Eco Investor September 2015

Pre-Revenue Securities

More Delays for AnaeCo

Investors know that commercializing new technology can take much longer than planned and can sometimes seem really hard as new and unexpected problems pop up, and so it is proving to be for AnaeCo and its first municipal waste-to-energy plant. With the plant just getting over the mechanical failures of its difficult biological ramp up phase and finally about to start performance trials, new problems and set backs have emerged.

There are three new issues. On the mechanical side, the maintenance shutdown has been extended by what is likely to be 8 to 10 weeks. On the contractual side, the criteria for the performance trial and the conditions for Practical Completion are under review. And on the strategic side, it has been decided that after Practical Completion AnaeCo will not to be appointed as the operator of the Alternative Waste Technology (AWT) plant at the facility.

Fortunately the difficulties are not terminal, but the new time delay potentially introduces more financial stress on the under capitalized and still pre-revenue business and also delays its ability to advance potential new contracts.

The expected 8 to 10 week extension to the maintenance period followed by the 11 week performance trials will push the commissioning of the plant out to at least another five months or so to early next year, if all goes well.

The 8 to 10 week delay is due to the lead time for new mechanical parts. The maintenance shutdown at the end of the biological ramp-up phase was for routine equipment inspection and maintenance and to complete some mechanical engineering punch list jobs. While the punch list jobs have been completed, new matters arose that impact the start of the waste processing and performance trials. These are replacing two defective gas analyzing sensors that are part of the safety system for using biogas to fuel the gas powered generator. The lead time for the delivery of these parts is 8 to 10 weeks.

At the same time the conveying systems for the bioconversion vessels are undergoing a thorough maintenance service to optimize their performance.

The performance trials should take 11 weeks and will see the three bioconversion vessels each perform three consecutive batch cycles of 21 days each. There will be test criteria for the production of compost, the production of biogas, the generation of energy from the biogas, and the efficiency of the recovery of organic material from the municipal waste. Successful completion of the trials will result in a certificate of Practical Completion and AnaeCo will have completed its obligations under the Design & Construct contract.

But for commercial, technical and operational reasons the trials, the test criteria and the conditions for achieving Practical Completion are being reviewed by the parties to the contract.

One reason is a significant change in the waste mix since the contract was written in 2010. The plant is designed to process 55,000 tonnes per year of mixed municipal solid waste (MSW). In 2010 the waste was going to comprise 33,000 tonnes or 60 per cent supplied by the Western Metropolitan Regional Council (WMRC) and 22,000 tonnes or 40 per cent supplied by the City of Stirling. But each had a different garbage system, with the WMRC using a two bin system and the City of Stirling a single bin system.

The new mix of waste is now likely to be about 25 per cent from WMRC and 75 per cent from City of Stirling. Plus City of Stirling recently changed to a three bin system and only the garbage bin will be sent to the plant.

AnaeCo's managing director, David Lymburn said that while the plant can handle a range of waste inputs, the outputs will change and the test criteria need to be reviewed to take the changed inputs and outputs into account.

Another reason for the review is that the commissioning identified limitations to the 55,000 tonne operating capacity of the facility. In regard to the WMRC transfer station, AnaeCo has identified tipping floor limitations and uncertainties over the logistics of waste delivery and integration with the transfer station's operations. WMRC now expects the plant to process 36,000 tonnes of MSW in its first year. Mr Lymburn said the lower figure is a one-off as the plant ramps-up.

While the operator of the facility is yet to be decided, it has been confirmed that it will not be AnaeCo. Mr Lymburn said it would have been better if AnaeCo were to stay involved, but operating the plant is not a core activity and would have involved additional staff. And Anaeco will still be involved through the provision of technical support.

The delay in choosing an operator may affect the start of performance trials as the contract envisaged the operator would be appointed and active in the performance trials.

AnaeCo said the delay has caused operations and maintenance activities to be combined with commissioning activities, and it has incurred additional costs because of this that it will seek to recover where possible.

Another possible source of delay is that the facility's owner and the councils have yet to agree on the terms for payment of gate fees for the waste delivered.

So for AnaeCo there is plenty happening and not happening, or happening more slowly than it was planned to happen.

Mr Lymburn said the many difficulties at its first plant mean that AnaeCo is much better prepared for the development of subsequent plants, both from an engineering perspective and in contract complexities and aligning the expectations of contract parties.

The ongoing revenue from the first plant will come from technology licensing and technical support. But it will not be substantial. To grow its revenue AnaeCo needs new projects. The key to this is having the first plant running, as this will enable it to further the interest in potential new plants from at least three parties.

The latest issues saw AnaeCo's share price touch an all time low at the rock bottom for penny dreadfuls of 0.1 cent.

IIts position is not helped by having net assets of minus $5.5 million and cash of only $728,725. Yes, commercializing new technology can be very tough. But its equity position will improve if a deal now being finalized to convert a big chunk of its debt to equity proceeds.

For investors, it would have been nice if the project could have been delivered much less painfully. The technology has been a very long time in the development and commercialization. But it is a measure of how important it could be that if and when it is up and running and new plants are being built, many of these problems will be forgiven and most forgotten. (ASX: ANQ)

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