Australian Biodiesel (ABJ.ASX)

This stock was a market darling in 2006. Its $1 shares raced to $1.70 before collapsing in 2 years to just 2c. Transfield stepped up last year by underwriting a $16mil capital raising at 5c. According to the company the problems for the company are:

1. Denied economies of scale – the major oil refining companies are not willing to buy their biodiesel, thus denying them access to 80% of Australia’s fuel market.
2. Significant rise in feedstock prices – tallow has risen in price from $450/tonne to $975/tone today due to strong global demand and also drought in Australia.
3. The Federal government hasn’t offer the same level of support as is offered overseas. The government’s 350 million litre per annum target has proved meaningless without mandatory targets
4. These factors have forced the company to cut production from 11.7Mt in 2006 to 10Mt in 2007. Rather than produce at a loss, it has since closed the plant for the foreseeable future. The capacity of its Brisbane plant is 160Mtpa, so it was producing at just 4% of capacity.

Other pertinent facts:

1. Government support would only undermine the short term viability of biodiesel plants since there is a shortage of tallow, palm oil, jatropha and algae feedstocks worldwide.
2. The company has 456mil shares on issue, with Transfield holding a 56% stake. Those shares at 2c = market capitalization of $10mil.
3. Even if the company got its desired mandatory biodiesel limits, what capacity does the industry have to buy cheap tallow at current prices?
4. It has been losing $10mil every year since it started production. See www.abgbiodiesel.com.
5. In the USA, biodiesel production has increased 10x since 2004 to 950mil litres (2006), but this is dwarfed by the 18 billion litres of ethanol production in the USA. In the USA biodiesel production capacity has growth 4x to 3.2 billion litres.
6. In Australia, local operators took at face value government support for biodlesel. The government was targeting 350 mil litres per year, yet the industry developed capacity of 500Ml by 2008. Go figure? They also criticize the government for decimating their sales by withdrawing a tax rebate for users.
7. On the positive side the plant is designed to treat a variety of feedstocks. Its interesting that Transfield underwrote the rights issue. The issue raised $16mil at 5c. Transfield were hardly generous – the issue was at 5c, but not the share price is 2c.

The question is – Is there scope for a deal here? Is it not likely that the newly-elected ALP government will adopt mandatory biodiesel limits. Such a move would make the world of difference to this project, but in a world short of commercial grades of biomass, will it fly with government supportive policies. It should get a kick, but I doubt its viability will be underwritten. Also governments are notoriously slow at making decisions.
See my ABJ discussion forum on Google Finance.

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Andrew Sheldon www.sheldonthinks.com