Saturday, September 23rd 2023

AEG’s Expansion Plans

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Can renewable energy firm Active Energy’s global expansion plans fuel a rise in its shares?

Despite a sharp rise on the back of a major US deal this week, shares in biomass-based renewable energy firm Active Energy remain below their recent 3p placing price at 2.1p. This year has seen the business take major steps forward in the commercialisation of its alternative fuel products CoalSwitch and PeatSwitch despite ongoing delays in its Canada-based forestry operations. Here, we look at the upside case for shares as the business continues to use the £1m it raised in a recent placing to fund its global expansion.

Green alternative

Active Energy’s flagship offering is CoalSwitch, a biomass fuel technology that creates what the firm describes as ‘unique, high-calorific, high bulk density, advanced biomass pellets’. The CoalSwitch pellets behave just like coal and, as such, can be mixed in any ratio with coal fines, or even wholly replace coal in existing coal-fired power stations.

However, unlike coal, the pellets are produced primarily from forestry waste and other industrial cellulose waste products, meaning they release far fewer harmful emissions than coal when burned. As a result, they can allow coal-fired power plant operators to fulfil their environmental obligations without having to change the way they operate.

Alongside CoalSwitch, Active has developed a process called PeatSwitch. This process creates a soil substrate made from waste fibre that can be mixed with chemical and microbiological additives to meet the specific requirements of an individual agricultural customer.

Finally, Active is also developing a sustainable international forestry management arm called Timberlands. This arm will support feedstock supply for both CoalSwitch and PeatSwitch, in addition to monetising underutilised or undervalued forestry assets.

Busy period

This year has been a busy one for Active, with the business posting developments across all of its operations.

Active’s five-tonne-per-hour CoalSwitch plant in Utah, US, became fully operational in February, allowing the company to demonstrate its capabilities at full commercial scale to potential customers. Sure enough, by the end of the month, Active had entered into an initial supply agreement with an agricultural company called Young Living Farms (YLF) beginning in March. Under the deal, YLF provides Active with up to 6,500ts of waste product that, through CoalSwitch, Active uses to create a soil amendment that YLF can then introduce into its crop production cycles. In June, Active announced that it had signed a further MoU with YLF to sell it an advanced organic soil manufacturing facility, utilising its PeatSwitch technology, for $3.4m.

One of Active’s most significant developments this year came in March when it signed a JV agreement with a Polish research firm called Cobant, which has access to millions of tonnes of recovered coal waste. Together, the two parties agreed to explore opportunities to commercialise CoalSwitch in blends with reclaimed coal. The result of the partnership was the creation of a new product called ‘SuperFuel’, which shares a similar calorific value to coal but offers a much lower sulphur content and low emission levels.

SuperFuel received formal Polish market certification and environmental clearance in June. At the time, Active and Cobant said they planned to move the product to production and begin generating revenues, adding that they were in the final stages of price negotiations with customers in the Slask Region of Poland.

Active’s subsidiary Timberlands has also enjoyed plenty of activity. In May, it signed a MoU to acquire a controlling interest in a forestry organisation called PowerWood Canada. PowerWood holds forestry contracts and management agreements with the Province of Alberta, enabling it to utilise 300,000ts of merchantable timber annually from 5m hectares of forestry. Active plans to construct a 25ts per hour CoalSwitch plant at the site, claiming it can significantly improve forestry economics.

Timberlands has also been pursuing a forestry management agreement with the Government of Newfoundland and Labrador in Canada. It believes the introduction of CoalSwitch could represent a significant long-term commercial opportunity for both the company and the province by ‘revitalising’ the area’s forestry industry.

The deal has been subject to some delays and, earlier this month, Active’s share price fell 19.8pc when it announced that talks with the government had yet to come to any conclusion. However, the business said it ‘had been given no reason to be concerned at the delay’ and has enjoyed ongoing support from all government departments throughout talks.

It has now amended its application to focus exclusively on the forestry opportunities and the development of one or more dedicated CoalSwitch plants. What’s more, Active executive director Richard Spinks has relinquished his board responsibilities to focus solely on his role as MD of Timberlands so he can put more time towards strengthening relationships.

Strategic alliance

After a long decline, Active shot up 7.7pc this week when it announced a JV agreement with a US biomass-to-energy firm called Georgia Renewable Power (GRP). The partners plan to install up to 100 tonnes per hour of CoalSwitch production facilities at three of GRP’s US plants to utilise its excess fibre feedstock and supplies of wood chips.

Under the agreement, Active will install a CoalSwitch plant at GRP’s existing power plant facilities in North Carolina before the end of the year. It will then introduce two more plants at GRP facilities in Georgia over the next 36 months. The JV will also look at creating a new process called LitterSwitch, which will produce fuel from poultry litter, as well as new products such as fertilisers and inert by-products. AEG is currently negotiating offtake agreements for the sales of both CoalSwitch and biomass sourced from existing GRP facilities.

Michael Rowan, chief executive of Active Energy, said: ‘This is an important development for Active Energy, which we believe will result in a significant increase in CoalSwitch and PeatSwitch production capacity in the US, the diversification of AEG’s activities in terms of both geography and feedstock, and additional revenue streams through biomass trading.

‘This agreement will shorten the timescales for large-scale commercialisation of our CoalSwitch and PeatSwitch products and will also allow AEG to benefit from the experience and the presence of our partner GRP, thus strengthening our capabilities in the next operational phase of our business plan.

‘We are delighted to be working with the GRP team who have been instrumental in the commercialisation and adoption of biomass-to-energy power generation in south-east U.S. We believe the clear synergies between GRP’s business and ours make a compelling proposition, and together we look forward to leveraging the benefits of our unique CoalSwitch and PeatSwitch technologies to develop into new markets.’

Moving forward

Despite this week’s leap, at 2.1p, Active’s shares remain considerably beneath the 4p they sat at back in June. This can be mostly put down to the ongoing delays in Canada, a considerable disposal by the its most significant investor in September, and high-profile board changes that notably saw Richard Spink step down as CEO.

However, there are plenty of positives to be taken from recent newsflow that may make Active worth a look at its current price. Perhaps one of the best examples of this is the company’s interim results, which were released last month.

Here, Active announced that CoalSwitch had attracted interest from several potential partners and customers in the US and Europe ranging from forestry operation to utility players. Also, it said it has received numerous requests for commercial samples and materials for test burning from utilities, power generators and forestry companies.

Likewise, the business said has received numerous enquiries for additional potential PeatSwitch customers, including a market-leading US soil enterprise called Kellog Garden Products. Finally, the firm said it expects to find out this quarter whether the EU has granted it funding to subsidise the development of SuperFuel.

On the funding side of things, Active raised £1m in June at 3p a share to fund the development of Timberlands and the commercialisation of CoalSwitch, PeatSwitch and SuperFuel. Although this money will not last forever, it at least lowers the chance of any imminent placing – although it will be worth keeping an eye on the firm’s cash balance moving forward.

Although Active has been held back by delays, its deal flow this year, this week’s JV announcement, and its expectations moving forward show a promising growth in demand for its products. If you believe Active can continue to roll-out its products globally and are willing to bet on the granting of a forestry agreement in Newfoundland, then its current £20.7m market cap could look attractive.

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The author does not hold shares but was remunerated

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