Dear fellow shareholders,
Please note that this update doesn’t disclose any new or material information, but does talk to the broader company strategy and provides context around the key factors currently impacting your company.
The update is via a video interview below covering some of the key topics in addition to a more detailed written update below the video.
High Level Strategy
Technology Commercialisation overview
As shareholders are well aware, ECT is a pre-commercial, pre-revenue technology commercialisation company.
At a high level, our objectives are simple; commercialise Coldry, then commercialise Matmor to generate revenue.
Necessarily Coldry is first cab off the rank as it also forms the front end processing for Matmor. By developing Coldry first, it not only de-risks part of Matmor scale-up in the future, but provides the path to the nearest term cash flows for the company.
Drilling down a layer, the commercialisation process involves progressive levels of research and development aimed at de-risking scale up and looks to validate, via hands-on operation and verifiable measurements, the technical and commercial basis of the technology.
The next stage for Coldry, commercial-scale demonstration, is intended to deliver on that validation objective.
Like any first-of-a-kind product or process, the initial commercial-scale deployment is usually the most expensive. Economies and efficiencies then develop as real-world learning is incorporated into subsequent versions. As such, the demonstration plant requires a significant capital investment.
Informed investors understand technology commercialisation follows a typical path that crosses two key financing ‘gaps’, colloquially called the ‘Technology Valley of Death’ and the ‘Commercialisation Valley of Death’. The diagram below shows where we’ve been and where we stand.
The original Coldry IP owners, the Calleja family, funded the early lab-scale and pilot development, bridging the ‘Technology Valley of Death’.
Since mid-2006 research and development has been funded by shareholder-sourced Venture Capital raised via the issue or conversion of securities as a listed company and subsidised by R&D Tax Incentives.
Traditionally, Venture Capital, in the form of either shareholder investment or institutional VC investment, has its limits. Between that VC limit and the point at which traditional debt and equity funding may kick in, is the “Commercialisation Valley of Death”. This gap exists because the cost of demonstration, as mentioned above, is higher than post-demonstration deployment. This extra cost also comes with increased risk from an investment perspective, simply because it’s never been done. The upside of success can however be substantial. The key is attracting investors with the right risk-reward profile.
Most banks and institutional investors risk profiles preclude them from financing pre-demonstration technologies. Crossing ‘the valley’ typically requires private risk capital with a higher-risk investment appetite and longer-term expectation on those investment returns. The addition of government funding can also help overcome the challenge by spreading the higher demonstration cost and risk.
As you know, we’re preparing to cross ‘the valley’ now. This is why Monash Capital Group is an attractive finance option worthy of our persistence. Despite delays in Monash’s completion of its wholesale capital raising, their investment profile remains an ideal fit with our stage of development due to their flexibility in bringing capital to bear. Investors will also clearly understand the rationale behind applying for the available government funding. Again despite the delays in the ALDP, the potential for the substantial assistance is worth the effort.
With this in mind I’d like to touch on one of our most frequently asked questions:
“When is the share price going to go up?”
The short answer is the company is not able to comment on its share price. It is a function of the equity market and determined by buyers and sellers. Operationally the company is focused on delivering the stated objectives.
What I can comment on is our strategy to commercialise our technologies and how we view long term shareholder value.
The topic of shareholder value is much discussed across all companies.
In some cases, taking the current value of future free cash flows and arriving at value per share can provide a fundamental value for a company with revenue. There are other methods and considerations, but nevertheless a fundamental value for a business can be determined.
A fully informed market will then consider this fundamental valuation, and adjust it for various views on expectations of increase or decrease in future earnings and investors will buy, hold or sell according to their own investment strategy & risk profile. This is overly simplistic and ignores many external influences such as government policy, natural disasters and the like, but it leads to my next point.
ECT is pre-revenue. It is harder to arrive at a fundamental valuation. At this stage of development, estimated value is calculated from the future revenue stream projected by the commercialisation plan and heavily discounted for time and risk.
In our case, we project first revenues following completion of the demonstration plant in Victoria. Those revenues are projected to increase with the subsequent planned expansion to 2 million tonnes capacity. From there it’s a matter of executing projects globally to generate increased royalties.
The key to shareholder value is generating revenue. The key to generating revenue is building commercial scale Coldry plants. The key to building those plants is developing customers for the product and technology. In our experience, prospective customers will only adopt the product and technology following demonstration and validation.
While we all share a desire for short-term share price appreciation, the key to long term, sustainable shareholder value is executing on the commercialisation plan to deliver revenue.
And that is where we are currently positioned.
At the end of August, your company concluded 18 months of engineering work with Arup delivering the ‘construction ready’ work packages for the Coldry demonstration project planned for Victoria.
This work is the culmination of R&D activity over several years focused on the scale up of the Coldry technology from the original lab and bench scale work through pilot and on to commercial-scale demonstration ahead of commercial deployment.
The reason behind this stepwise approach is simple; Scale up involves risk. Scaling up in steps maximises the learning opportunities and minimises the total cost should the process fail to satisfactorily scale.
We’ve followed a conservative approach using a scale up factor of 10. The pilot plant produces at approximately 2 tonnes per hour. The Demonstration plant is designed to produce around 20 tonnes per hour. The Commercial Scale Plant will produce more than 200 tonnes per hour.
That’s the technical side. The other side of the R&D equation is the commercial feasibility. Capital intensity and cost per tonne of finished product need to fall in line with the various target markets. Demonstration at commercial scale is specifically intended to validate both the technical and commercial aspects so that the required investment of several hundred million dollars into a commercial scale facility is adequately de-risked.
The second last hurdle is project feasibility. Each project will feature unique variables that when added to the technical and commercial fundamentals of the core process will either make or break a project. These variables mostly relate to infrastructure and logistics.
Lastly, a newly demonstrated process needs to compete for capital against alternatives. Demonstration pins down the economics and allows potential customers of the technology or product to form an investment profile of the project and benchmark the available solutions.
With this in mind, the relationship between scale and capital intensity for Coldry looks like this:
The R&D combined with stepwise scale up is achieving a key objective; driving down projected capital intensity.
As mentioned, the engineering is ‘construction ready’. The next steps centre on capital raising for the Coldry demonstration project. There are two external factors influencing the timing of this next stage:
- ALDP outcomes
- Monash investment timeframe
This $90 million funding program, originally administered by the Victorian Department of Primary Industries, and now under the Department of State Development, Business and Innovation (DSDBI), sought expressions of interest from companies with pre-commercial lignite upgrading technologies to construct and operate demonstration facilities in line with specific grant program criteria.
Shareholders would be well aware from previous announcements that the Company applied for funding in November 2012 to support Coldry commercialisation in Victoria under the program. We were shortlisted in December 2012 and invited to submit a detailed proposal in March 2013.
We submitted the comprehensive proposal and, following several rounds of increasingly detailed evaluation, remain on the short list.
At the time of writing this update, the ALDP website states:
“The department advises that the selection process is still in progress in relation to the outcome of the Advanced Lignite Demonstration Program (ALDP).
The department can confirm that no applicant has been advised of any outcome in relation to the ALDP.”
In short, the ALDP remains in place, but it is unclear how the new Federal Government and its policy objectives may change the program objectives. What is clear is that the timetable continues to stretch.
While there is no guarantee ECT will attract a funding award from the program, we are committed to pursuing alternate arrangements to further our commercialisation agenda.
We will continue to update the market as material events occur. Meanwhile, in lieu of new information, we refer shareholders to previous company announcements.
As reported in the various updates throughout the year, despite delays Monash Capital Group continue to pursue their capital raising program, and their intent to invest $6 million equity in addition to substantial project funding for the Coldry demonstration plant remains.
While their delays are frustrating, the Board acknowledges the need to remain patient, as the Monash funding commitment extends to the CDP, which as outlined earlier in this update, is a mandatory stage in the pathway for commercialisation of Coldry.
I have expressed previously that without Monash’s very substantial funding commitments to the CDP, alternative financing might be difficult to secure in the current economic and financial environment, and on terms less favourable to shareholders.
In the interim, ECT has continued to deliver on its preparatory steps ahead of the CDP.
Further, the Board has developed and continues to refine contingencies to enable the Company to secure alternate funding for the CDP and for ongoing operations.
As an example of this, our R&D rebate for the tax year 2012/2013 was received last week. The $1.632 million cheque was welcome! We received an advance against this expected rebate earlier this year (see FAST finance: http://www.ectltd.com.au/asx-announcements/capital-raising-update/). We are now in the process of considering a similar mechanism to provide for the company’s working capital needs for this year’s expected R&D rebate. This funding mechanism allows the company to bring forward these cash flows, and provides an alternative to equity issue. It was expected that the Federal Government would introduce a quarterly R&D claim process in the last parliament, but this legislation was unable to be presented before the election. Should this come forward again, it represents an alternative to FAST finance as it is currently structured.
This sums up the two key influences on our current commercialisation status.
I now turn my attention to another two key points of interest raised by shareholders recently.
- Options series expiry
- India strategy
We’ve received several queries from options holders concerned about the expiry date in January 2014.
Clearly, the decision to convert for most holders is contingent upon share price being above a certain level.
The timing and outcome of both ALDP and Monash investment can significantly impact share price and therefore the decision by options holders to convert.
In short, the Board is aware of the timing issue and will respond accordingly in line with events as they unfold and in the best interests of the Company.
Coming back to Coldry, we’ve been extremely mindful of the need to develop commercialisation options, locally and elsewhere, independent of ALDP outcomes.
To this end we provided an update in August on our ‘India Strategy’ that outlined the drivers behind our plans in India.
Coldry not only delivers a high-energy fuel for power generation, but is also a ‘gateway’ process to ‘downstream value-added processes’. It has been successfully tested on lignite samples from India’s Neyveli Lignite Corporation (NLC).
NLC controls approximately 80% of India’s 15.8 Bn tonnes of known lignite reserves.
Earlier this year NLC commenced a program aimed at developing options around the upgrading and advanced utilisation of their resource.
ECT has developed a proposal, currently under consideration by NLC, to demonstrate Coldry at their facility, located near Chennai.
Broadly, the proposal seeks to demonstrate the Coldry process and, as part of an integrated value added approach, produce dry lignite for domestic power generation and conversion to higher value products including oil, gas, metallurgical coal equivalent (MCE) and fertilisers via third-party technologies and to displace imported coal in non-power applications.
Given the fact India has no domestic metallurgical coal reserves there is also interest in developing Matmor to pilot scale and beyond.
In line with ECT’s strategic partnering approach, Coldry produced from the proposed demonstration plant at NLC would be utilised for testing in third-party downstream processes ahead of subsequent technology selection and deployment. As such ECT will be actively engaging with technology providers in these areas to develop and deliver appropriate solutions designed to meet NLC’s objectives.
Assisting us to engage productively with NLC and other potential India market partners, ECT has been working closely with local market advisors. This approach has been instrumental in building local market connections and qualified, responsive expertise on the ground, to facilitate and guide ongoing discussions.
In addition, we’re working closely with Yes Bank of India, who will provide corporate advisory assistance, in addition to assisting us to establish links into reliable, qualified plant and equipment fabrication partners.
With the status of our Coldry plant design and engineering for the Victorian project, we now have the ability to rapidly adapt the core design to the conditions in India, which is expected to minimise engineering and design cost. This aspect, combined with cost-effective local fabrication and construction, has the ability to significantly impact the economics of the proposed project. Our current estimates place the cost of deploying Coldry in India at ~50% of an equivalent project here in Australia
The development of partnerships with skilled equipment manufacturers and fabricators in India will provide benefit beyond Indian Coldry plants, with potential for export of components from India to Coldry plant projects globally.
Timeframes for further discussions and formal agreements are not yet agreed, however NLC have signalled their intention to refine this in the near term.
Coldry demonstration is the number one focus for the company. It is the key to progressing to commercial deployment globally and underpins our advancement toward generating revenues.
Annual General Meeting
We plan to hold our AGM towards the end of November. A Notice of Meeting will be issued in the near future confirming the details.
We will continue to make ASX announcements as material events occur.