Chairman's Address - 2012 AGM
11:00 AM (EST)
I need to advise shareholders that this morning we have requested a trading halt in response to a letter received this morning from Monash Capital Group. In this letter, they have confirmed the availability of the first tranche of funding is available within the next week. However, they have sought to change some of the terms of the placement agreement, and some of these are material and requiring due consideration by the Board. This will take the Board some time to consider and respond to Monash. However, we will proceed with the AGM agenda as it stands, including resolution 6, which seeks approval for the placement of shares to Monash on the terms detailed in the explanatory memorandum that formed part of the Notice of Meeting.
Before I start the Address I would like to refer to the Notice of Annual General Meeting and the invitation to Shareholders to ask questions of the Directors and Auditors.
To date we have received three (3) explicit sets of questions from shareholders.
These questions can be generally classified as follows:
- Monash Capital Group as a cornerstone investor; its investment to date and in the future
- Funding of the Coldry Commercial Demonstration Plant
- Corporate Governance issues
- Extension of the “sunset date” as a result of the postponed AGM
I will address all of these “Questions submitted by Shareholders” during my address.
With that said, I will start this address by referring to the Company’s strategy for commercialising our core technologies as this will help shareholders understand why the Board decided to defer the AGM by almost two weeks.
And, in the context of our commercialisation strategy, I will also elaborate on why your Directors have managed the Monash Capital Group share placement transaction in the way that we have.
In August of 2011, when this Board was established, we decided that a key priority was to review the strategy for commercialising our technologies. The Board members felt that the Company had not been making adequate progress in this area; ECT did not have a strategy based on solid engineering data and sound commercial terms, and the window of opportunity to have first-mover advantage would soon be lost.
After discussion with resource industry experts, including global resource traders, steel producers and coal-based electricity generators, we came to the realisation that our technologies would not be commercialised until we could demonstrate consistent and reliable production at commercial scale; and we needed to develop a commercialisation strategy which included this mandatory element.
A strategy of going from pilot plant to commercial-scale production, by-passing a commercial demonstration stage, would not garner the industry financial support necessary to proceed with a commercial-scale plant for what would still be, as far as the industry was concerned, an unproven technology.
The essence of our commercialisation strategy is:
- Complete the engineering necessary:
- To prove the process at commercial scale
- To refine the capital cost and operating cost estimates for a Commercial Scale Plant
- To provide designs and construction plans for both a Commercial Scale Plant, and a Demonstration Plant
- Based on the integrity of this engineering work, and the collateral it provides, we will then proceed to attract investors, including industry investors, in a Demonstration Plant.
- We would then construct the Demonstration Plant and produce from it for 6 to 12 months to prove feasibility at commercial scale, and
- Using the Demonstration Plant experience, refine the engineering to design and build a Commercial Scale Plant.
- We would then invite Demonstration Plant investors to participate in a Commercial Scale Plant, based on the now proven economics of Commercial Scale production.
- And then proceed to construct and operate the first Commercial Scale Plant.
This plan should deliver the most expedient commercialisation pathway as it’s based on detailed engineering, sound legal and commercial structures, risk minimisation and appropriate financial incentives for project participants.
This strategy however has numerous challenges attached to it, and we assess the greatest challenge to be that of attracting investors into the Commercial Demonstration Plant or CDP. The reason for this is that, at the CDP stage, the technology is still unproven and investment into the CDP has significant risk attached to it.
Given the current state of the financial and capital markets, your Board is very strongly of the view that financing of the CDP by traditional project financing sources will be difficult if not impossible.
The offer by Monash to assist with project financing for the Coldry Demonstration Plant reduces the financial risk for other investors, and the Board is of the view that, without the provision of substantial project financing from Monash, it would be very difficult to secure interest from resources companies in the project.
Yesterday we announced our success in securing a 5% equity interest in the CDP from K-Coal of Korea and we are in negotiations to secure further equity investment from other resource companies, including several large Korean conglomerates. Whilst K-Coal’s equity interest is modest, we believe it will have significant influence on the other Korean companies to also invest in the CDP project.
K-Coal has committed to the CDP, in large part, because of the expectation that Monash will provide substantial project finance and, in doing so, mitigate the risk for other investors.
During my numerous discussions with Korean and Japanese resource companies in their offices in Seoul and Tokyo, it is made very clear to me that their interest in the project is contingent on a de-risking brought about by substantial financial participation by other parties, and this includes the provision of substantial project financing.
It is for these reasons that we have continued to work with Monash for the delivery of the share placement monies and, very importantly, the subsequent delivery of substantial project financing for the Coldry Commercial Demonstration Plant and other ECT projects.
Monash Capital Group (Monash)
As of today’s date, Monash has not delivered any further placement monies however we are in receipt of a letter from them which states that the first tranche of $1.0m will be delivered to us during next week, and further tranches of $1.0m each will be delivered each fortnight until full settlement of the $6.0m is made.
I can advise that the wholesale funding provider to Monash has confirmed the funding arrangements are proceeding and are unconditional.
Whilst the actual delivery of funds to ECT has been much slower than expected, receipt of the letter from Monash this week, together with the Board’s knowledge of the financial instrument being used by Monash to deliver funds to ECT, we remain confident that Monash will fully complete the transaction. Furthermore, we fully expect that Monash will be in a position to fulfil its commitment to provide substantial project financing for the Coldry CDP within the timeframe required.
The Board fully appreciates the concern and anxiety expressed by Shareholders over recent months regarding the delayed settlement by Monash however we trust that, with the renewed confidence provided by the Monash letter, together with Monash’s re-affirmation of project financing for the Coldry CDP and other projects, it was in the Company’s best interests to extend co-operation with Monash and accept the delayed settlement.
Design for Tender (DFT)
The delivery plan for the full DFT and subsequent pre-construction engineering works has been adjusted to take into account the timetables embedded within the Advanced Lignite Demonstration Program (ALDP). We expect to commence soon on the construction cost estimation programs and some elements of the Tendering Program.
We expect to have more formal engineering construction estimates in hand prior to the final submission dates for the ALDP Request for Proposal stage, towards the end of March next year.
The DFT and associated works have progressed more slowly than originally planned. The constraint to progress was the available cash resources, but also the form of our ALDP submissions required a different delivery schedule. Recently, we have proceeded with the Arup Strategic Deliverable Bond to assist in funding Arup's work and we will soon learn of the outcome of the first round of ALDP assessments.
Meanwhile, we will progress our Commercial Demonstration Plant designs and construction plans, which fits perfectly with the requirements of scale, technology maturity level and demonstration challenges, which the ALDP process will support.
We would like to show a video at the end of the meeting, which provides a walkthrough of the latest of the design iteration of the Coldry Demonstration Plant.
Commercial Demonstration Plant (CDP)
We are in the process of establishing the CDP legal entity and have developed commercial agreements including Letters of Intent and Terms Sheets. It is these agreements that K-Coal have accepted and signed and we have provided similar agreement documents to other resources companies for consideration. These agreements provide for equity participants in the CDP to have a similar or greater equity participation in the Commercial Scale Plant or CSP, subject to certain conditions. These conditions include success to a defined level of ALDP funding being approved for the project and the proving of feasibility of Coldry production at commercial scale through the successful operation of the CDP. On proving of feasibility, CDP participants become obliged to participate in the subsequent CSP. By these commercial agreements, we are assured of receiving funding for the CSP, once Coldry feasibility is proven through the operation of the CDP.
As stated earlier, we have received a commitment for a 5% share of the CDP from K-Coal and we are negotiating with other resource companies to commit to taking equity in the project. We expect to complete these negotiations, during January or February, after we know whether our CDP project has been shortlisted for ALDP funding.
We expect that through the combination of Monash’s project financing, the anticipated equity funding and a reasonable expectation of ALDP funding, that we will have available to us all of the funding required to build and operate the CDP.
The pre-construction engineering works, including the balance of the DFT, will be completed in time as to not delay the physical construction of the CDP at Loy Yang.
Advanced Lignite Demonstration Program (ALDP)
In a very positive development for the Victorian brown coal industry, in August this year, the Victorian and Federal governments jointly announced the Advanced Lignite Demonstration Program (ALDP). This program will provide financial assistance in the form of grants to selected companies, which intend to commercialise lignite up-grading technologies through the construction and operation of commercial demonstration facilities.
ECT responded with an Expression of Interest or EOI seeking funding support under this program on Monday of the week before last, the 19th of November.
The EOI developed by the ECT team, led by Ashley Moore, was very comprehensive and, we believe, addressed the technical, commercial and financial capability issues of delivering Coldry commercialisation, through the CDP, very capably.
I want to address several issues and questions in regard to Corporate Governance. These will include the more general issue of continuous disclosure and specific issues in regard to the separation of responsibilities between Chairman and Managing Director.
There have been questions related to the transparency and disclosure of information to shareholders. Your Directors are mindful of their obligations to ensure investors are fully informed of developments at your Company but they must also be cautious not to provide misleading information or to breach confidentiality in matters that may not have been finalised. The Company meets its obligation of continuous disclosure pursuant to the ASX Listing Rules, the Corporations Act and its own Corporate Governance Statement, Policies and Constitution.
In regard to the separation of responsibilities between the Chairman and Managing Director, I make these comments.
I have been Chairman and Managing Director since August 2011. When the Board made the appointment it fully recognised that it is not ideal, from a governance point of view, to have one person act in both these roles, and it was decided to limit the term I would occupy these two roles to one year. However in August this year, the Board agreed to my request to extend the period for another year.
The principal factor for this decision relates to the ongoing development of relationships with potential investors in Coldry and Matmor production facilities.
The most likely investors in Coldry production facilities are Asian resource and energy companies, and this has been substantiated by K-Coal’s commitment to the CDP. Anyone who has succeeded in doing business with Asian companies will understand that business will not occur until very solid and trusting relationships are built, and these relationships must be at the right levels in those organisations.
As Chairman of ECT, I have built solid relationships with very senior executives and board members of a substantial number of Asian resource and energy companies. Many of these relationships have developed to the extent they have, because of my position as Chairman of ECT.
Asian companies are very conscious of status and hierarchy, and valuable relationships with very senior people can only be built by a comparably senior person.
As ECT has been in the process of negotiating investment into the Coldry CDP, and the subsequent Commercial Scale Plant, and as I have led these negotiations with the major North Asian resources companies myself, the Board agreed to have me continue in the dual roles for another year, by which time we expect to have secured all of the equity investment required.
There will be no extension to these arrangements and we have a succession plan in place that will see a new appointment to the role of Managing Director by September 2013.
There have been questions regarding director fees and consultancy payments to non-executive directors.
The Company has a small executive team, which is focussed primarily on the delivery of the Strategic Plan. During the past year, the Technical and Commercial priorities of that plan were the completion of the DFT and the securing of resources industry participation in the CDP.
Alongside his other executive activities, Ashley Moore has overseen the DFT and managed our input to Arup; this has been very time consuming. Alongside my other executive activities, I have spent very considerable time seeking investment interest in the CDP.
There has also been, over the same period, considerable work required in capital raising activities and securing support from shareholders for such activities. These are activities that would typically be undertaken by the executive team or independent consultants. In ECT’s case, we do not have sufficient executive resources to fully provide for these activities and we need to make other arrangements. One option available to the Company is, where they have appropriate skills and experience, the engagement of Non-Executive Directors. Another option is engagement of outside consultants.
Our experience with outside consultants is that they are very expensive and they don’t always deliver the required results.
The responsibilities of the Board and, in particular those of the non-executive directors, are outlined in the Corporate Governance Statement of the 2012 Annual Report. It considered that capital raising activities, and securing support from shareholders for such activities, fall outside the specific director responsibilities, and are very time consuming.
It is appropriate that there be fair remuneration for the “executive duties” being undertaken by non-executive directors in discharging duties that fall outside of their duties as directors.
The contracts for Messrs Carter and McEwin have been extended to September 2013, each at a daily charge-out rate of $1,500 however the Company will take the initiative to minimise the use of non-executive directors as consultants into the future, including the balance if the current financial year.
I can report for the current financial year-to-date, Iain McEwin has not provided any consulting services to the Company and, at the present time, I do not envisage a requirement for his consulting services through the balance of the year.
There have been significant capital raising and capital management projects to date this year and these will continue through the year as we plan construction of the CDP. As a consequence, Stephen Carter’s consulting services for the current year are expected to be substantial though, in total, lower than last year.
In respect of Matmor, I am pleased to report that numerous Matmor trials were conducted during the year using a range of lignites from various countries and a variety of iron-bearing materials, including waste streams such as nickel refinery tailings and mill-scale from steel mills. It is very significant that Matmor technology is now proven, at test plant scale, to be capable of producing quality primary iron from a variety of iron bearing materials and low rank coals.
By using low rank coals in place of more expensive coking coal, and substituting high grade iron ore with lower grade ore or waste streams, Matmor has the potential to reduce the raw material costs of steel making by up to $250 per tonne. This is very significant given that typical steel industry cash costs of production, using Blast Furnaces, are around $600 per tonne.
Whilst Matmor holds significant potential, our financial and human resources are focused on advancing Coldry at present as Coldry provides the front-end pelletisation stage in the Matmor process. As such, Coldry scale -up is a significant de-risking factor for future Matmor scale-up and commercialisation.
Exploration Licence EL5119
In May 2012, ECT announced that it had entered into an agreement to secure an interest in a coal exploration licence within the Latrobe Valley identified as EL5119. Under this agreement, ECT will meet the costs of development work required to prove up the reserves of lignite to JORC measured reserve status. On completion of this development work, ECT will become the beneficial owner of a minimum of 90% of the coal delineated within EL5119.
In discussion with potential partners in the development of Coldry plants in Victoria it became evident that, by having access to its own coal resource, ECT was viewed very positively and was seen to be more self-sufficient.
Also, our interest in EL5119 has had a positive influence in negotiations with overseas resources companies in regard to investment in the CDP, particularly as we have provided CDP participants the opportunity to share in the exploitation of the resource.
Coal Allocation Process
In a positive demonstration of support for the Victorian coal mining industry, in March 2012, the Victorian government announced it would begin a process to open up new allocations of brown coal from the State’s vast reserves of this resource.
Whilst details of any allocation process are yet to be advised, the government has stated that it wants the Victorian brown coal resource to be more fully utilised and it will support companies, which bring technologies that add value to this otherwise low value resource. Technologies such as coal gasification and the production of synthetic diesel, chars, tar and chemicals from brown coal will be encouraged as they add the greatest value to the resource.
Generally, these secondary or tertiary process technologies cannot efficiently or economically process high-moisture, raw brown coal directly and ECT sees enormous potential in providing Coldry as a feedstock to these industries.
There have been questions on the status of the Tincom engagement.
In October last year, the Company announced it has re-engaged with Tincom of Vietnam under certain conditions that included the provision of Engineering and other data from the Design for Tender program, when completed. On provision of this DFT data, Tincom was to engage an independent engineering firm to perform a feasibility study on its behalf and, based on this feasibility study, Tincom would determine whether to proceed with the Victorian Coldry Project with ECT.
When the DFT has been completed, we will advise Tincom and test their interest in proceeding with their feasibility study.
We have recently been in communication with Tincom to advise the status of the DFT and the expected date for completion.
Extension of “sunset” dates
In the Explanatory Memorandum that forms part of the Notice of Annual General Meeting there are a number of “sunset” dates in relation to approvals sought at this Meeting. The “sunset” dates are in conformity with the ASX Listing Rules and are set by reference to the date of the AGM. Directors consider it appropriate that these dates be deferred by the 13 days that the AGM has been deferred. The relevant dates include:
(a) The expiry date of the approval for additional placement capacity of securities (Resolution 5) being 15 November 2013, 12 months after the date of the AGM. The expiry date is to be revised to 28 November 2013.
(b) The proposed issue of securities to Monash Capital in Resolution 6 must be completed by 13 February 2013, 3 months after the date of the AGM. The expiry date is to be revised to 28 February 2013.
(c) The expiry date for the issue of Shares to Directors under the ECT Executive & Director Incentive Plan in Resolutions 9(a), (b), (c) and (d), if approved is shown as being 13 November 2015, 3 years after the date of the AGM. The expiry date is to be revised to 28 November 2015.
Also I want to recognise the contributions made by fellow directors. Ashley Moore has done an outstanding job in overseeing the further development of the Coldry technology through completion of Phase 1 of the Design for Tender Program. Also Ashley has been key to the development of strong relationships with Indian and Chinese prospects for commercialising Coldry and Matmor technologies in those countries. India and China remain very important target markets for both Coldry and Matmor and his relationships in these regions will be critical to the Company’s success there.
Stephen Carter has worked tirelessly to deliver on the Company’s capital raising plan and capital management plan. His management of the exit of La Jolla, various interim capital raisings, settlement of EL5119 and his deep involvement in the Monash share placement negotiations and transaction was necessary to achieve the outcome the Company required.
Also Iain McEwin’s ongoing assistance in participating in investor forums and his work with shareholders and potential investors should be acknowledged.
The Operations Management team, led by Ashley Moore, has done a superb job of refining and improving both the Coldry and Matmor production processes and collaborating with our technology partners to optimise production plant design. Also they have been excellent hosts to the many visitors we have had to the Bacchus Marsh facility.
The Company’s mission for the coming year is quite simple – ensure completion of the Monash share placement; deliver a compelling detailed proposal for ALDP funding should we be shortlisted; secure further investment from the resources sector into the Coldry CDP and complete the preparatory work required to start construction of the CDP in July 2013, after the announcement of ALDP funding.
Finally, I wish to acknowledge the ongoing support and loyalty of our shareholders, which we know has been severely tested due to the delayed settlement by Monash.
Thank you for your attention.
For Further Information Contact:
Mike Davies – Managing Director +61 3 9909 7684 or [email protected]