Some positive news for holders and watchers.
July 24, 2007
Australian Renewable Fuels Secures 2007 Growth With New Contracts
By Chris Cann
Biodiesel producer Australian Renewable Fuels has signed off yet another supply agreement, this time to provide biodiesel for a merchant of the world's dirtiest fossil fuel – coal. ARF has agreed to supply Wesfarmers Premier Coal's mine in Collie, Western Australia, with 1.5 million litres of biodiesel per year from its Picton plant, also in WA. The open cut Premier mine will use a 10 per cent biodiesel blend in its operation.
The deal provides an insight into the future of energy as environmentally abrasive fossil fuels are combined with green fuels such as biodiesel to reduce greenhouse gas emissions.
It is an inevitable partnership. Only those with their heads in the sand believe that the world's energy needs, which are predicted to grow by 60 per cent by the year 2030, can be met largely with renewable energy. Equally naïve is anyone who thinks fossil fuel generators will be allowed to continue operating without significant cuts to their emissions. Green fuels, including uranium, are predicted to grow just enough over the next 20 years to maintain their current share of the supply at about 15 per cent.
Wesfarmers realised this trend years ago and has reduced unit emissions at Premier by 50 per cent since 1994 through adaptations including energy audits, changes in mining practices and equipment, reduced haulage distances, higher efficiency motors, and lighting control systems. The contract with ARF is its most recent initiative.
The growing expectation for business to be green is the catalyst for biodiesel demand and the basis for ARF’s strategy. The Wesfarmers agreement is the third of its kind signed by ARF in the past few months to supply businesses with biofuel to blend with traditional petroleum.
The other two contracts were significantly larger than the latest. The biggest is a contract to supply Bunbury (WA) based mining and earth moving contractor Piacentini & Son with 8 million litres of biodiesel over 12 months from the Picton plant. The other is a 5 million litre per annum deal with major oil and gas producer Caltex based on delivery of biodiesel from both Picton and the company's other plant in Largs Bay, Adelaide.
The three contracts together have taken the annual supply from the two plants up to 34.5 million litres and moved ARF ever closer to profitability, according to newly appointed chief executive John Lillywhite. Lillywhite replaced former managing director and ARF founder Daryl Butcher in mid-June.“All our sales are structured to earn a positive gross margin, even at today's high feedstock prices, and contribute to fixed costs,” Lillywhite said. “When feedstock pricing returns to historical trend, both contracts will generate a highly acceptable net profit.”
Feedstock for biodiesel accounts for between 60 per cent and 70 per cent of production costs and its price can vary greatly. ARF feedstock is made up entirely of tallow, which has experienced a price hike in recent months. Tallow was up more than 60 per cent on its April price of A$516 per tonne at A$840/t. Lillywhite expected prices to ease toward the end of this quarter but for now, ARF had reviewed its cost structure in order to compensate for the feedstock premium and had identified an annual saving of A$1 million.
The total capacity of ARF's two plants is 90 million litres – a far cry from its contracted demand at this point. However, Lillywhite is confident of both plants fulfilling their potential by next year.“We're negotiating sales contracts that will take us close to the capacity of both plants,” he said. “While we expect these to be signed during the September quarter, production and sales may not rise to near capacity levels until the first half of calendar 2008 due to the need for our customers to re-engineer their terminals for biodiesel storage and blending.”
ARF's further growth into next year at this stage looks likely to continue to get help from the Federal Government, as the John Howard-led administration attempts to seduce the green vote in the lead up to elections this year. ARF recently received A$5.4 million from the Government, which the company says helped it to secure recent contracts by allowing the demonstration of the “excellence of our production and quality capabilities”.
For now though, Lillywhite is fixed firmly on the company's requirements for the remainder of 2007, which focus around achieving cash flow. “We're focused on closing the outstanding contract negotiations, assisting customers with engineering their logistics solutions, storage and blending requirements and moving the company to positive cash flow. The key driver of cash flow will be future feedstock prices. We'll complete and implement our review of corporate overheads and opeating expenses.”