patent application in Australia for the McConchie-
Stroud will be granted.
Financing Requirement: The company is currently building a demonstration facility; it is quite possible
that the current available funds may not be sufficient for fulfilling the initial business objective. Also the
funds are not sufficient to enable the company to fully commercialize the McConchie – Stroud System.
Inability to obtain additional financing may require reducing its scope of operation and scaling back its
expansion and development programs.


Success of McConchie-Stroud system: The company’s success largely depends on the success of its
technology. Though the company has shown excellent results during its research and development
phase, it still faces the risk of commercialization of algae products from the McConchie-Stroud system.
Apart from the above risks, the company faces the risk of attrition of its key personnel, operational risks,
adverse weather conditions, industrial and environmental accidents, and industrial disputes.
For a detailed risk assessment, please refer to the Risk profile analysis section.

Algae.Tec’s Corporate Strategy
Algae.Tec is establishing strategic partnerships and alliances with investors, venture partners, customers
and suppliers (materials, services, technologies) to accelerate the achievement of the company’s goals
and objectives.
Algae.Tec currently has MOUs with:
– Hong Kong company Pacific Minerals Limited and Australian company RKD International to deploy in
China
– The Malindra Group for the first Australian plant
– Leighton Contractors for engineering and project management expertise

The company’s strategy has been focused to assess competitive algae technologies to apply the
development phase results to detailed engineering evaluations of commercial plant operations. The
development of unique algae technology has led to improvements in productivity, product yield, carbon
dioxide sequestration and substantial capital/cost savings versus agricultural crops and other
competitive algae processes in the industry.
The company is currently in the process of scaling up the technology to the next phase of
commercialization with construction and operation of a demonstration Plant—Shoalhaven One—for
performance evaluations, product trials and technology marketing. Total developmental capital and
operating costs are budgeted at AU$4MM with a scheduled start date in Q1-2012, and the first
commercial plant is projected to launch by the end of 2013.
The photo bioreactors will be employed at Algae.Tec’s demonstration plant. The plant is located at
the Malindra Group’s ethanol facility situated at Nowra, south of Sydney. The Malindra Group is the
largest ethanol producer in Australia.
The key milestones in the Demonstration Plant are as follows:

Period Milestone
March 2011 Manufacturing plant operational in Atlanta
April-August 2011 Module fabrication in Atlanta
August Construction of Nowra commences
2012 Q1 Start-up of Demonstration facility

The initial two commercial facilities will be deployed in China and Australia. Considering the rising
demand for biomass in India, the company is equally inclined towards venturing in India. There are also
worldwide efforts to lower carbon emissions to which algae oil and biomass act as a healthy substitute.


Key Market Trends
Algae properties: Algae is a group of aquatic estuarine and marine plant organisms, which may range
from microscopic (microalgae) to many meters in length. Algae potential is greatest in regions where
there is an abundance of land, water, and sunlight. Studies show that algae species, which are primarily
unicellular or diatom microalgae has a potential for biofuels, meeting the general requirement for algae
production. These species are useful in producing:
– Carbohydrate (sugar) compositions most suitable for ethanol production, or
– Lipid (fats/oils) compositions which are suitable for production of biodiesel, or
– Hydrocarbon compositions suitable for production of renewable distillates.
The most abundant types/families of microalgae include Green, Diatom, Blue- Green and Golden Algae.
Global growth prospects: The global market for Algae is poised for explosive growth in the next 10
years reaching 61MM gallons per year and a market value of AU$1.3B by 2020 representing a CAGR of
72%, roughly on par with early developments in the biodiesel industry.
Globally, the United States is poised to ramp up production, being the earliest amongst world markets
with 50% of the total algae activity. The European Union (EU) market, accounting for about 30% of
algae activity, will be limited initially by the industry’s focus on university research, and later by
insufficient access to water, land, and nutrient sources.
Technology: The company uses McConchie-Stroud technology system to produce algae-based biofuel.
Currently, the company is pursuing the commercialization of this technology for algae production and
processing system. Algae production comprises a series of critical processing steps, including supply
systems for carbon dioxide, light energy and nutrients, harvesting of biomass and refinement of algae
products.
For more details, refer to the Technologies and Markets section


News
– Algae.Tec signs collaboration contract for demonstration plant: On June 30, 2011, the
company announced that Malindra is making several contributions to the project, including access
to the land and utilities. Stroud said that, Malindra has made their personnel freely available and
moreover, through their goodwill, the liaison with local contractors and specialist groups required
from time to time during the construction process was facilitated. In turn, Algae.Tec’s role in the
project is to build the demonstration plant, and ensure safety and site regulations are met, Stroud
continued. Stroud also noted that his company currently intends to convert a percentage of the
algae produced at the demonstration facility into biodiesel for use by Australia’s armed forces.
Alternatively, some of the algae feedstock will be converted into jet fuel and used for testing
purposes in aircraft engines.
– Algae.Tec to build demonstration Facility: On June 29, 2011, the company announced the
construction of an algae demonstration facility in Shoalhaven One, in Nowra, south of Sydney,
Australia. Algae.Tec signed the contract to build its proposed algae harvesting and production
facility. ‘Shoalhaven One’ will be at the Malindra Group’s Nowra ethanol plant, the largest ethanol
producer in Australia.
– Algae Tec’s depositary Receipts commences trading on the USA OTC market: On April 28,
2011, the company announced its American Depositary Receipts (ADR) debut on the USA OTC
market under the ticker ALGXY. The Bank of New York Mellon (BNY Mellon) was appointed to
establish and manage the Level 1 American Depositary Receipt (ADR) Program.
– Algae.Tec opens Atlanta Algae Development & Manufacturing Centre: On March 17, 2011,
the company announced the opening of the Algae Development & Manufacturing Centre in Atlanta,
Georgia where the photo-bioreactors will be assembled for shipping around the world. The Algae
Development & Manufacturing Centre is an 18,200 square foot fabrication facility. The company’s
executive chairman said that the center is currently being modified to enable retrofitting system
process of the 40 feet steel shipping container algae growth modules, ready for the first module
delivery to the center in April.
– Algae.Tec launches ADR Program: On March 17, 2011, the company announced; it had
appointed the Bank of New York Mellon to commence the establishment of a Level 1 American
Depositary Receipt program. The Executive chairman, Roger Stroud, said that the ADR program
would give the United States energy and investors access to shares of the company, which is in a
high growth phase establishing facilities in Australia and Asia.
– Algae.Tec lists on Frankfurt Stock Exchange: On February 21, 2011, the company announced
that it has been accepted to list on the Frankfurt Stock Exchange (FWB). The Executive chairman,
Roger Stroud said that the dual listing on FWB gives the company access to the most significant
sustainable energy financial market. He also said that the company has a globally focused growth
path so it is important to be part of the world’s biggest investment facility covering the European
Union and United States.
– Algae.Tec lists on Australian Stock Exchange: On January 13, 2011, the company announced
that it has listed on Australian Stock Exchange. On this occasion, the CEO of the company said that
Algae.Tec will be the first algae company to list on a main board stock exchange in the world, and
one of the few cleantech companies to be listed in Australia.
– Algae.Tec targets Australia's Cleaner Future for Power Stations Policy: On September 14,
2010, the company announced that it is targeting for inclusion in the Australian Government's
Cleaner Futures for Power Stations Policy. Algae.Tec’s Executive chairman, Roger Stroud said that
he understood the carbon capture and algae growth and harvesting system should be eligible for
the program which seeks to establish a best practice emissions standard for new coal-fired power
stations. He said the company would be seeking high-level government meetings in a bid to have
the technology included as an alternative to existing proposed carbon capture and storage options.


– Algae.Tec signs MOU’s for China and Australia pre-listing: On August 26, 2010, the company
announced two MOUs for non-binding commitments to deploy the technology in China and
Australia. The company’s Executive Chairman said that the MOU with Hong Kong Company Pacific
Minerals Limited and Australian company RKD International Pty Ltd provides for the establishment
with the objective of introducing company’s technology to China.

Listing Information
Algae.Tec was listed on the Australian Stock Exchange on 13-Jan-2011 and was listed on Frankfurt
Stock Exchange on 21-Feb-2011. The company raised AU$5.1MM while issued 25.5MM shares at AU$20c
per equity share. Algae.Tec’s American depositary Receipts (ADR) commenced trading on the USA OTC
market on 28-Apr-2011.

Contacts
Registered office: Suite 9, 3 Centro Avenue, Subiaco, WA, Australia, 6008
Telephone: +61 (08) 9380 6790
Email: phatfull@algaetec.com.au

Major Shareholders

Equity Holder No. of Shares Held (MM) Percentage Holding

Teco. Bio ~200.00 80.35%
Mr Peter Ernest Hatfull ~9.49 3.82%
Fmr Investments Pty Ltd ~5.00 2.01%
Moltoni Corporation Pty Ltd ~4.38 1.76%
Other holders less than 1% ~30.02 12.06%
Source: Bloomberg - 29 Aug 2011


Management and Governance
The management team at Algae.Tec comprises experienced professional with a proven track record.

Mr. Roger Sydney Stroud Executive Chairman
Mr. Roger S. Stroud has over 35 years experience in a variety of industries. He spent over 10 years in
finance in a number of areas including credit, money market and investment banking for CitiNational
(Citibank/National Mutual) merchant bank, predominantly in Sydney.
Following the above, he floated a mining company, while undertaking the role of managing Director for
eight years. In the late 1990s, Roger began the process of building businesses in the renewable fuel
sector, primarily biodiesel. This included floating two separate biodiesel companies. One of these
companies, Natural Fuel Ltd went into voluntary administration in April 2009. Roger was a director of
Natural Fuel Ltd until October 2007. He is a founding director and 50% shareholder of Teco.Bio LLC, and
is based in Perth, WA.

Mr. Garnet Earl McConchie Executive Director
Mr. Garnet Earl has over 35 years experience over a broad field of chemistry and associated
technologies, including global markets, bulk chemicals and plastics, differentiated commodities and
intermediates, specialty chemicals, polymers and interaction with environmental sectors.
Earl’s field experience includes international business management, plant operations, and project
engineering in the United States, Europe (especially Germany, Holland, Switzerland, UK and CIS), Latin
America (Brazil, Argentina and Mexico) and Asia (Korea, China and Australia).
Earl has over 10 years of specific technical and business experience in the biodiesel and glycerine
industry sectors. He is a founding director and controlling shareholder of Teco.Bio LLC, and is based in
Atlanta, Georgia where he has coordinated the microalgae development.

Mr. Peter Ernest Hatfull Managing Director & Company Secretary
Mr. Peter Ernest has over 30 years experience in a range of senior executive positions with Australian
and International companies. He has an extensive skill-set in the areas of business optimization, capital
raising and company restructuring.
He was recently Managing Director of a leading integrated metal recycling and contracting company,
CMA Corporation Ltd, based in Sydney, where he managed a period of dramatic growth and increased
profitability. He has experience in turnaround and slow growth situations, where companies have
struggled to expand their business. This has required revitalising the business plan, attracting investor
funding, and implementing profitable strategies. Peter is currently a director of Teco Pty Ltd, Kresta
Holdings Ltd, Barminco Pty Ltd and is based in Perth, WA.

Mr. Timothy Morrison Non-Executive Director
Mr. Timothy is the current Director of Research and Development at Murdoch University. Tim represents
the University on the Boards of a number of companies engaged in the commercialization of University
IP. Mr. Morrison plays a role with a number of early stage clean tech companies supporting these groups
to raise early stage capital and structure merger and acquisition transactions. Through his engagement
on an Australia-based private equity investment fund, Mr. Morrison plays a role in reviewing and
investing in businesses seeking early stage venture finance.
Prior to his current position, he was General Manager of MurdochLink Pty Ltd, the commercial arm of
Murdoch University, which is the dedicated provider of quality research consultancy services to the
professions, industry and government.


Algae
Assets and Projects Products
End-Use Markets

Biomass Feedstock source for biomass
Overview
power generation with
Algae.Tec is focused on commercializing Substitution of fossil fuels
technology that produces algae at a very fast
Conversion of residual
rate, to manufacture sustainable algae oil
biomass following oil
(which is further used to produce vegetable oil,
extraction to renewable
biodiesel and refined glycerine), biomass (used
distillates.
to produce animal protein feed, bio-ethanol and
Biomass nutrients suitable for
renewable distillates) and other nutrients such
use in agricultural fertilizers
as fatty acids.
The company produces high-yield algae growth Vegetable Oil
and harvesting technology through the Microalgae such as higher plants produce
McConchie-Stroud System. The McConchie- storage lipids in the form of triacyglycerols.
Stroud System is designed to cultivate algae Comparatively, algae produce more oil than any
virtually anywhere, including marginal land or other oilseeds which are currently in use. Many
industrialized areas. The system is designed for microalgae species can be induced to
scalability and minimal land footprint and water accumulate substantial quantities of lipids, often
usage. greater than 60% of their biomass. The table
Algae Oil Vegetable Oil Market below presents indicative oil yields from various
Biodiesel Biodiesel Market oilseeds and algae.
Algae Oil
Refined
Glycerine
Glycerine Market Yields (Gallons of oil per acre per year)v
Corn 18
CO2 Animal

Nutrients
Protein Feed
Animal Feed Market
Soybeans 48
Algae Ethanol Market
Biomass Bio-Ethanol
Water
Production
Safflower 83
Renewable
Chemicals Diesel Fuel Market
Distillates
Sunflower 102

Fatty Acids Fatty Acid Market
Rapeseed 127
Oil Palm 635

Algae Micro Algae 5,000-15,000
End-Use Markets
Products
Depending on the geographic region, the
Lipids/Oils Algae oil substitution of 125Mtpa vegetable oil market (primarily, palm,
vegetable oil feedstocks (e.g. soybean and rapeseed oils), representing AU$
soybean oil, palm oil) for 110Bis growing between 3% and 5%.
biodiesel industry vi
Approximately 80% of the vegetable oil
Refined glycerine produced
demand is for the food market, and consumer
via algae-biodiesel production
products and feedstock for biodiesel production
Specialty oils and fatty acids. account for approximately 25Mtpa of the total
Carbohydrates Substitution of agricultural demand. Vegetable oil prices have historically
sourced feedstocks for followed agricultural supply/demand balances,
conversion of carbohydrates population growth and standard of living;
(sugars) to bio-ethanol however, crude oil pricing has also significantly
influenced vegetable oil prices. Soybean and
Proteins High protein content algae
palm oil prices (see chart below) vii have
biomass for the animal food
escalated approximately 14% per year over the
market
past five years and the trend continues (current
Hydrocarbons Production of renewable vegetable oil prices are AU$1220/T).
distillates via gasification for
substitution of diesel fuels.


Palm and Soyabean oil price United States (approximately 15% of the global
1600
market).

1400 Biodiesel is registered and used as a direct
diesel fuel substitute and fuel additive, which is
1200
most often marketed in blends of 5% to 20%.
1000 Biodiesel provides important environmental
advantages, e.g., carbon dioxide sequestration,
US$/MT

800
significantly reduced toxic exhaust emissions,
600 and has the highest “energy balance” of any
400 transportation fuel. There are more than 500
biodiesel manufacturing plants worldwide with a
200
total in-place production capacity of 37B liters
0 per year.
The price of biodiesel is primarily driven by the
01

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03

04

05

06

07

08

09

10
r-

r-

r-

r-

r-

r-

r-

r-

r-

r-
Ap

Ap

Ap

Ap

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following factors:
Palm Value Soyabean Value
– The crude oil-derived diesel market
– The level of government subsidy and,
Fatty Acid – The price of biodiesel feedstock.

Another very useful form of algae is fatty acid.
Fatty acid is a viscous, gum-like substance,
derived from algae. It is also a very important
ingredient in the manufacturing of papers and
textiles. As it possesses most of the properties
of gum, it is also used in the water-proofing and
fire-proofing industry. It is especially helpful in
making fabrics that are fire and water resistant.
In the pharmaceutical industry, it is used in the
manufacture of Gaviscon, Asilone, Bisodol etc. It
is used as a mould-making material in life
casting, prosthetics and dentistry. Like most of
the forms or products of algae, alginic acid is
used extensively in the food processing industry
as an ingredient of soups and jellies.
The world production of fatty acids from the
hydrolysis of natural fats and oils aggregates to
approximately5Mtpa, which represents an
AU$3B per year market. The consumption of
fatty acids is related to the growth in vegetable
oils and economy of the region. The current
fatty acid prices range from 50% to 70% of the
vegetable oil prices, which is greater than Sources: Energy Information Administration – U.S.
AU$500/T on an average. Department of Energy (EIA-DOE), U.S. Department of
Agriculture (USDA) Jacobsen
Biodiesel
Glycerine
Most research into efficient algal-oil production
predicts that biodiesel may be the only viable Glycerine is a by-product in the process of
method to produce enough automotive fuel to producing biodiesel for pharmaceutical and
replace current world diesel usage. Current consumer products industries. From every 1 mt
biodiesel consumption represents approximately of biodiesel 0.1 mt of glycerine is produced.
1% of the total vehicular diesel fuel demand Crude glycerine (80% content) is typically
globally at 12.5B liters per year. Europe is by far upgraded to refined glycerine (99.5 %+) for
the largest biodiesel market (approximately food, pharmaceutical and consumer product
80% of the global market), followed by the applications. The worldwide demand for


glycerine is over 1 Mtpa and continues to grow Ethanol from algae is produced by converting
at 5% per annum. The current glycerine market starch (the storage component) and cellulose
is approximately AU$900MMper year at (the cell wall component). Lipids in algae are
AU$750/T. converted into biodiesel, while the
carbohydrates are converted to ethanol. Algae
Biomass
are the optimal source for second generation
Algae biomass may be used directly or after oil bio-ethanol due to the fact that they are high in
extraction for a number of major applications carbohydrates/polysaccharides and thin cellulose
such as animal protein feedstock, agricultural walls.
fertilizer, biomass power generation, and further
The total global bio-ethanol consumption is
biomass conversion to ethanol via fermentation
approximately 70B liters (55Mtpa) and
or to middle distillates via gasification and
represents an AU$35B biofuel market per year.
Fischer-Tropsch synthesis. Biomass after
Bio-ethanol demand is set to double over the
extracting oil contains about 40% to 60%
next 20 years. Ethanol prices correlate highly
carbon content dependent on the algae species
with ex-rack gasoline with current prices at
and operating conditions in the form of
AU$650/T.
carbohydrates, proteins and hydrocarbons.
The animal feed market is a 180Mtpa market
(AU$80B per year). The primary source for
animal protein feed in the U.S. is high protein
soybean meal, currently priced at approximately
AU$425/T. The residual algae biomass with high
carbohydrate and protein contents offers a
direct substitute for agricultural-based protein
sources.
Ethanol


– Blue-Green Algae – They are found in
Technologies and Markets freshwater and marine environment habitats
and play an important role in fixing nitrogen
from the atmosphere.
Algae
– Golden Algae – Golden algae primarily exists
Chemistry and Properties in freshwater systems. They are very similar
Algae is a group of aquatic estuarine and marine to diatoms but have more complex pigment
plant organisms, which may range from systems.
microscopic (microalgae) to many meters in Algae as Energy Sources
length. They range from small single celled
organisms to multi-cellular organism, some with Shooting prices of oil, increase in consumption
fairly complex and differentiated form. Algae is of fossil fuel, advances in technology
usually found in damp places and bodies of development and government’s focus on global
water and thus are common in terrestrial as well warming have attracted demand for algae as a
as aquatic environment. There are more than potentially rich source of sustainable biofuels.
30,000 fresh water and salt water species of Algae are very beneficial as a renewable fuel
algae. Approximately 1,000 algae species show resource because of the following advantages:
the potential for production of biofuels. – It has one of the most efficient and fastest
Microalgae production cycles, which converts solar
energy and carbon dioxide into renewable
Studies shows that algae species which are and sustainable fuels.
primarily unicellular or diatom microalgae has a
– It is an environment friendly source of
potential of biofuels, meeting the general
producing energy. It efficiently sequesters
requirement for algae production. These species
atmospheric carbon dioxide, favorably
are useful in producing:
balances greenhouse gas production and
– Carbohydrate (sugar) compositions most reduces the long-term impact of global
suitable for ethanol production, or warming. Also, it provides environmental
– Lipid (fats/oils) compositions which are solutions for recovery of toxic stackgas
suitable for production of biodiesel, or pollutants and remediation of polluted water
streams.
– Hydrocarbon compositions suitable for
production of renewable distillates. – The production of oil per land mass is greater
than any terrestrial crop and can be
These are the most primitive form of plants; cultivated virtually anywhere.
however the mechanism of photosynthesis is
– Also, the hydrocarbons derived from algae
similar to that of higher plants. Due to simple
production can be used to produce renewable
cellular structure and growth in aqueous
biofuels for direct substitution of fossil fuels.
environment with more efficient access to water,
carbon dioxide and nutrients, microalgae are far Global Algae Market Opportunitiesviii
more efficient converters of solar energy.
The global market for Algae is poised for
Biologists have categorized algae into a variety
explosive growth in the next 10 years reaching
of classes on the basis of pigmentation, life cycle
61MM gallons per year and a market value of
and basic cellular structure. The most abundant
AU$1.3B by 2020, representing a CAGR of 72%,
types/families of microalgae include:
roughly on par with early development in the
– Green Algae – They generally exhibit high biodiesel industry.
growth rates and are considered as the
Globally, the United States is poised to ramp up
evolutionary progenitors of modern plants.
production the earliest amongst world markets,
Carbohydrates and natural oils (lipids) are
with 50% of all algae activity. The European
the main storage compounds for green algae.
Union (EU) market, accounting for about 30% of
– Diatom Algae – Found in oceans, they are algae activity, will be limited initially by the
rich in silica in the cell walls and store carbon industry’s focus on university research, and later
primarily in the form of natural oils or by insufficient access to water, land, and
carbohydrates. nutrient sources. It is believed that United
States and Europe cannot grow enough corn,


soy, or rapeseed to meet there bio-fuel targets. oil-palm trees - currently the largest producer of
Latin America and Asia Pacific, which have fewer oil to make bio-fuels - yield just about 20% of
projects in operation today, are set to gain their weight in oil.
significant market share in the long run.
Technology
Ultimately, algae potential is greatest in regions
The company uses McConchie-Stroud technology
where there is an abundance of land, water, and
system to produce algae-based biofuel.
sunlight. Secondary considerations include
Currently, the company is pursuing the
favorable regulations around biofuels mandates,
commercialization of this technology for algae
greenhouse gas (GHG) emissions, wastewater
production and processing system.
treatment, and livestock operation, as well as
potential co-location opportunities (wastewater Algae are micro organisms that contain
remediation and carbon recycling). Algae is chlorophyll, and with water, carbon dioxide and
becoming one of the most promising sources of sunlight they produce complex carbon chain
biodiesel as it is biodegradable and can be molecules such as hydrocarbons and
produced using ocean and waste water without polysaccharides and proteins. The composition
depleting fresh water resources. of algae product is dependent on the specific
species utilized and the photo-synthesis
The industry believes that the algae-based
operating conditions employed. Algae products
biofuels market will be characterized by regional
contain 45%-80% of carbon content in the form
collaborations and partnerships that are able to
of lipids/oils, carbohydrates, proteins and
capitalize on efficiencies through expertise
hydrocarbons.
related to unique environmental conditions, co-
location opportunities, and access to end Algae Production
markets. This horizontal organization will result
Algae production comprises a series of critical
in significant consolidation within the market
processing steps, including supply systems for
over the next decade.
carbon dioxide, light energy and nutrients,
Algae are attracting increased investments and harvesting of biomass and refinement of algae
interests from bio-fuel, petroleum and products.
agribusiness industries. Driven by escalating
The company developed and utilized process
global climate change concerns and the rising
simulation models for evaluation of the algae
cost of petroleum-based energy, companies and
process and its downstream bio-fuels, including
government entities are developing the use of
detailed material and energy balances, process
bio-fuels derived from algae to reduce carbon
flow diagrams, unit and equipment design and
emissions from power plants and generate
specifications, plant lay-out and turnkey capital
renewable transportation fuels.
estimates. Based on the development phase
Using an intricate process of photosynthetic, results, engineering design and process
companies have developed biodiesel and ethanol simulation modeling, material and energy
from algae that, given optimal conditions, can balance data are presented in the process flow
double its volume overnight. Up to 50% of an diagram for a typical algae plant.
alga's body weight is comprised of oil, whereas


Make-up Seed Algae
Water Supply
Algae Unit CO2 Nutrients & Water

Recycle Water
Nutrients Nutrient System

Off-Gas
Chemicals Alkalinity System
Vents Algae Oil

Modular Photo- Chemicals
Light Energy Product Refinement Fatty Acids
Reactors

Algae-Water
Dilute
Algae-Water Biomass
Stackgas Gas Treatment

Harvesting &
Additives Separation Biomass Losses
Recycle Water

Conversion Energy Process Areas

The entire process of algae production and processing is described in following table:

Process Steps Process Description Key Unit Operations

Utilization of high CO2 content (8-15%
volume) stackgas from fossil fuel power Stackgas Pre-Treatment
plants, biomass etc. Water Recycle
Gas Treatment
Preparation of stackgas for photo-reactors, Gas Distribution Network
including water removal, temperature control, Recovery of Module Off-Gas
compression and gas distribution.
Solar Collection
Light Energy Solar energy in the form of visible light
Visible Light Filtration & Distribution
Supply absorbs and converts CO2 to produce algae.
Energy Recovery/Storage
Water Supply (fresh, marine and/or
Preparation units for water supply, nutrient wastewater)
Raw Material package, alkalinity control and make-up algae.
Alkalinity Control
Systems Nutrients, Nitrogen and Phosphorus are
Nutrient Preparation Unit
formulated via addition of industrial fertilizers.
Make-up Algae Control System
Modular Photo-Reactors
Photosynthesis bio-reactor system controls the Internal Light Distribution Network
Modular Photo-
overall productivity and desired product yields per Module
Reactors
per species. Modular Infrastructure & Process
Controls per Module Series


Process Steps Process Description Key Unit Operations

Low concentration of micro-algae in final
output requires various algae separation Combinations of Flocculation, Gas-
measures. Lift Frothing & Paste Handling
Harvesting
Recovery methods for algal cell fracturing and Mechanical Separation Units
direct recovery of hydrocarbon products Algae Biomass Refinement
provide improved overall energy efficiencies.
Algae biomass contains predominantly lipids
(fats/oils) and carbohydrates
Conventional oil extraction technologies Oil Extraction Units
(mechanical expeller and/or solvent Crude Algae Oil Treatment
Product
extraction) are employed to recover crude
Refinement Fatty Acid Co-Product Recovery
algae oil.
Chemical treatment and refinement is required Biomass Product Refinement
for purification of the finished algae oil
product.
Biodiesel & Glycerine via Oil
Transesterification
Algae oil acts as raw material for biodiesel Biomass Animal Food Products
Downstream (and glycerine).
Ethanol Production
Products Biomass is a source of animal feed, ethanol
and other energy sources. Middle Distillates Production
Power Generation via Biomass
Gasification


Porter’s Five Force Analysis for the Biofuel industry in Australia

Overview
Australia’s algae oil rush is fueled by a combination of tough emission control standards and state-by-
state bio-fuel mandates. Carbon emitters will pay an AU$23/T tax starting in 2012, which accelerated a
boom for carbon capture and bio-fuels. The bio-fuel consumption increased 34% from 2009 to 2010.
The Malindra-Algae.Tec demonstration offers both emission control as well as bio-fuel. Algae Tec
photobioreactor modules will use carbon dioxide (CO2) produced by ethanol processing to feed algae,
which consumes two parts CO2 for every part algae produced.

Barriers to Entry High

• High Capital Investment
• High-end scientif ic expertise
• Patented Technologies
• Economic Viability of new
technologies

Power of Customers Low
Power of suppliers Low
Customer base is spread
• Engineer ing Suppliers (to Industry competition Medium across industr ies – which give
build the production unit) will less control to any particular
hold key to the systems built • The existing players are highly industry.
(repairs & maintainance) experienced and very f ew in number. • Aviation industry: shif t to
• Bargaining power: other • The success of the industry is on biodiesel due to pressures
suppliers will be dependent on based on technological expertise and from clean energy and
the type of technology used. the strong R&D team . emission standards
For instance, Solazyme uses • Some of the players already have • Glycerine: used extensive ly
Sugar/ Starch to cultivate grants from govt. to supply f uel f or in pharmaceutical and
algae whereas Algae.Tec uses them and also contracts f rom various consumer product industry -
light, w hich reduces the airlines growing around 5% every
supplier bargaining power. year
• Vegetable oil: Algae would be
pref erred as it produces 10-
100 times oil in the same
area as crops
Threat of substitutes Low

• Algae is the best available
substitute f or oils – biodiesel
and vegetable oil ,and
various other uses in paper
and textile industry


Financing Risk - LOW
Project Risk Profile Analysis The company is in its initial stages of
Peer Risk Analysis development. The company is building a
demonstration facility and there is no guarantee
We have evaluated the risk profile of Algae.Tec that current available funds will be sufficient for
compared with other biofuel players in Australia. fulfilling the initial business objective. The
We identified the risk as “Medium” on a company will be required to raise additional funds
comparative basis and assigned a score of “1.8” in the future and faces the risk of obtaining it on
based on the risk profile of the major projects terms which are favorable to the company.
pursued by the company as well as its peers. The Additionally, the funds are not sufficient to enable
important risk categories considered for the study the company to fully commercialize the
include: McConchie–Stroud System.
– Project Stage Risk: Medium - Near feasibility Any additional equity financing will dilute
– Intellectual Property Risk: Medium – Yet to be shareholders interest, and debt financing, if
patented available, may involve restrictions on financing
and operating activities. If the company is not
– Financing Risk: Low – Successfully publically able to obtain additional financing, it may be
issued its shares required to reduce its scope of operations and
scale back its expansion and development
– Operational Risk: Medium – dependent on
programs.
technology used
Success of the McConchie-Stroud System -
The Risk Profile has been assessed as a weighted
HIGH
blended score based on the project stage risk
(30% weight), intellectual property risk (30%), The company is relying on the success of its
financing risk (20%), and operational risk (20%). McConchie-Stroud system and believes that it will
be able to develop and commercialize the system
The individual risk parameters and the underlying
in the near future. Though the company has
rationale for the scores are discussed in the
shown excellent results during its research and
subsequent sections.
development phase, it still faces the risk of
Peer Risk Profile commercialization of algae products from the
McConchie-Stroud system.
Total Project Intellectual
Financing Operational
Ticker Risk Stage Property Key Personnel - MEDIUM
Risk Risk
Score Risk Risk
AEB 1.8 2 2 1 2 The company faces the risk of losing its two key
PALG 1.4 1 1 2 2
directors, Messrs McConchie and Stroud, who
developed the McConchie-Stroud system. While
SZYM 1.2 1 1 1 2
these directors are the major shareholders in the
Intellectual Property Risk - MEDIUM company, non involvement of either of them will
adversely hamper the company’s future plans.
The company has not obtained a patent in
relation to the McConchie-Stroud System so far. Operational Risks- LOW
There is no surety that the current patent The company’s demonstration and commercial
application in Australia for the McConchie-Stroud plants proposed by the company may be affected
will be granted, or that any other patent by various factors, including failure to locate a
applications that may be lodged in relation to the suitable location, failure to achieve predicted
McConchie–Stroud system will be granted. yields of algae and algae products, operational
There is always a risk of a third party bringing a and technical difficulties encountered in scaling up
claim in relation to any aspect of the property. the McConchie–Stroud system to commercial
Any dispute will adversely affect the company. production level. The company also faces the risk
However, the company has taken reasonable of unanticipated bioreactor problems which may
steps to protect the ownership of the intellectual affect the production cost.
property related to the McConchie-Stroud and Apart from the above risks, the company faces
believes that there is no third-party interest. the risk of adverse weather conditions, industrial


and environmental accidents, currency risk and fuel produce along with Siemens and the
industrial disputes. University of Utah.
Solazyme Inc.
Peer Profile
The San Francisco-based, Solazyme Inc., grows
Petroalgae Inc. algae with sugars in closed fermentation tanks to
Petroalgae Inc. is a Melbourne-based algae create oils, which can be used for liquid fuel and
production firm that has lemna as its main for chemicals, foods, or personal care products.
output. It is easier, at present, to grow, harvest Solazyme proprietary microalgae are
and dewater lemna than the unicellular algae heterotrophic, meaning they grow in the dark (in
harvested by Algae.Tec. Lemna shares with fermenters) by consuming sugars derived from
microalgae, a rapid growing rate and ability to plants that have already harnessed the sun's
generate large amounts of usable biomass on energy. By using standard industrial fermentation
non-productive land. equipment, they're able to efficiently scale up and
accelerate microalgae's natural oil production time
The company is planning to optimize the growth to just a few days and to commercial levels.
of indigenous micro-crops with open tanks at
commercial scale through the management of The company's strategy has been to make oils for
light exposure and other elements of the specific personal care and nutritional markets
environment. The technology monitors variable before taking on liquid fuels where there is
parameters, including light, temperature, density margin pressure and brands play a major role. It
and nutrition, to determine the optimal point in has customers for food and personal care and was
the growth cycle at which the biomass should be awarded a Department of Energy grant to make
harvested. fuel for use by the Navy, which successfully
tested a 50-50 blend of petroleum and algae oil.
The company plans to generate licensing fees and Solazyme has development arrangements with
royalties from customer licensees in the global airlines Qantas, Chevron Technology Ventures,
energy and agriculture markets. They would and with chemical company Dow.
consider entering into alternative arrangements in
which license fees and royalties would be reduced Solazyme signed an agreement with Bunge for
in place of a greater share of the operation’s commercial renewable oil plant in Brazil. This JV
profits, but with no direct exposure to capital planning to build 100,000 mt renewable oil
requirements. production facility located at Bunge owned sugar
cane mill in Brazil.
The company has two hector demonstration
facilities in Florida, while it has done testing of its


Risk Parameters – Definition biofuel companies. Debt is considered only as a
last option to the public issue due to high
Project Stage Risk financing charges as well as financial covenants
attached.
Arrowhead understands the different project
stages for this business model to be: We consider a project to be of lower risk profile if
demonstration plant is successfully completed and
– Laboratory Research: Deals with research yields desired results as the viability of the project
and development (R&D) of the project. will be proved.
– Pilot Tests: Initial tests of the R&D results
are carried out for the technical, commercial, Intellectual Property Risk
and economic feasibility of the project. The technology used for the culture, and
– Demostration Plant: The Plant will be of harvesting of algae and the production are highly
much high capacity than of the pilot tests and dependent on the company’s research and
intends to prove the commercial feasility of technical capabilities and are mostly developed in-
the project. house. In-house developments generally involve
huge R&D expenditure which they aim to recover
– Commercial Plant: Based on market from future revenues.
prospects the commercial plant with required
capacity will be developed for the production. We consider a project to be of lower risk profile if
the technology possesses all necessary patents.
We consider a project to be of lower risk profile if
demonstration plant is successfully completed and Operational risk
yields desired results and a commercial plant is
underway as the uncertainty regarding the Depending on technology, the input used for the
commercialization of the project reduces culture of algae would be light or sugar/starch.
significantly. The technology using light as its input for culture
will need to set up the necessary infrastructure
Project Financing Risk whereas when the input is sugar/starch, there is
an additional uncertainty with respect to the cost
The projects in this industry are very capital and availability of the input.
intensive. Therefore, this business model, in
general suffers for financing risk as the viability of Since the culture of algae is technology driven,
the project is known only at a later stage, when we see the risk emerging from system break-
half of the capital outlay is done. down requiring technical expertise.

The industry has most of the initial projects We consider a project to be of lower risk profile if
financed by private equity firms or venture its input available at lesser cost than its peers
capitalists. Other important source could be input and is available in abundance.
equity financing as resorted to by most startup


Market Enterprise
Project Financing Algae.Tec in comparison
Company Ticker Major Projects cap value
Stage information with peer
(AU$MM) (AU$MM)

Algae.Tec is in its initial stages
when compared to its peers.
It is currently building a demo
plant whereas Petroalgae has
an operational demo plant and
Solazyme has a fully
commercial plant in place.
IPO in April
Demo Plant with Building a
Algae.Tec AEB 2011 for 81.81 87.31 Algae.Tec’s demo plant is
Malindra demo plant
AU$20c made along with Malindra, the
largest Ethanol producer in
Australia.
Algae.Tec has also received
recognition from aviation
industry for its fuel demo
plant with Malindra.

Algae.Tec is in its developing
Ministry of Natural IPO underway stages while Petroalgae has a
Resources for the functional demo plant in
Republic of Active Demo Currently place. Algae.Tec is currently
PetroAlgae PALG managed by 1,176 1,240
Suriname Plant in US building a demo plant for
Private equity commercialization of algae
Biomass fuel test firms production, which will be
functional in early 2012.

Chevron
Technology
Ventures IPO in 2011 in
May 2011 for Algae.Tec is in its infant stage
Marine Diesel fuel Commercial $18 per share.
for US NAVY when compared to Solazyme,
Solazyme SZYM Plant 750.6 504.7 which has a functional
Joint – 50:50
Renewable between the commercial plant supplying
chemicals project fuel to US Navy.
Nutrition products partners

Skincare Products


SWOT Analysis

Strengths

Strong Management team with core
competencies in biofuel technologies,
energy markets, project
commercialization and business
management.
Developed McConchie-Stroud System Weaknesses
which cultivates high yield algae and
economically harvests them.
The McConchie –Stroud System is
Technology facilitates algae yet to tested for its
Opportunities
cultivation even in marginal land or commercialization with a demo
industrialized areas plant. The demo plant will be
Global market for Algae is poised operational by early 2012
for explosive growth in the next
10 years, demand reaching 61MM Unanticipated bioreactor problems
gallons per year of bio-fuel and a SWOT may affect the production cost
market value of AU$1.3B by 2020 once the production is
Aviation industry is looking for commercialized
clean fuels to reduce carbon Threats
footprints and also to reduce fuel
costs
The McConchie –Stroud System is
Reduced cultivation area will
yet to obtain the patent for the
increase demand for vegetable oil
Quantum Fracturing Technology
from algae; which produces 10-
used
100 times per acre of land
compared to crops Messrs McConchie and Stroud,
directors and major shareholders,
developed the McConchie-Stroud
system. Non involvement of either
of them could adversely hamper
the company’s operations


Value
The Fair Market Value for Algae.Tec shares stands between AU$375.3MM to AU$532.2MM.
The Fair Market Value for one of Algae.Tec publicly traded shares stands between AU$1.51 to AU$2.15.

Algae.Tec Balance Sheet Forecast

CONSOLIDATED all figures in '000 AU$, Low bracket estimates
BALANCE SHEET unless stated differently

year ending June 30 2012E 2013E 2014E 2015E 2016E 2017E 2018E

Total Current Assets 3,741 19,797 63,839 106,195 149,205 192,999 237,589
Total Non-Current Assets 29,815 55,633 52,574 49,682 46,949 44,367 41,927
TOTAL ASSETS 33,556 75,430 116,412 155,877 196,154 237,367 279,516
Total Current Liabilities - 1,603 3,598 3,670 3,743 3,818 3,895
Total Non-current Liabilities 22,400 44,800 44,800 44,800 44,800 44,800 44,800
TOTAL LIABILITIES 22,400 46,403 48,398 48,470 48,543 48,618 48,695
Total Shareholders’ Equity 11,156 29,027 68,014 107,407 147,611 188,749 230,822
TOTAL LIABILITIES and EQUITY 33,556 75,430 116,412 155,877 196,154 237,367 279,516

Important information on Arrowhead methodology
The principles of the valuation methodology employed by Arrowhead BID are variable to a certain
extent, depending on the sub-sectors in which the research is conducted. But all Arrowhead valuation
researches possess an underlying set of common principles and a generally common quantitative
process.
With Arrowhead commercial and technical due diligence, the company researches the fundamentals,
assets and liabilities of a company, and builds estimates for revenue and expenditure over a coherently
determined forecast period.
Elements of past performance such as price/earning ratios, indicated as applicable, are mainly for
reference. Still, elements of real-world past performance enter the valuation through their impact on the
commercial and technical due diligence.
We have also presented the comparables method based on market capitalization per resource of gallon
(AU$/gallon) as a secondary measure of fair value, which, though is not central to the methodology
applied towards building the fair value bracket, is presented here as additional information.

Arrowhead BID Fair Market Value Bracket
The Arrowhead Fair Market Value is given as a bracket. This is based on quantitative key variable
analyses such as key price analysis for revenue and cost drivers or analysis and discounts on revenue
estimates for projects, especially relevant to projects estimated to provide revenue near the end of the
chosen forecast period. Low and high estimates for key variables are produced as a valuation tool.
In principle, an investor comfortable with the high brackets of our key variable analysis will align with
the high bracket in the Arrowhead Fair Value Bracket, and, likewise, in terms of low estimates. The
investor will also note the company intangibles to analyze the strengths and weaknesses, and other
essential company information. These intangibles serve as supplementary decision factors for adding or
subtracting a premium in investor’s own analysis.
The bracket should be taken as a tool by Arrowhead BID for the reader of this report and the reader
should not solely rely on this information to make his decision on any particular security. The reader
must also understand that while on the one hand global capital markets contain inefficiencies, especially
in terms of information, on the other, corporations and their commercial and technical positions evolve
rapidly. This present edition of the Arrowhead valuation is for a short to medium-term alignment


analysis (one to twelve months). The reader should refer to important disclosures on page 26 of this
report.

Information on the Algae.Tec valuation
Algae.Tec Valuation Methodology: The Arrowhead fair valuation for Algae.Tec is based on the
discounted cash flow (DCF) method. Valuation is based on for the three products namely—Algae Oil,
Biomass and other nutrients.
Time Horizon: The Arrowhead fair valuation for Algae.Tec is based on a DCF method. The time period
chosen for the valuation is ~130 months (2012-2022). While revenue is expected to ramp up
significantly during the 2013-16, the later years are heavily discounted and have a marginal effect on
valuation, which are included primarily to present a full project cycle situation.
Underlying Business Plan: Algae.Tec limited is establishing strategic partnerships and alliances with
investors, venture partners, customers and suppliers (materials, services, technologies) to accelerate
achievement of the company’s goals and objectives. Algae.Tec currently has MOUs with:
– Hong Kong company Pacific Minerals Limited and Australian company RKD International to deploy in
China
– The Malindra Group for the first Australian plant
– Leighton Contractors for engineering and project management expertise
The initial two commercial facilities will be deployed in China and Australia. Considering the rising
demand for biomass in India, the company is equally inclined towards venturing in India. The company
plans to invest IPO proceedings in building demonstration facility. It has inaugurated Algae Development
& Manufacturing Centre in Atlanta, Georgia where the photo-bioreactors will be assembled. Algae.Tec
has applied for patents in relation to McConchie-Stroud System, which would cement its technological
core competency.
Terminal Value: Terminal Value is estimated to depend on a terminal growth rate of 0%, representing
the maturity, technology change and prospective competiveness in the business.
Prudential Nature of Valuation: This Arrowhead Fair Value Bracket estimate is a relatively prudential
estimate, as it discounts the eventuality of the company acquiring and producing from any projects other
than Malindra - Algae.Tec Demo Plant before 2021.


Key variables in Algae.Tec revenue estimations

Variable 1 – Modules Constructed
Arrowhead has forecasted the modules construction capacity in lines with the company’s estimates. We
believe the company will install the first module and will go operational from 2013. Overall, we have
remained conservative in estimating the number of modules considering some level of uncertainty in
future revenue generation. Additionally, financing and technology risk could adversely impact the
company’s potential revenue generation or could delay the company’s revenue-related strategy.

2013 2014-2020 2021-2025
Low 250 550 650
High 300 650 700

Variable 2 – Algae Production per Module
Arrowhead believes that the low and high estimates of cultivation of algae from one module are 225T
and 250T per year respectively, maintaining it close to company’s estimates.

Variable 3 – Algae Oil, Biomass and Other Nutrients Prices
Arrowhead has forecasted the following low end and high end price range for the three products:-
Project Low end (AU$/mt) High end (AU$/mt)
Algae Oil 1,175 1,225
Biomass 375 425
Fatty Acid (Other nutrients) 400 450

Algae oil is a substitution of soya and palm oil which are used as raw material for biodiesel production.
Currently, soya oil and palm oil are trading in a range of AU$1250/T to AU$1300/T. We have assumed
that algae oil would sell at a discount of around 10% to soya oil and palm oil prices since it’s a new input
for bio diesel production.
Biomass can be substituted by high protein soybeans and corn which currently trade at AU$300/T and
AU$550/T, respectively. We have used the average of these two prices to arrive at the selling price of
the biomass produce.
Currently fatty acid trades at around AU$300/T. We believe algae fatty acid output would fetch a similar
price.


Algae.tec abid report - 06 sep11

Algae.tec abid report - 06 sep11

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