Eco Investor April 2013

Pre-Revenue Securities

AnaeCo's Commercialization Outlook Improves

After 14 years of development, AnaeCo is at a timely point in its commercialization with a $21 million rights offer that has solved its balance sheet and near term capital issues, a new study for a 200,000 tonne per annum plant in Southern Australia, and the expansion of its foundation municipal waste to energy project in Perth mostly complete and ready for ramp up.

A shortage of capital has long plagued AnaeCo, and the rights issue was big enough to be a massive recapitalization. The number of shares on issue more than quadrupled from 510 million to 2.29 billion. But most importantly, the $21.4 million injection saw its balance sheet go from a net equity of minus $15.5 million to a positive $7 million.

Along the way, using cash and shares, it cleaned up a $7 million liability to partner, Monadelphous, and $0.7 million in loans from two of the company's directors, Dr Ian Campbell and Gianmario Capelli. Total liabilities fell from $27.4 million to $19.7 million.

Cash jumped from $2.5 million to a very handy $17.5 million, and this is a big chunk of its $26.7 million in total assets. Even after allowing for all other costs to complete the Perth DiCOM project, AnaeCo said it has enough working capital for the next 12 to 18 months.

Managing director and chief executive officer, Patrick Kedemos said total cash will soon rise by another $2.7 million when AnaeCo receives the balance of a $4.9 million R&D Tax Incentive refund for 2011-12; and there is the prospect of more R&D refunds in coming years.

Another benefit of the rights issue is that it brought new shareholders and blue chip funds onto the share register. The issue was fully underwritten and Mr Kedemos said the company could have raised double the money.

All this is well earned relief for shareholders as developing and commercializing the DiCOM technology has taken about $120 million over 14 years. Before the rights issue AnaeCo had raised $67.8 million in equity and accumulated losses of $61.6 million. Other capital has come from project partner Palisade Investment Partners and from government grants.

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The development timeline for the DiCOM system.

Eco Investor has always emphasized the usually long and expensive path of technology commercialization, and unfortunately for early shareholders AnaeCo well and truly ticks these boxes.

But the company's prospects are now much brighter, as 18 months is long enough for AnaeCo to start earning revenue from its Perth project and to set its course on developing its next project.

It has choice. Since January it has announced an agreement with Brisanzia Technologies Pvt Ltd of New Delhi to look at using the DiCOM technology at a site in India; an agreement with Repindo Resources Pty Ltd to look at using the technology for an up to 500,000 tonne per annum facility at Basra in Iraq; and last month it was asked by a private company to do a Project Definition Study for a 200,000 tonne plant at an existing facility in South Australia.

It also has earlier agreements with some other Australian organizations and with Dynagreen Environmental Protection Group Co Ltd of China.

All of these potential deals are based on AnaeCo licensing its technology, so this should limit its capital needs if they proceed.

Mr Kedemos said the South Australian opportunity is the most advanced and at this stage is the most likely to be next.

The third leg supporting AnaeCo's future is the upcoming commissioning of its Perth project.

There are only a few items of construction to complete, then will come ramp-up which should take 12 weeks, and performance testing which should take nine weeks. All of this should be done by December this year. At full function the plant will process 55,000 tonnes per year of municipal solid waste.

Mr Kedemos said that when the plant is running AnaeCo will receive royalties for the use of the technology and fees from technology support. There will also be initial operation fees but AnaeCo does not see itself as an operator and is likely to subcontract this function.

AnaeCo's business model is to earn revenue from its DiCOM System package including design, the process control system, and commissioning; from technology transfer and licensing; and from consultancy services such as project and feasibility studies and technology support.

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Mr Kedemos said the Perth plant will also be a working reference site that should unlock further interest from potential clients, be the catalyst for new orders, and he expects it will lead to AnaeCo becoming cashflow positive in 2013-14.

But immediate revenues will come from consultancy services such as feasibility studies.

AnaeCo's system recycles unsorted household solid waste by sorting it into recyclables such as steel, aluminium, glass and plastics and using a bioconversion process of anaerobic digestion and aerobic composting to turn the organics into biogas and compost.

As well as reducing the need for landfill, it has the potential to turn Australia's mountains of food scraps, garden waste and lawn clippings into a source of energy.

The OECD estimates that global municipal solid waste is over 2 billion tonnes per annum, and AnaeCo says the global market is worth over $400 billion and growing at 7 per cent per year.

With its three big steps forward, AnaeCo now has a serious chance to turn some of this waste into a business. The next year or two will be interesting. (ASX: ANQ)

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