Eco Investor June 2017
Cleaning China's Water
China has a lot of dirty water, says the chairman of Phoslock Water Solutions, Laurence Freedman. And there is a lot of pressure to clean it, said Zhang Zhigang, the general manager of Beijing BHZQ Environmental Engineering Technology Company (BHZQ). BHZQ is Phoslock's new Chinese partner in cleaning some of this water.
The comments were made last month at a function at the NSW Parliament where Phoslock and BHZQ signed a strategic co-operation agreement. BHZQ is the largest water remediation group in China, so when Mr Zhigang repeated the phrase "a lot of pressure" it was clear the pressure is coming from the top.
China has serious water issues. Its fresh water resources are low, it has too much wastewater, and water pollution is a threat to people, food and wildlife. A number of long-term Government plans are underway to tackle these issues, and at least three Australian cleantechs with innovative water technologies have partnered with Chinese companies to help them become part of the solution.
Phoslock has a product, also called Phoslock, that can reduce phosphate that causes algae blooms in rivers, canals and lakes. Emefcy, which has announced it is merging with RWL Water, is commercializing small energy efficient units for treating rural and industrial wastewater. Clean TeQ Holdings has a water business that is commercializing a technology for treating wastewater, recycling process water, and upgrading ground and surface water into potable water.
A fourth cleantech, De.mem, is commercializing products for the decentralized treatment of wastewater and industrial water into potable water or to a standard that can be recycled or discharged. China is on its expansion horizon but its immediate focus is on Singapore, Vietnam and Australia.
The technologies are mostly complementary and the Chinese water market is so huge that these and other companies are unlikely to fall over each other anytime soon.
The three companies have been working hard in recent years to win a place in the market. That has meant proving their technologies, expanding their product range, and finding suitable Chinese partners.
Phoslock has been active in China for some time and already has agreements with other Chinese companies, but Mr Freedman said the deal with BHZQ is transformational. Not only are sales forecast to rise to $15 million in 2017-18, a huge leap from $1.7 million in 2015-16, but new products and capabilities are being added.
A new subsidiary, Phoslock (Beijing) Environment Engineering Technology Company, will add infrastructure, engineering and construction to Phoslock's services in China. Phoslock itself is a proven product, and the company is now adding several new products to its range including zeolite and construction materials that aid water remediation. These will turn Phoslock into an engineering solutions provider that can offer a more complete service for individual projects and broaden the scope of projects it can handle. A new factory soon to open in China will mean Phoslock can greatly increase and better control production of its products.
Phoslock and BHZQ will work to remediate impaired canals, rivers and lakes. Phoslock will provide technical, engineering and design services and products such as Phoslock, modified zeolites, bacteria and specialized construction materials. BHZQ has about 30 contracts for large water remediation projects in China. The initial project for co-operation is a huge canal network in Beijing that is in serious need of remediation.
The deal with BHZQ can open big doors. BHZQ is 70 per cent owned by Beijing Enterprises Water Group (BEWG), the largest water remediation company in Asia and with a market capitalization of $9 billion on the Hong Kong exchange. So success could lead to more success.
Phoslock has worked hard over many years but found it hard to seriously grow its revenue. The latest moves put it in the best position it has ever been in. Its improving outlook has seen its share price more than double since February and it is now at an eight year high.
Emefcy is newer to China than Phoslock, but its ambitions are just as big. The company is targeting the treatment of municipal rural wastewater and industrial wastewater. It is offering small low cost onsite treatment plants that are able to substitute for large fixed plants. It has a manufacturing plant in Israel and is building a factory in China to reduce costs in its key market.
Over the past year it signed partnership and distribution agreements with five Chinese firms, and last month it announced it would build its third commercial project in the country.
In March this year Emefcy entered a partnership with RWL Water, a New York based water, wastewater and waste-to-energy company to accelerate their penetration into China. Last month the companies went a big step further and announced they will merge to form Fluence Corporation. They believe Fluence can be a global leader in distributed water treatment solutions.
Emefcy's Membrane Aerated Biofilm Reactor (MABR) technology will be the main wastewater offering while RWL brings its anaerobic digestion and reverse osmosis technologies as well as its service offerings in system design, construction and deployment. RWL Water provides solutions for desalination, water, wastewater, waste-to-energy, and water recycling. It has designed and built over 7,000 installations in over 70 countries.
Fluence will target more markets than Emefcy was able to do and these will include the municipal, commercial, industrial, mining, oil and gas, power, and food and beverage sectors.
The companies said that combined they would have made revenues of US$62 million ($83 million) in 2016 and they anticipate combined sales will be over US$90 million ($120 million) for calendar 2017. In this regard, RWL is the major contributor. However, neither company was profitable in 2016.
If shareholders approve the merger, Emefcy will issue RWL Water's owner, Ronald Lauder, with 100.5 million new shares. Mr Lauder or his controlled entity will invest US$20 million ($27 million) in additional Emefcy shares at 85 cents per share. Following the merger, Emefcy shareholders would own 66 per cent of Fluence and Mr Lauder would own 34 per cent.
The deal looks good for both parties. Mr Lauder will get potential liquidity when the two year escrow period is over. Emefcy will retain its ASX listing, and gets a much bigger business plus $27 million in cash to fund its growth.
While Emefcy's Richard Irving will remain as executive chairman, there will be management changes. Henry Charrabé, president and chief executive of RWL Water, will become Fluence's managing director and chief executive; and Philippe Laval, RWL's chief operating officer, will become Fluence's chief operating officer. Eytan Levy, co-founder and chief executive of Emefcy, and Ronen Schechter, co-founder of Emefcy, will become president - Products & Innovation and chief technology officer respectively. Fluence will be headquartered in New York.
Mr Charrabé said "The combined company will provide packaged treatment plants with competitive capital cost, rapid deployment capability and economical operating costs. The distributed treatment model enables all communities worldwide in remote or developing regions to have the access to clean water and sanitation they deserve, at a price they can afford, while also offering a compelling model to the developed world."
But China is the big prize. As Fluence, the company will offer turnkey solutions that it hopes will accelerate the deployment of rural wastewater treatment plants.
While Phoslock and Emefcy are pure wastewater plays, so to speak, Clean TeQ's main project is its Syerston scandium, nickel and cobalt mine in NSW. The same proprietary technology is behind the company's minerals and water processing businesses. Clean TeQ Water can treat wastewater to remove hardness and nutrients and for desalination and zero liquid discharge. It targets surface water and wastewater from the municipal, industrial and mining sectors.
China is a key market and it has a joint venture with a Chinese company to develop water treatment opportunities in Shanxi Province. An initial contract is to build, own and operate a Clean TeQ water treatment plant to treat up to 13,000 tonnes of effluent per day for 20 years. Final approval of the plans and the environmental impact assessment are expected soon with construction to commence in the third quarter.
Outside China, last month Clean TeQ Water won a contract from Multotec Process Equipment to design, procure and commission a Clean TeQ Continuous Ionic Filtration (CIF) wastewater treatment solution at a minerals processing plant under construction in Oman. Clean TeQ's managing director Sam Riggall said the Oman Contract is a ground breaking step forward in validating the company's technology for industrial water recycling and reuse markets. "Treating wastewaters from flue gas desulphurisation scrubbers is a major issue for fossil fuel burning industries world-wide. The Clean TeQ plant in Oman will demonstrate the cost effectiveness and versatility of the CIF technology in this field."
Clean TeQ Water has also been contracted to perform feasibility and engineering for ion exchange water treatment systems in Australia and to remove low concentrations of uranium from process liquors at a copper/ cobalt operation in Africa.
Neither Phoslock, Emefcy or Clean TeQ are currently profitable. While cleaning China's water is a huge opportunity, the three cleantechs remain speculative investments. The Chinese are impressed with their technologies, but the companies still need to show they can turn the opportunities and the technologies into shareholder value. (ASX: PHK, EMC, CLQ, DEM)
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