Quadrise Fuels International — Key role in transitioning to net-zero

Quadrise Fuels International (AIM: QFI)

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Last close As at 04/02/2023

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0.11 (7.97%)

Market capitalisation

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Research: Industrials

Quadrise Fuels International — Key role in transitioning to net-zero

While there is much discussion about the use of green fuels to achieve net zero carbon emissions, in practice there are many hurdles to overcome before these can be widely deployed. Quadrise’s synthetic oil and biofuel technology provides a proven, economically attractive route for reducing emissions today and eliminating them completely by 2030.

Anne Crow

Written by

Anne Margaret Crow

Director, TMT & Industrials

Industrials

Quadrise Fuels International

Status of trial programmes

Alternative energy

Spotlight - Update

28 November 2022

Price

2.18p

Market cap

£31m

Share price graph

Share details

Code

QFI

Listing

AIM

Shares in issue

1,406.9m

Net cash at end June 2022

£4.4m

Business description

Quadrise is the innovator and global supplier of disruptive fuel blending technology that produces a synthetic, enhanced fuel oil called MSAR and a biofuel called bioMSAR. The technology provides a low-cost and cleaner energy for marine, power and industrial applications.

Bull

bioMSAR gives better CO2 and cost savings than existing biofuels.

Adoption of MSAR improves economics of refinery production and upstream operations.

Adoption of MSAR reduces costs and emissions in industrial, marine bunker and power markets.

Bear

Economics of adoption dependent on oil product spreads.

Ability to progress trials adversely affected by many factors outside Quadrise’s control.

Size of company limits number of projects that can be progressed at any one time

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

Quadrise Fuels International is a research client of Edison Investment Research Limited

While there is much discussion about the use of green fuels to achieve net zero carbon emissions, in practice there are many hurdles to overcome before these can be widely deployed. Quadrise’s synthetic oil and biofuel technology provides a proven, economically attractive route for reducing emissions today and eliminating them completely by 2030.

Historical performance

Year
end

Revenue
(£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E

(x)

06/19

0.0

(2.8)

(3.0)

(0.32)

0.00

N/A

06/20

0.0

(3.0)

(3.3)

(0.32)

0.00

N/A

06/21

0.0

(2.8)

(2.8)

(0.23)

0.00

N/A

06/22

0.1

(2.7)

(2.8)

(0.19)

0.00

N/A

Source: Company accounts *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Key role in transitioning to net-zero

Technologies that can reduce emissions today

Adoption of green fuels such as methanol, ammonia and hydrogen is often proposed as a solution for reaching net zero. However there are many obstacles to overcome before these are widely deployed including manufacturing these fuels in sufficient volume and at competitive price points and transporting these fuels to where they will be used. Quadrise’s portfolio of synthetic fuels and biofuels, MSAR and bioMSAR, provides a proven, economically attractive route for reducing emissions that is compatible with existing infrastructure for transporting, storing and using fuel and can be readily integrated within existing infrastructure.

Targeting commercial revenues in H1 CY23

Quadrise is currently engaged in three key trial programmes which, if successful, could potentially start to generate commercial revenues from H1 CY23 onwards. These are (1) with MSC Shipmanagement (MSC), part of the world’s largest shipping line, which is looking for environmentally friendly bunker fuels, (2) with a large Moroccan industrials group for on-site use and (3) creation of a multi-purpose low-sulphur fuel or biofuel from surface oil sands and sub-surface heavy oil in Utah. Management estimates that the group has sufficient cash to reach commercial revenues in H1 CY23 and to cover project expenditure and fixed costs up to early H2 CY23, although additional funding may be required to bridge the gap to sustainable cash generation from H2 CY24 onwards.

Valuation: Modest adoption transformational

We are not presenting forecasts at this stage. However, as a rough guide, based on data from the company, our scenario analysis calculates that even modest adoption of MSAR could generate material revenues and take the company to sustainable profitability. For example, adoption across only 8% of MSC’s global fleet could generate around $106m in licence revenues and require minimal capex.

Company description: environmentally friendly alternative to heavy fuel oil

Quadrise has developed a disruptive residual oil technology for producing an enhanced, emulsified synthetic heavy fuel oil called MSAR (multiphase superfine atomised residue) and a biofuel called bioMSAR.

Environmental and economic benefits

Quadrise’s first fuel, MSAR, was originally promoted primarily for its economic benefits, but in the last couple of years Quadrise has attracted interest because of the environmental benefits of its fuels. MSAR, produces less NOx (nitrogen oxide) and soot than heavy fuel oil (HFO) and 5% less CO2 (carbon dioxide) in diesel engines, giving a route to reducing greenhouse gas emissions. The newer variant, bioMSAR, which was launched in December 2020, reduces greenhouse gases even further, by up to 25%, and the company is working towards having a net-zero solution by 2030.

The economic benefits have not gone away. MSAR production frees up valuable distillates traditionally used for HFO manufacture so installing MSAR production technology increases profitability for oil refiners without incurring the significant expenditure typically associated with infrastructure upgrades. The savings achieved enable refineries to price MSAR at a discount to conventional HFO, resulting in cost savings for existing HFO users. A switch to MSAR can also improve the profitability of upstream heavy oil operations. MSAR and its biofuel variant, bioMSAR, can be used for the same applications as conventional HFO which, based on data from the 2022 BP Statistical Review, is a market currently worth around $291bn/year. These economic benefits depend on the differential in price between diesel and HFO rather than the price of crude oil, so there will still be savings linked to MSAR adoption when oil prices reduce to more normal levels. bioMSAR uses refined crude glycerine, a sustainable waste product from biodiesel manufacture, making it lower in cost than other biofuel alternatives.

Proven technology applicable to multiple market segments

Quadrise is focusing on four significant market segments. These are as a marine bunker fuel/biofuel, as a replacement for fuel oil, biofuels or crude oil in industrial processes such as cement manufacture; in power generation and in upstream oil production operations where MSAR or bioMSAR may be used either as an alternative fuel source for on-site utilities or to produce a low-viscosity finished fuel product that significantly reduces pipeline transport costs. Quadrise has already proved that MSAR is a substitute for marine bunker fuel through extended sea-based trials with Maersk. MSC is proceeding with its own sea-based trials of bioMSAR and MSAR based on the results from the Maersk trials. The case for MSAR in power generation has been proven through the supply of more than 60Mt of a first-generation emulsion fuel from BP, PDVSA and BITOR between 1993 and 2006. Key members of Quadrise’s management, including CEO Jason Miles, were instrumental in the development and commercialisation of Orimulsion this first-generation fuel.

Focus on three customer programmes

Quadrise is currently focused on three customer programmes: (1) pending on-vessel trials with MSC; (2) on-site trials with a chemicals and mining group in Morocco to generate power for industrial processes; and (3) discussions regarding the commercial production of bioMSAR and MSAR adjacent to proposed oil wells in Utah. The earliest that any of these projects may proceed to commercial supply is the middle of CY 2023.

Quadrise was admitted to AIM in April 2006 and its headquarters are in London. It also has an R&D facility in the UK where it develops bespoke MSAR and bioMSAR solutions for residual oils and biofuels, some of which activity is paid for by the potential customer. It currently employs nine staff excluding non-executive directors and consultants.

Proven alternative to heavy fuel oil

Complementing traditional refining with MSAR and bioMSAR

Around 70% of the output from a typical semi-complex refinery post-refining is high-value transportation fuel and 30% low-value residue. This tar-like residue is typically solid at room temperature. Consequently, if not processed further, it can only be used for limited volume applications such as road surfacing material. Refineries widen the market for this residue by blending it with some of the high-value transportation fuel to create HFO in a mix that is 60–80% low-value residue and 20–40% valuable distillate. HFO is sold at a discount (c 4-12% as of October 2022) to crude oil, resulting in a loss for the producer.

Quadrise’s proprietary MSAR process removes the need to blend the heavy residues with distillates to make HFO, significantly improving refinery yields. The hydrocarbon residue (c 70%) is processed instead with water (c 30%) and small amounts (<1%) of specialised surfactants and emulsifiers from Quadrise’s long-term partner Nouryon, so the refiner can retain all of the high-value distillates for sale at a premium to crude oil, improving its profitability. Quadrise calculates that MSAR can generate savings of 10-40% compared with HFO and bioMSAR can generate savings of 10-15% compared to conventional biofuel.

Manufacturing process for MSAR and bioMSAR

Exhibit 1: Manufacturing process

Source: Quadrise Fuels International

MSAR and bioMSAR are manufactured using a proprietary process in which the hydrocarbon residue is reduced to particles of approximately 5–10 microns in diameter. The surfactant chemicals ensure that the resultant emulsion is stable throughout transportation, storage, fuel handling and consumption. Quadrise is able to tailor the production process to suit different residue types and applications, broadening its applicability. The key steps in the manufacturing process are:

(1): oil residues are taken direct from a refinery or heavy oil production site and cooled to under 200º C to achieve the required viscosity for the colloid mill. This is a machine used to reduce the particle size of a solid in suspension in a liquid, or to reduce the droplet size in emulsions.

(2): water, which can be derived from several utility or waste-water sources, is added to the residue.

(3): special additives are included in the water phase to stabilise the emulsion for long-term storage and conventional transport, and to promote complete combustion.

(4): the mixture is processed in a proprietary emulsion module to produce a highly stable oil-in-water emulsion with enhanced fuel properties.

(5): glycerine can be added to the water, additives and oil residuals to produce bioMSAR.

MSAR is better for the environment than HFO

The oil phase in MSAR is pre-atomised to very small sizes (5–10 microns) compared with atomised HFO droplets (100 microns). As a result, the increased surface area enables almost complete combustion, leaving virtually no carbon particulates (soot) in the exhaust gases. Tests carried out by engine manufacturer Wärtsilä have shown this reduces NOx emissions by up to 45%. MSAR also produces up to 9% less CO2 in diesel engines because it burns more efficiently. There are further, so far unquantified, CO2 savings because the MSAR production process uses less energy than other techniques for refining residue, which may involve cracking at high temperatures or the use of solvents. The amount of sulphur dioxide produced on combustion depends on the composition of the residual oil, for example any MSAR manufactured from oil or oil sand deposits in Utah (see below), which are naturally low in sulphur, will be compliant with the stringent limits on sulphur dioxide emissions required by the International Maritime Organisation (IMO). As MSAR and bioMSAR are emulsion fuels, they will readily disperse in water in the unlikely event of a spill, which is different to either conventional HFO or biofuels.

Biofuel variant – bioMSAR - is even better for the environment

As noted above, MSAR is already a more environmentally friendly fuel than HFO, but Quadrise went a step further with the launch of bioMSAR in December 2020. bioMSAR is manufactured in the same way as conventional MSAR but uses a mixture of bioglycerine (40–50%), residual oils (40–50%), water (c 10%) and small amounts (<1%) of specialised surfactants and emulsifiers from Nouryon. Glycerine is a biodegradable, non-toxic liquid derived from plant and animal sources which is a waste product from the manufacture of biodiesel. The proportion of glycerine in bioMSAR can be adjusted to potentially give a range of CO2 savings of 10–50% depending on a customer’s requirements. Formulations currently under test offers up to 25% reductions in CO2 compared with HFO. There are economic benefits as well. Quadrise calculates that bioMSAR generates savings of 10-15% compared with biofuel for the same reduction in CO2 emissions.

Exhibit 2: Efficiency of four-stroke Wärtsilä engine – 75% load

Exhibit 3: NOx reduction

Source: Quadrise Fuels International

Source: Quadrise Fuels International

Exhibit 2: Efficiency of four-stroke Wärtsilä engine – 75% load

Source: Quadrise Fuels International

Exhibit 3: NOx reduction

Source: Quadrise Fuels International

bioMSAR and MSAR fuels are fully interchangeable with each other. bioMSAR thus provides a potential route for MSAR adopters to reduce their CO2 emissions. In our opinion, this should help increase both Quadrise’s market opportunity and the speed and scale of market penetration. For example, we note that the rapid progress made developing bioMSAR was instrumental in securing the joint development agreement (JDA) with MSC, which intends to trial bioMSAR ahead of MSAR.

Initial results announced in August 2021 from independent tests carried out by VTT in Finland gave average CO2 savings of 26% on a well-to-wake basis compared with conventional diesel. Part of the CO2 reduction was attributable to an increase in engine efficiency of up to 7%. This result is better than the CO2 savings achieved with existing biofuels, which are typically in the region of 10–15%. NOx emissions were lower than for HFO and comparable to diesel. Smoke and particulate levels were very low, as were unburned hydrocarbons emissions because of efficient fuel combustion. Aquafuel Research carried out further tests, the results of which were announced in January 2022. These showed that engine efficiency could be increased by over 13% by advancing injection timing, further reducing fuel consumption and CO2 emissions. Typically, higher engine efficiencies result in increased combustion temperatures and NOx emissions. However, it was possible to reduce the inlet air temperature with bioMSAR to the same level as with diesel, resulting in NOx levels around 45% lower than diesel fuel.

Aquafuel is scheduled to complete further diesel engine testing of bioMSAR as well as other fuel and biofuel formulations to support the new Quadrise Blend-on-Board solution (see below) by the end of CY Q422. Quadrise has jointly submitted an international patent application for bioMSAR and other fuel variants with Nouryon, the supplier of surfactants used in the production process.

As the potential demand for bioMSAR is so significant, Quadrise is keen to secure sources of feedstock for the production of both bioMSAR and a future net-zero fuel. Alternatives include lignin, which is a renewable, wood-derived fuel source and cellulose sugars from renewable biomass and wood derived sources. The company has entered into a JDA with lignin biofuel specialists Vertoro under which the two companies will seek to progress the use of Vertoro’s advanced crude sugar oil as a cost-effective supplement or alternative to glycerine in bioMSAR. Quadrise has already produced stable blends of Vertoro’s crude sugar oil based bioMSAR emulsions at laboratory scale. The two companies intend to schedule diesel engine tests during the next twelve months and have filed a joint patent for crude sugar oil based bioMSAR.

Adoption by oil refineries

Exhibit 4: MSAR production plant at the Cepsa Refinery Gibraltar-San Roque

Exhibit 5: Elektrėnai power plant

Source: Quadrise Fuels International

Source: Quadrise Fuels International

Exhibit 4: MSAR production plant at the Cepsa Refinery Gibraltar-San Roque

Source: Quadrise Fuels International

Exhibit 5: Elektrėnai power plant

Source: Quadrise Fuels International

Our discussion of the MSAR production process notes that no distillate is used in the manufacture of either MSAR or bioMSAR. For an oil refiner, this means that all of its high-value middle distillate can be sold as transportation fuel, so it can offer MSAR at a discount to HFO and still improve its overall profitability. Being able to potentially purchase MSAR at a discount should encourage the refinery’s customers in industry and shipping to adopt the fuel if it was available. Quadrise has carried out extensive assessment work for a wide variety of refineries. This has included detailed front-end engineering design studies and determination of MSAR formulation costs for residues from individual refineries. It also has data from the installation, commissioning and operation of a 1,000t/d (6,000bpd) MSAR manufacturing unit at the Cepsa refinery in Gibraltar (see below and Exhibit 4).

The value generated by the refinery is not linked directly to the price of crude oil but is a function of the pricing spread between diesel and residue-based fuel oil. Based on the global marine fuel prices in October 2022 which indicates a MGO (marine gas oil)-HSFO spread of US$679/tonne, Quadrise calculates that if a 100kbpd semi-complex refinery producing 15kbpd of residue switched to MSAR production it would save 10kbpd of middle distillate and produce output c 22kbpd of MSAR, giving an additional gross profit of US$148m each year for the refinery.

The studies also show that a refinery can switch to MSAR relatively swiftly and inexpensively because the production technology is modular and can be integrated into an oil refinery’s existing operations in less than 12 months. Quadrise calculates that the total capital expenditure required for full conversion of the 100kbd refinery in the example above would be around $20m. The alternative approach for this type of refinery to achieve a comparable increase in crude ‘yield’ would be to undertake a substantial facility upgrade costing c $1.1bn and taking four to six years. In addition, MSAR is a low-viscosity liquid at room temperature so it can be stored and transported at ambient temperatures (c 20–30°C), while HFO must be heated to much higher temperatures (60–100°C). Consequently, less energy is required to handle and transport MSAR, generating further savings. The volume of greenhouse gases created during the extraction, refining and transportation of oil products has become an important metric now that companies have begun to prepare ESG reports that examine carbon emissions throughout their supply chains. The proportion emitted prior to use can be significant. For example a study by Chalmers University of Technology notes that the extraction, transport and refining of crude oil accounts for 15-40% of total greenhouse gas emissions from transport fuels such as gasoline and diesel.

Adoption in the shipping industry

Helping shipping lines meet carbon reduction targets

The IMO estimates that in 2018 global shipping emitted 1,076m tonnes of CO2, representing 2.9% of emissions caused by human activities. The organisation calculates that emissions could increase from about 90% of 2008 emissions in 2018 to 90-130% of 2008 emissions by 2050, undermining the objectives of the Paris Agreement (December 2015) which aims to limit global warming to well below 2°C. In support of the Paris Agreement, the IMO set out a policy framework in April 2018 that aims to cut greenhouse gas emissions from international shipping by at least half by 2050 compared with the level in 2008, and reduce the carbon intensity of international shipping by at least 40% by 2030 compared to 2008. (Carbon intensity is defined as either the amount of CO2 emitted per tonne of cargo transported a nautical mile or the amount emitted by a vessel in a year divided by its cargo-carrying capacity and the number of nautical miles travelled.) In June 2021, the IMO adopted some short-term measures aimed at achieving its target. These measures combine technical and operational approaches to improve the energy efficiency of ships and will require all ships to obtain a rating of their energy efficiency and ships over 5,000 gross tonnage to determine their annual operational carbon intensity indicator (CII) and CII rating. This is the first time the IMO has established a formal rating system for ships, sending a strong signal to the market. The IMO notes that shipping will need new technologies, new fuels and innovation to meet the greenhouse gas targets. In April 2022 the IMO brought forward the entry into effect date of certain specified improvements in energy efficiency from 2025 to 2022, for several ship types, including gas carriers, general cargo ships and liquid natural gas (LNG) carriers.

Exhibit 6: Comparison of transition fuels for the marine sector

Transition fuel

CO2 savings vs HFO

Relative cost per unit energy

Availability

Storage and handling cost per unit energy vs HFO

Safety

MSAR/bioMSAR

9-25%

Lower

Medium

1.2-1.3x
uses same fuel systems

Stable

LNG

10-20%

Higher (dependent on price of natural gas and logistics)

High

1.8x
New cryogenic systems
below -160º C required

Explosive

FAME* biodiesel blended with fuel oil

10-25%

Highest

High

1.05-1.1x

Non-hazardous

Source: Quadrise Fuels International. Note: *Fatty Acid Methyl Ester.

Alternative fuels are one approach to reducing CO2 emissions. A large vessel consuming 25,000 tonnes of HFO annually emits around 89,000 tonnes of CO2 annually on a ‘well-to-wake’ basis. Based on third party tests, Quadrise calculates that adoption of MSAR would reduce CO2 emissions by up to 5%, saving up to 4,000 tonnes of CO2 emissions annually. Adoption of bioMSAR could reduce emissions by up to 25%, saving up to 22,000 tonnes of CO2 emissions, which is equivalent to the annual emissions from 11,000 petrol cars. Adoption of bioMSAR or MSAR thus potentially presents a mechanism for shipping lines to reduce carbon dioxide emissions from existing vessels without incurring substantial investment in new vessels, propulsion systems, transportation and storage systems. Management estimates that a switch from a conventional biofuel to bioMSAR would also generate 10-15% cost-savings for the same CO2 reduction. For comparison, a switch to LNG, which is 85-95% methane, would cut emissions by 14% or 12,000 tons of CO2 each year, though there is a risk with low pressure engines that some of the methane, which is 28 times more potent a greenhouse gas than CO2, would not be combusted and thus be released into the atmosphere. In contrast to bioMSAR, LNG has specialised and expensive storage and handling requirements. While adoption of green methanol or ammonia would result in emissions reductions of 81% and 83% respectively, Quadrise notes that around 50MW of renewable generation capacity would be required per vessel, which is equivalent to 70-80 wind turbines or solar panels covering an area of around 4km2. There would therefore need to be substantial investment in additional renewable generation capacity for widespread adoption across the global shipping fleet to be viable.

On-vessel CO2 scrubbers are yet another option, giving a potential reduction in emissions of over 70%, but the technology is still under development and the containers for storing the carbon removed from flue gases would occupy space that could otherwise be used for cargo. In our opinion, it is likely that shipping lines will use a combination of approaches, including speed optimisation, route optimisation and improved hull and superstructure design as well as alternative fuels to reduce emissions.

MSAR proven for use in marine sector

Shipping giant Maersk invested seven years in a programme which conclusively proved that MSAR was a viable marine bunker fuel in both two- and four-stroke engines. The programme culminated in an operational trial during 2016 and 2017 on the Seago Istanbul container vessel. The vessel completed c 1,500 MSAR running hours following its normal route, using a total of 7,000 tonnes of MSAR produced at Cepsa’s Refinery Gibraltar-San Roque in Spain. The MSAR fuel performed well and feedback from engine manufacturer Wärtsilä and from Maersk was very positive. As a result, Quadrise received an interim letter of no objection (LONO) for MSAR for Wärtsilä RT-flex96C-B engines.

Despite this successful outcome, in 2017 Maersk decided not to adopt MSAR because the trial had been part of a programme in which Maersk was to meet tightened IMO regulations on sulphur emissions by installing scrubbers for removing sulphur oxides on the majority of its fleet. Maersk planned to offset the cost of installation (estimated at around $2m per large vessel) from the cost savings arising from replacing HFO with MSAR. Instead, Maersk decided to meet the IMO regulations by using very low sulphur fuel oil (VLSFO), which is more expensive than standard HFO. It is possible that the change in strategy was because the IMO had decided to bring forward implementation of the low sulphur legislation from 2025 to 2020, requiring a massive investment in scrubbers over a much-shortened timescale, requiring many vessels to be taken out of service simultaneously for scrubber fitting. More recently Maersk has changed its stance on scrubbers, with 35% of its fleet equipped with the technology according to a report from Alphaliner published in January 2022.

Exhibit 7: Seago Istanbul sailing its normal route during Maersk’s trial of MSAR

Source: Quadrise Fuels International

MSC decided to meet the IMO’s regulations on sulphur dioxide emissions by equipping its container ships with scrubbers so it could continue to burn high-sulphur fuel. The Alphaliner report cited above notes that almost half of MSC’s fleet is equipped with scrubbers. MSC was initially interested in using Quadrise’s MSAR to offset the costs of installing and operating scrubbers but soon widened the scope of its discussion to include bioMSAR as well (see below).

Adoption in industrial processes

As noted above, refineries can potentially offer MSAR at a discount to HFO, making it an attractive proposition for energy intensive industrial processes such as making cement. Based on the studies carried out for utility companies and using the spread value given above, Quadrise calculates that the cost of converting a 400MWe boiler to MSAR would be $2.5m, generating fuel savings of $34m/year compared with HFO costs of c $340m pa at current prices. This represents a payback time of only a few months. Converting from a biofuel to bioMSAR would potentially generate savings of c US$55m/year. Quadrise estimates that over 80% of the running costs for a boiler are related to fuel costs.

Adoption in the power industry

Similarly, since refineries can potentially offer MSAR at a discount to HFO, it is also an attractive proposition for power generation. This was proven commercially in 2008 when Quadrise successfully completed a commercial demonstration of MSAR as boiler fuel in Lithuania. Over 22,000 tonnes of MSAR were produced at ORLEN Lietuva’s 200,000bpd (10Mt/year) refinery from Urals crude-based residues. The MSAR was transported c 300km by rail to the 1,800MWe Elektrėnai power plant in Lithuania (Exhibit 5). This plant is operated by Lietuvos Elektrinė, a former Orimulsion customer, and is the primary source of Lithuania’s electrical power. Lietuvos Elektrinė concluded that the performance of MSAR was similar to or better than Orimulsion. The trial results were independently verified by consultants from the European Bank for Reconstruction and Development (EBRD), but the project did not proceed to commercialisation because of the financial crash in 2009. The project has not been revived since because Lithuania now has an LNG terminal at Klaipeda so security of fuel supply is less of an issue than when it was dependent on Russian gas.

Quadrise is currently engaged in three key trial programmes which, if successful, could potentially start to generate commercial revenues from the middle of CY23 onwards. The status of these is summarised in Exhibit 8.

Exhibit 8: Project timeline CY22-23

Source: Quadrise Fuels International

Marine programme with MSC Shipmanagement

In January 2021 Quadrise announced a JDA with MSC Shipmanagement under which MSC was to carry out a LONO trial of MSAR and potentially bioMSAR, which had only recently been launched, on representative commercial vessels in its global fleet. These trials are essential preliminaries to Quadrise potentially supplying its proprietary fuels to MSC for use in its fleet, thus helping MSC to achieve its stated target of reaching net zero by 2050. In July 2022 Quadrise signed a framework agreement with MSC covering both proof-of-concept (POC) tests and subsequent LONO trials. The POC tests will take place on the MSC Leandra, which was previously named the Seago Istanbul and was used by Maersk for its successful demonstrations of MSAR noted above. A project team from Quadrise has already checked that the MSAR systems installed on the vessel for the Maersk tests are ready for fuel testing and commissioning tests are ongoing. The new LONO tests will require 25,000 tonnes each of bioMSAR and MSAR, which will be produced by Quadrise and sold to MSC. Management is in discussions with third parties regarding the production of fuel for the trials.

The POC tests will commence in H1 CY23 after the Leandra returns from its scheduled maintenance and regulatory class inspection in a dry dock. This is slightly later than the Q4 CY22 start shown in our March note because of the time taken to purchase the Leandra. Assuming that the results from the POC tests are positive, MSC will then finalise agreements with third parties for trial and commercial fuel supply and conduct lengthier trials (4,000 hours of operation) to provide commercial operating experience, potentially culminating in obtaining LONOs from the engine manufacturer, Wärtsilä. Management expects that the LONO trial will take around six to eight months to complete. As the trials progress, Quadrise, MSC and other key stakeholders such as refineries will hold discussions, which are likely to commence in CY H223, regarding the supply of bioMSAR and/or MSAR for use by MSC’s global fleet. A single vessel would consume 0.6kbpd of fuel.

Quadrise is also launching a "Blend-on-Board" solution for the production of MSAR or bioMSAR emulsions on vessels. This may be tested under the MSC agreement or with new marine clients that the company is approaching.

Industrial applications with partner in Morocco

Quadrise continues to work with a large industrial group headquartered in Morocco, which is considering using MSAR and bioMSAR as a substitute for HFO to generate power at some of its operations. Quadrise successfully completed a pilot trial at one of the partner’s sites (site A) in Morocco in October 2020. A follow-up industrial-scale trial at a different site (site B) owned by the same group was delayed from Q1 CY21 because of a combination of site access restrictions related to COVID-19 and an internal management reorganisation at the client, which held up the signing of a new material transfer and cooperation agreement until May 2022. Signature has cleared the way for the industrial-scale trial to be completed in December 2022, following a delay of a couple of months caused by global electronic component shortages which meant that a new MSAR manufacturing unit was not able to start producing fuel for the trial when scheduled. The fuel has now been manufactured and is in Morocco.

Once the trial has completed, Quadrise will provide the client with a written report on the efficacy of using MSAR and bioMSAR. Provided that the client’s stated parameters regarding MSAR performance and product quality are met, the parties will enter into discussions regarding potential commercial supply, with a view to signing a fuel supply agreement in CY Q123. An industrial demonstration test at site A, which will be covered by a further agreement, is contingent on the results of the tests at site B. The Moroccan group could potentially require 2–5kbpd of fuel, depending on how many of the group’s sites deploy MSR/bioMSAR. The requirement could be substantially higher if Quadrise’s fuel is used extensively across the group’s sites.

Exhibit 9: On-site trial in Morocco during October 2020

Exhibit 10: Site of one of Valkor’s projects in Utah

Source: Quadrise Fuels International

Source: Quadrise Fuels International

Exhibit 9: On-site trial in Morocco during October 2020

Source: Quadrise Fuels International

Exhibit 10: Site of one of Valkor’s projects in Utah

Source: Quadrise Fuels International

Converting oil from oil sands in Utah

In April 2022, Quadrise signed a phased commercial development agreement with energy services company Valkor Technologies to commercialise MSAR and bioMSAR technology at Valkor’s projects in Utah. Valkor has equity stakes in multiple heavy oil projects in Utah including Greenfield Energy, Petroteq Energy and Heavy Sweet Oil LLC. The agreement provides a framework for the potential delivery of commercial revenues from bioMSAR/MSAR manufactured using oil from one or more of these projects. As the Utah deposits are naturally low in sulphur, this bioMSAR/MSAR should be very attractive as a bunker fuel, assuming it can be transported from Utah to a suitable bunker hub. For several months ending August 2022, Valkor carried out an extensive core sampling programme to accurately define the recoverable reserves from surface oil sands and sub-surface heavy oil in Utah. It also worked with partners to optimise the solvent extraction process for extracting oil from the sand.

Valkor is now waiting for drilling permits for four pilot wells which it hopes will enable it to extract its first oil later in Q4 CY22. Some of this oil will then be used by Quadrise for on-site trials converting oil to bioMSAR and MSAR. We note that Quadrise has already demonstrated it can convert oil from this area into MSAR and bioMSAR, so this step should involve working out the optimal process for converting the oil rather than the overall viability of conversion. As a result of delays in securing drilling permits, this is later than the timescale outlined in our March note, when production drilling was expected to commence at a Utah site in the summer, resulting in oil being available for on-site trials converting oil to bioMSAR and MSAR during H2 CY22. In that note, we stated that Quadrise and Valkor would agree full commercial terms for an MSAR and/or bioMSAR licence and supply agreement by October 2022, potentially resulting in commercial sales by the end of CY22. The two parties now aim to conclude an agreement by the end of January 2023 for the licensed supply of a manufacturing unit to provide fuel for MSAR and bioMSAR trials as a precursor to commercial supply during CY 2023.

Power plant applications in the Americas

Quadrise is progressing discussions with candidate sites in Panama and Honduras to trial MSAR and bioMSAR at power plants in CY H123. This is a precursor to potential commercial supply agreements later in the year.

Management

Quadrise’s management has the breadth and depth of experience required to commercialise the MSAR technology. CEO Jason Miles spent the first 12 years of his career developing emulsified fuel projects, initially as a process engineer for BP and subsequently as business development manager for PDVSA, where he implemented numerous Orimulsion power projects globally. He now has over 30 years’ technical and commercial experience in emulsion fuels. He joined Quadrise in 2006 and was promoted from COO to CEO in February 2020.

Executive chairman Michael Kirk retired at the group’s AGM in November 2021. Non-executive director Laurie Mutch took over as interim chairman until Andy Morrison became non-executive chairman in February 2022. Andy is a director of growth businesses with almost 40 years of experience encompassing major multi-national corporations and junior public companies. He began his career at Royal Dutch Shell, where he spent 17 years in its oil products (including bunker fuel), lubricants and speciality chemicals divisions. His roles there included VP positions in sales, marketing, trading and strategy, spanning several continents. After leaving Shell, Andy held senior positions at BG Group and BOC Group in corporate strategy and new business development respectively. Since 2007 Andy has led a number of junior listed companies in both the energy and ESG sectors, where he has significant experience covering restructuring, turnarounds, new listings and acquisitions. His former directorships include CEO of Xtract Energy and Silvermere Energy. He is currently non-executive director of Kanabo Group and Ondo InsurTech.

Following the resignation of former COO Mark Whittle in July 2021, Quadrise announced the appointment of Philip Hill to the position, which is a non-Board role, in January 2022. Philip is a Chartered Chemical Engineer with over 20 years of experience in fuels and chemicals manufacturing, sales and distribution for BP and INEOS. He has significant technical and commercial experience in production operations, technology licensing, asset optimisation, project development and strategic planning. Prior to joining INEOS, he managed and held directorships in a number of BP's joint ventures, where he worked to develop and license gas-to-liquids technology for downstream and synthetic biofuel applications, and to supply jet fuel to the airline industry.

Sensitivities

Customer acceptance: Quadrise’s MSAR has been proven both in extensive marine trials with Maersk and in a commercial and technical demonstration in Lithuania. However, MSAR and bioMSAR still need to be adopted as marketable, environmentally friendly and economic substitutes for HFO by the power and marine bunker sectors. Moreover, unless refineries intend to use all of the MSAR/bioMSAR they produce within their own operations, there need to be enough customers using MSAR/bioMSAR for power generation, providing heat for industrial processes or marine transport for refineries to start manufacturing the fuel.

Fuel oil spreads: the refinery price ‘spread’ between diesel and HFO determines the economic attractiveness of a switch in converting heavy residue to MSAR/bioMSAR, rather than HFO, and thus the amount by which MSAR/bioMSAR may be discounted with respect to HFO. In addition, depressed oil prices tend to extend decision-making cycles.

Not applicable to all refineries: only one-third of refineries globally are suitable for producing MSAR/bioMSAR because some do not produce any liquid residue and some inland refineries would have logistics issues. However, this still offers substantial scope for MSAR/bioMSAR uptake.

Partner risk: Quadrise has been working with Nouryon since 2004. It currently has a contract with Nouryon for the exclusive global collaboration and supply of goods and services for future MSAR and bioMSAR projects which has recently been extended for a further three years to October 2025.

Financial: when the FY22 results were announced in October management estimated that the group had sufficient cash to reach commercial revenues in H1 CY23 and to cover project expenditure and fixed costs up to early H2 CY23, adding that additional funding would be required to bridge the gap to sustainable cash generation from H2 CY24 onwards. Clearly there is no certainty on whether sufficient funding will be secured.

Financials

Quadrise is still pre-revenue. Stripping out share option and exceptional charges, operating losses reduced by £0.1m year-on-year during FY22 to £2.8m, reflecting reduced professional advisor fees and lower office costs following the move from the company’s previous head office in February 2021. Free cash outflow increased by £0.2m to £2.6m as the prior year number was flattered by positive working capital movements. The group had £4.4m in cash and no debt or convertible securities at end FY22. With current expenditure, excluding project costs at £240k/month, management estimates the group has sufficient cash to reach commercial revenues in H1 CY23 and to cover project expenditure and fixed costs up to early H2 CY23. Additional funding will be required to bridge the gap to sustainable cash generation from H2 CY24 onwards.

Valuation: Modest adoption transformational

As Quadrise has yet to generate commercial revenues, its value resides in the potential future cash flows generated from volume production of MSAR and bioMSAR. Since there is substantial uncertainty on when the various projects Quadrise is working on with its partners will progress to commercialisation, precluding the preparation of estimates, we present a high-level scenario analysis based on data from the company, which we understand is derived from the numerous detailed case studies it has carried out for prospective clients. This shows potential revenues, EBITDA and capex requirements attributable to projects for various levels of adoption by global refineries and penetration of MSC’s shipping fleet. We note that minimal capex is required for projects where MSAR technology is installed on a licensing basis, although the potential profit and risk is substantially less than if Quadrise were manufacturing fuel on a toll basis, ie charging a fee per tonne of MSAR and bioMSAR manufactured as it did for the production of fuel for the Maersk trials. We expect that Quadrise will form a separately financed JV with a partner for projects involving production on a tolling basis, thus avoiding substantial investment in capex and minimising shareholder dilution.

Exhibit 11: Possible financial implications for Quadrise from different MSAR adoption scenarios

Power market

Number of MSAR manufacturing units

2

3

4

6

Production capacity (HFO equivalents Mtpa)

0.5

0.7

0.9

1.4

Production capacity (HFO equivalents kpbd)

8.8

13.2

17.5

26.3

% global HFO market

0.1%

0.2%

0.2%

0.4%

Revenues - licence model (US$m)

22.9

33.6

44.3

67.2

EBITDA attributable to projects - licence model (US$m)

4.9

7.3

9.6

14.5

Revenues - tolling model (US$m)

32.2

49.9

67.7

101.2

EBITDA attributable to projects - tolling model (US$m)

1.5

7.4

13.4

16.1

Capex - tolling model (US$m)

(9.8)

(16.8)

(23.8)

(37.8)

Marine market

Number of vessels using MSAR

18

27

36

54

% MSC fleet

2.6%

3.9%

5.2%

7.7%

Revenues - licence model (US$m)

35.9

53.0

70.2

106.1

EBITDA attributable to projects- licence model (US$m)

5.4

7.9

10.4

15.8

Revenues - tolling model (US$m)

43.3

66.6

89.9

134.4

EBITDA attributable to projects - tolling model (US$m)

0.1

5.3

10.5

11.8

Capex - tolling model (US$m)

(9.8)

(16.8)

(23.8)

(37.8)

Source: Edison Investment Research based on company data

Adoption across only 8% of MSC’s global fleet of around 700 vessels including chartered ships could generate around $106m in licence revenues and $15.8m EBITDA and be transformational for Quadrise. The other two projects closest to commercialisation are smaller. Commercial adoption by the Moroccan partner would require the output from one MSAR manufacturing unit (MMU), ie c 2–5kbpd. This would be only part of the output from a single refinery such as the Cepsa site, which produced MSAR for the Maersk trial and has an output of 240kpd. The projected output from extraction of oil and oil sands in Utah is 3–10kbpd for each site. In our opinion, adoption of MSAR in any one of the projects closest to commercialisation would encourage multiple customers to use the fuel, which could potentially support profits beyond the upper range of our analysis.

Exhibit 12: Financial summary

£000s

2019

2020

2021

2022

30-June

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

22

0

17

75

EBITDA

 

 

(2,780)

(3,006)

(2,752)

(2,671)

Operating Profit (before amort. and except.)

 

 

(3,010)

(3,178)

(2,887)

(2,791)

Amortisation of acquired intangibles

0

0

0

0

Exceptionals

0

(1,199)

(1,266)

(13)

Share-based payments

(154)

(474)

(303)

44

Reported operating profit

(3,164)

(4,851)

(4,456)

(2,760)

Net Interest

(3)

(139)

46

(2)

Profit Before Tax (norm)

 

 

(3,013)

(3,317)

(2,841)

(2,793)

Profit Before Tax (reported)

 

 

(3,167)

(4,990)

(4,410)

(2,762)

Reported tax

184

147

150

164

Profit After Tax (norm)

(2,829)

(3,170)

(2,691)

(2,629)

Profit After Tax (reported)

(2,983)

(4,843)

(4,260)

(2,598)

Minority interests

0

0

0

0

Net income (normalised)

(2,829)

(3,170)

(2,691)

(2,629)

Net income (reported)

(2,983)

(4,843)

(4,260)

(2,598)

Average Number of Shares Outstanding (m)

888.7

982.8

1,175.4

1,406.9

EPS - normalised (p)

 

 

(0.32)

(0.32)

(0.23)

(0.19)

EPS - diluted normalised (p)

 

 

(0.32)

(0.32)

(0.23)

(0.19)

EPS - basic reported (p)

 

 

(0.34)

(0.49)

(0.36)

(0.18)

Dividend per share (p)

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

 

 

3,654

3,506

3,384

3,322

Intangible Assets

2,924

2,924

2,924

2,924

Tangible Assets

730

582

460

398

Investments & other

0

0

0

0

Current Assets

 

 

1,396

2,766

7,279

4,703

Stocks

61

61

61

0

Debtors

169

213

117

103

Cash & cash equivalents

1,060

2,380

7,006

4,423

Other

106

112

95

177

Current Liabilities

 

 

(288)

(2,243)

(276)

(262)

Creditors

(288)

(198)

(276)

(262)

Tax and social security

0

0

0

0

Short term borrowings

0

0

0

0

Convertible securities

0

(2,045)

0

0

Long Term Liabilities

 

 

0

0

0

0

Long term borrowings

0

0

0

0

Other long term liabilities

0

0

0

0

Net Assets

 

 

4,762

4,029

10,387

7,763

Minority interests

0

0

0

0

Shareholders' equity

 

 

4,762

4,029

10,387

7,763

CASH FLOW

Op Cash Flow before WC and tax

(2,780)

(3,072)

(2,752)

(2,671)

Working capital

(77)

(140)

191

(21)

Exceptional & other

130

65

7

5

Tax

184

147

150

164

Net operating cash flow

 

 

(2,543)

(3,000)

(2,404)

(2,523)

Capex

(24)

(24)

(29)

(58)

Acquisitions/disposals

0

0

0

0

Net interest

(3)

1

46

(2)

Equity financing

1,401

2,343

6,513

0

Dividends

0

0

0

0

Net Cash Flow

(1,169)

(680)

4,126

(2,583)

Opening net debt/(cash)

 

 

(2,229)

(1,060)

(2,380)

(7,006)

FX

0

0

0

0

Other non-cash movements

0

2,000

500

0

Closing net debt/(cash)

 

 

(1,060)

(2,380)

(7,006)

(4,423)

Source: Company data

General disclaimer and copyright

This report has been commissioned by Quadrise Fuels International and prepared and issued by Edison, in consideration of a fee payable by Quadrise Fuels International. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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United Kingdom

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Quadrise Fuels International and prepared and issued by Edison, in consideration of a fee payable by Quadrise Fuels International. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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