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Synthesis Energy Production (SYMX)

A clean coal company with a difference. We have eyed it for quite some time, but we found it too expensive by quite a margin. That seems to be changing, so we’ll introduce you to the company without formally recommending to buy it because we feel the bloodletting isn’t done yet.

Company website

In summary

  • The main selling point for this company is it’s proprietary technology enabling to win clean gas out of dirty coal (and waste) in a relatively clean way
  • They do not have significant revenue, but they do have a couple of relatively big projects underway (one already operating since Feb. this year)

Metrics

  • Almost 60% held by insiders and another 20% by institutions (according to Yahoo, but a different picture emerges at MSN)
  • It has 51 full-time employees (Sept 08)
  • Just moved to Nasdaq this month
  • 278M market cap (at $6 share price)
  • Hardly any revenue to speak of (40K)
  • Short is 7.5% of float
  • So you’re not buying it for the valuation, you’ll buy the technology

Useful background sources

The gasification technology

  • SYMX builds, owns and operates coal gasification plants that utilize its proprietary U-GAS® fluidized bed gasification technology to convert low rank coal and coal wastes into higher value energy products, such as transportation fuel and ammonia.
  • The U-GAS® technology, which we license from the Gas Technology Institute, gasifies coal without many of the harmful emissions normally associated with coal combustion plants.
  • We acquired an exclusive license to the U-GAS ® gasification technology from the Gas Technology Institute (“GTI”), a leading non-profit research, development and training organization focused on the development of technology-based solutions to energy and environmental challenges for over 60 years. Our U-GAS ® license grants us the exclusive right to manufacture, make, use and sell worldwide both U-GAS ® coal gasification systems and coal and biomass mixture gasification systems that utilize coal and biomass blends having feedstock materials containing no less than 60% coal and no more than 40% biomass. The license also grants us a non-exclusive license to manufacture, make, use and sell worldwide biomass gasification systems and coal and biomass mixture gasification systems that utilize coal and biomass blends having feedstock materials containing up to 60% coal and no less than 40% biomass. Our license has an initial term of 10 years with two additional 10-year extensions exercisable at our option. [prospectus Nov 2007]
  • The primary advantages of U-GAS® relative to other gasification technologies are greater fuel flexibility provided by our ability to use all ranks of coal (including low rank, high ash and high moisture coals, which are significantly cheaper than higher grade coals), many coal waste products and biomass feed stocks, and our ability to operate efficiently on a smaller scale, which enables us to construct plants more quickly, at a lower capital cost, and, in many cases, in closer proximity to coal sources. SES currently has offices in Houston, Texas and Shanghai, China. [company website]
  • It also functions with lower operating temperatures, which saves operating and maintenance cost [8K Aug 5, 2008 (PDF)]
  • There are almost a dozen gasification technologies, for a nice overview see Dow Chemical PDF on different technologies

The market

  • There are more than 140 gasification plants operating worldwide. Nineteen of those plants are located in the United States. (See Existing Gasification Plants in the U.S). Worldwide gasification capacity is projected to grow 70 percent by 2015, with 80 percent of the growth occurring in Asia. (See World Syngas Capacity Growth). [gasification.org]
  • There can be little doubt that there is a market for this stuff, especially in places like China, where two facts conspire to provide significant opportunities, an abundance of coal, and really big pollution problem produced mostly by burning coal for electricity production. Here a few quotes from a recent Wharton article:
  • Pollution aside, energy presents a hefty challenge for China. Simply put, the country doesn’t have enough of it, said McElwrath and other experts who came to Wharton. “Twenty-one of 34 provinces experienced electricity shortages in 2004,” he said. “China will need to add a total of 1,300 additional gigawatts by 2025.” According to Bloomberg News, China currently has about 800 gigawatts of electric capacity. “If coal provides 70% to 80% of that power, what this implies for air quality and global warming is surreal,” McElwrath warned.
  • China now derives about three-fourths of its electricity from burning coal, and it has rapidly constructed new coal-fired plants to keep pace with burgeoning power demand. “With annual growth of 9% to 10%, coal utilization will soon approach 10 billion tons a year,” McElwrath predicted. The country now consumes about 2.5 billion tons a year. “If China maintains the energy supply it needs, using coal, it will be unbearable environmentally. If it doesn’t maintain that supply, it will see a drop in economic growth.”
  • Another technology under consideration is coal gasification, which transforms coal into a synthetic fuel, known as syngas, which burns as cleanly as natural gas. “Coal gasification has the potential to squelch power plants’ emission of soot and smog, and also to decrease China’s growing dependence on imported oil,” according to a report from the Massachusetts Institute of Technology. “It could even help control emissions of carbon dioxide, which is more easily captured from syngas plants than from conventional coal-fired plants.” [Wharton May 14, 2008]
  • PDF on China’s market lead (From Dow Chemical)

The competition

  • Rentech (RTK)
  • Syntroleum Corp (SYNM)
  • Headwaters Inc. (HW)
  • Sasol (SSL)

Risks

  • In general, gasification benefits from increasing energy prices, but there is one exception. If coal prices also increase this could have some impact. The key metric is the gas-coal spread, but that has been on an upwards trend until lately.

Finance

  • Companies not producing significant cash-flow can have the most promising proprietary technology, but if they continue to issue shares to develop and commercialize it, the shareholder might very well not get a whole lot of return (if anything).
  • Equity offering $54M at $9 per share Nov. 2007
  • Equity offering $100M at $9.25 per share Jun. 2008
  • The latest result (Q2 2008), not terribly pretty but the company is just starting up

The projects

1) Hai Hua

  • HOUSTON, Texas, December 5, 2006 – Synthesis Energy Systems (“SES” or the “Company”) (OTC: SYMX) announced that its 95%-owned joint venture, SES (Zaozhuang) New Gas Company, Ltd., held an official ground breaking ceremony in Shandong, China today for its new coal gasification facility.  This facility will use the Company’s proprietary U-GAS® licensed technology to cleanly convert waste coal to synthesis gas (“syn-gas”).  The plant will be SES’ first designed and built U-GAS® coal gasification facility and signifies a key milestone in the global development and commercialization of the Company’s gasification technology. [gassification.org] (PDF)
  • Synthesis Energy Systems’s (SES) 95%-owned joint venture project with Shandong Hai Hua Coal & Chemical Company Ltd. (SHHCCC) obtained government approvals for the expansion of its existing Hai Hua project in Zaozhuang City, Shandong Province, China. The Phase II expansion will result in additional production capacity of approximately 17,000 standard cubic meters per hour (scm/hr) (a 15 MW equivalent) of high grade syngas at this site. After completion of the expansion, the plant will have a design capacity of approximately 45,000 scm/hr (a 40 MW equivalent). [Greencongres Aug 19, 2008]
  • The additional capacity from the Phase II expansion is expected to support approximately 100,000 tonnes/year of methanol production as well as other gas demands in the Xuecheng Industrial Park. [8K SEC filing Aug 20, 2008]
  • Zaozhuang City, China
  • Capacity 300 tons/day of coal [25 MW (equivalent)]
  • Product Syngas Design Output 28,000 scm/hr [after approval increased to 45,000 scm/hr]
  • Build Cost $29 million
  • Financing Source Industrial and Commercial  Bank of China (ICBC) Term Loan $12 million
  • Groundbreaking December 2006
  • Start-Up January 2008
  • Partner Shandong Hai Hua Coal & Chemical Company Ltd.
  • Structure 95% SES / 5% Hai Hua Joint Venture [2008 investor factsheet]

2) Yima Coal

  • Synthesis Energy Systems, Inc. (SES), a coal gasification company, and Yima Coal Industry Group Co., Ltd. (YIMA), a large Chinese integrated coal company, have signed a preliminary agreement to establish a joint venture company to build and operate a new integrated coal gasification to methanol to Dimethyl Ether (DME) plant. The new plant, to be located in Henan Province, China, will help supply the region’s growing petrochemical and transportation fuel needs.
  • This marks SES’s third project in China. SES is also involved in a coal gasification project with Shandong Hai Hua Coal & Chemical Company Ltd., and in another coal-to-DME project with Golden Concord Holdings Ltd. [greencarcongress May3, 2007]
  • Yima Coal Industry Group Co. Ltd. (“YIMA”) is a large Chinese integrated coal company. This key relationship — our third project in China — positions SES with one of China’s largest coal producers and one of the country’s top companies focused on the development of the coal-to-chemicals industry as an environmentally responsible and viable alternative to supplying China’s rising energy demands
  • The syngas produced will then be used as a feedstock for the production of methanol, a basic building block used in manufacturing for a wide variety of chemical products including plastics, paints, construction materials, as a hydrogen carrier for fuel cell applications, or as an alternative fuel. In this application, the coal-derived methanol will also be used to produce DME, an alternative to liquefied petroleum gas, liquid natural gas, diesel and gasoline. The parties are also considering opportunities for power generation applications
  • When completed, the Plant is expected to have a daily capacity of 10 million standard cubic meters of syngas and an annual capacity of 1 million tons of methanol
  • The Company currently is leveraging its engineering, procurement, and project development expertise in China through two additional U-GAS® coal gasification projects. The first facility, located in Shandong Province, is about 75 percent complete with start-up anticipated by mid-summer of 2007 and commercial operations expected to begin by the third quarter of this year. SES’ second project, located in Inner Mongolia, is similar in structure to the Plant in Henan — an integrated coal gasification to methanol to DME project. This second project is expected to break ground by the end of this summer and be in operation by late 2008. [Yahoo Jul 5, 2007]
  • Henan Province, China
  • Capacity 4,000 tons/day of coal [400 MW (equivalent)]
  • Product Methanol/DME
  • Design Output 1,000,000 tons/year of methanol or 660,000 tons/year of DME
  • Expected Cost $300 million
  • Expected Groundbreaking 1H 2008
  • Expected Start-Up 2Q 2010
  • Partner YIMA Coal Industry Group Co. Ltd.
  • Structure Under Negotiation [2008 investor factsheet]

3) Golden Concord

  • HOUSTON, TX–(Marketwire – June 6, 2007) – Synthesis Energy Systems Investments, Inc., a subsidiary of Synthesis Energy Systems, Inc. (“SES” or the “Company”) (OTC: SYMX), a coal gasification company involved in the conversion of low cost fuels into clean energy and chemical products, and Inner Mongolia Golden Concord (Xilinhot) Energy Co., Ltd., a subsidiary of Golden Concord Holdings Ltd. (“Golden Concord”), a private provider of electricity, steam and chilling water in China, have signed a co-operative joint venture contract to build an integrated coal gasification plant and methanol and Dimethyl Ether (“DME”) production plant (the “Plant”). Located in the Inner Mongolia Autonomous Region of China, the Plant will optimize low value, abundant lignites from coal mines to meet the region’s growing need for clean, affordable non-petroleum-based fuels and petrochemical feedstocks.
  • SES and Golden Concord will own 51% and 49% respectively of the joint venture named SES-GCL (Inner Mongolia) Coal Chemical Company Ltd. (the “JV Company”), based at the Lignite Coal Chemical Industrial Base of Xilinguole Economic and Technology Development Zone in the Inner Mongolia Autonomous Region.
  • The Plant is expected to produce about 84,000 Normal cubic meters per hour of gross syngas. The syngas produced will then be used as a feedstock for the production of a 225,000 ton/year methanol plant. Methanol is a basic building block used in manufacturing for a wide variety of chemical products including plastics, paints, construction materials, as a hydrogen carrier for fuel cell applications, and can be blended with gasoline. In this application, the coal-derived methanol will also be used to produce 150,000 ton/year of DME, an alternative to liquefied petroleum gas, liquid natural gas, diesel and gasoline. [marketwire]
  • Inner Mongolia, China
  • Capacity 1,200 tons/day of coal [100 MW (equivalent)]
  • Product Methanol/DME
  • Design Output 225,000 tons/year of methanol or 150,000 tons/year of DME
  • Expected Cost $100 million
  • Groundbreaking June 2007
  • Expected Start-Up 2Q 2009
  • Partner Golden Concord Holdings Ltd.
  • Structure 51% SES / 49% Golden Concord Joint Venture [2008 investor factsheet]

4) CONSOL

  • Synthesis Energy Systems Inc. is partnering with Consol Energy Inc. to develop a coal gasification and liquifaction plant in West Virginia. The plant to be built by joint venture Northern Appalachia Fuel LLC near Wheeling, W.Va. will convert coal into gasoline and methanol. Pittsburgh-based Consol (NYSE: CNX), the nation’s largest producer of bituminous coal, will provide coal for the plant from its nearby Shoemaker complex. Houston-based Synthesis (NASDAQ: SYMX), which also has an office in Shanghai, China, builds, owns and operates coal gasification plants. [houstonbizjoural Jul 28, 2008]
  • Capacity: 2000 tons a day of coal
  • Product: methanol and gasoline (SES and are currently in negotiation with Exxon to license their proprietary methanol-to-gasoline technology)
  • Design output: 720,000 tons a year of methanol
  • Financing: under negotiation
  • Expected groundbreaking Q1 2009
  • Expected commissioning Q1 2011
  • Joint venture 50/50% SES/CONSOL [8K Aug 5, 2008]

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