Leaf Resources — Update 20 July 2016

LER has developed and owns the ‘game changing’ Glycell process. Carbon feedstocks for production of biochemicals are produced by breaking down lignocellulosic biomass to cellulosic sugars. The sugars are then used as a feedstock for bio-based chemicals. Traditional methods have generally not been cost competitive with petroleum based chemicals.

The Glycell process breaks down the biomass to cellulosic sugars at a substantially lower cost than existing processes (such as high pressure acid) with many productivity related, technical and revenue enhancement benefits. In the Glycell process, recyclable glycerol is used as a reagent.

The process is competitive against petroleum based alternatives because of its lower operating costs, high cellulose recoveries and the production of ‘clean’ sugars. Moreover, this process operates on virtually all biomass, and projects based on low cost or zero cost biomass, such as agricultural waste, can be financially very attractive.

Notwithstanding the technical and financial attractions of the Glycell process, many incumbent producers are already invested in older technology. LER has therefore been proactive in seeking opportunities for its Glycell process, particularly potential projects with ‘advantaged’ biomass where biomass is readily available at low or zero cost.

Companies with process based technological advances often achieve income streams through licence fees and royalty payments when the technology is commercialised. However, the technology developer does not achieve any economic interest in the facility, with most of the financial benefit passing to the project operator.

Having developed a globally significant process for the production of renewable chemicals, LER has focused on leveraging its Glycell technology towards earning free carried interests in projects that use it, in addition to licence fee income, to obtain a more favourable return for its technology.

LER has entered into binding agreements with US-based project developer Claeris Inc. of Dallas, Texas USA to establish a JV entity, Leaf Development, LLC. The structure of the agreements incentivises Claeris to develop a financially attractive platform company of renewable production facilities.

LER has outsourced new project development to Claeris, which has a proven track record of developing successful large-scale renewable chemical projects.

LER has existing JVs and MOUs with Monaghan Mushrooms, ZeaChem and projects related to rice husks:

Claeris will manage Leaf Development and be responsible for all aspects of project development, including:

LER believes the capital required to support Leaf Development is very much in line with what LER would need to complete engineering packages and feasibility studies for an equivalent licence only transaction.

In earlier studies, LER had considered that the optimal scale of a Glycell facility was of the order of 210,000 bone dry tonnes per annum. While the scale of the first facility has not been finalised, consideration is now being given to a facility with a feedstock capacity of 100,000 bone dry tonnes per annum. This scale makes economic and technical sense and may be more suitable for a wider range of project opportunities.

After a broad search of the opportunities available globally, LER recognised, as a small Australian company, that it was hard to achieve the desired progress and momentum in securing global scale projects with large US partners on its own. Working with an established industry participant like Claeris provides LER with connections to a large network of organisations and professionals in the renewable sector and potential advantages such as:

We have modelled a ‘typical’ project that converts a low-cost source of biomass to a standard chemical with mainstream applications. Glycell produces the cellulosic sugars from the biomass.

Compared to our valuations in our June 2016 note, we are now modelling a plant size of 100,000 bone dry tonnes per annum compared with 210,000 bone dry tonnes per annum. This is line with the current project proposals of Leaf Development.

The valuation of a single project is now lower because of the c 48% reduction in capacity, but similar on a valuation/tonne of capacity basis. The lower A$/share valuation also reflects recent and assumed future equity raisings. The capital cost per unit of output is now higher because of the lower production scale. We have also increased the modelled project life from 15 years to 20 years in line with comparable plants. The reduction in the market price of refined glycerol has limited impact on the valuation because the cost of purchased crude glycerol has also fallen. The valuation is relatively insensitive to the small increase in the C5 sugar price, which reflects market volatility.

Key assumptions from our model include:

In Exhibit 1, we tabulate a range of indicative valuations for LER for a free carried interest in an individual project. We vary the renewable chemical price from US$1,200/t to US$1,800/t and the free carried interest from 5% to 20%.

The free carried interest will be a combination of Leaf Development’s free carried interest in the project (expected to be up to 30%) and LER’s interest in Leaf Development (up to 75%).

For the purpose of our valuation per share range, we use issued shares of 180.6m after allowing for a placement of LER shares to Claeris and an assumed equity raising, which will assist with LER’s funding commitments for Leaf Development. This compares with current issued shares of 142.7m.

These valuations do not include the potential value of LER’s existing JVs and MOUs with Monaghan Mushrooms, ZeaChem and projects related to rice husks.

The JV arrangement with Claeris was formed to develop up to five renewable chemical projects using Glycell technology. In Exhibit 2, we provide indicative valuations (A$m) for up to five projects over a range of free carry interests.

LER is actively involved in discussions with a broad range of organisations in many countries with the objective of establishing commercial applications for the company’s Glycell technology. The agreement with Claeris aims to accelerate the speed of project development.

LER has no current source of earnings. LER’s agreements with Claeris and its existing JVs and MOUs have the objective of commercialising LER’s Glycell technology and generating earnings in negotiated free carry interests in projects and through licence and access fees.

A placement and options conversion on 6 June 2016 raised A$947,000. In addition to the funds raised from the placement, LER is expecting to receive a total of A$650,000 from JV research fees, the Export Market Development Grant programme and the R&D Tax Rebate in the near future.

Claeris has also stated that it intends to invest US$500,000 in LER at an issue price of A$0.125.

For the purpose of our model, we had previously assumed an equity raise of approximately A$2.3m at a notional price of A$0.12/share in the 2016/17 year. We now assume an equity raise of approximately A$3.5m at the same notional share price of A$0.12. This will cover the US$1m funding for Leaf Development.

The current number of issued shares is 142.7m shares. For the purposes of our model, we assume there are issued shares of 180.6m shares after the placement to Claeris and the assumed A$3.5m equity raising. For FY17e, the consequent weighted average number of shares would be approximately 170.7m.

Given LER’s goal to accelerate the commercialisation of its Glycell technology, the company may raise more equity funds during 2016/17.

At 31 March 2016, LER had cash of A$0.79m and no debt. LER subsequently raised A$947,000 on 6 June 2016 through a placement and options conversion.