Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
10/24/08
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EcoloCap Solutions Inc. 740, St-Maurice Street Montréal, Québec H2Y 2P1 Canada Phone (IR): 514-402-2538 Fax(IR): 514-876-4080 E-mail: info@ecolocap.com Website: www.ecolocap.com
Company Overview ECOS OTC BB $0.34 $0.82 Speculative Buy 42.54 Million $14.45 Million 15,043
Source: Yahoo Finance, Analyst Estimates
EcoloCap Solutions Inc. (ECOS) provides solutions, eco-technologies and services that generate financial gains from greenhouse gas emissions reduction. The Company acquires tradable Carbon Credits, known as Certified Emission Reduction (CERs) and issued according to Kyoto Clean Development Mechanisms (CDM), by providing developing countries with the expertise, capital, network, technology, engineering and on-the-ground operations to successfully reduce greenhouse gases by both capture and utilization. ECOS provides expertise in four specific areas: Valorisation of Methane Gas (CH4) from landfills; Hydro Power Development; Biomass Valorisation; and Industrial Complex Improvement. ECOS is developing a portfolio of economically feasible renewable energy and carbon reduction projects and has identified projects in China, India, South East Asia, Vietnam, Africa and South America. To date, the Company has formed strategic alliances and secured projects in Vietnam and China. These countries together represent more than 60% of carbon credits trading under the CDM. Most of ECOS’ contracts are for a period of 17 years. These contracts are projected to result in an equivalent reduction of 5.8 million tons of CO2. The Net Present Value (NPV) of ECOS’CERportfolio is estimated at $50 million. ECOS is undertaking additional projects that are likely to double the company’s CER reserves with long-term contracts. In Vietnam, ECOS has signed agreements for one biomass valorization project and three new hydro power projects. In China, agreements were signed for four large industrial improvements projects consisting of two steel mills, a cement production complex and a coalmine. ECOS’ projects are
EcoloCap Solutions, Inc. (OTCBB: ECOS)
1
Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
likely to produce 807,660 Carbon Credits annually. ECOS expects to double the CERs count over the next six to nine months and has a goal of accumulating five million CERs annually within its portfolio over the next two to three years.
Investment Highlights Growing environmental concerns Scientists estimate that global greenhouse gases must be reduced 30%-40% by 2030 to make a significant difference in global warming. In terms of dollars, global investment to accomplish this task is projected at around $2 trillion. The carbon market grew in value to approximately $30 billion in 2006 [1]. A study released in May 2008 by Point Carbon, a European consultancy and analyst service in global power and carbon markets, estimates that the world carbon market could be worth $3.1 trillion by 2020 [2]. This estimate assumes that the United States adopts a cap and trade mechanism similar to the plan introduced in the Lieberman-Warner Climate Security Act and that the EU sets a 25% emissions reduction target. Given the Point Carbon’s scenario, 67% of the carbon market would be in the United States. This projection implies trading volume of 38 billion tons of carbon equivalent per year by 2020. Carbon credit emissions trading mechanism The Kyoto Protocol was adopted December 11, 1997, and entered into force February 16, 2005. The major feature of the Kyoto Protocol is binding targets for 37 industrialized countries and the European Community for greenhouse gas (GHG) emissions reductions. The penalty for non-compliance in the first phase, which ends in 2008, is €40 per ton of carbon dioxide equivalent. In the second phase, which runs from 2008 to 2012, the penalty rises to €100 per ton of CO2. The CER trading mechanism provides a rapid payoff for companies that implement greenhouse gas emissions reduction programs and a vehicle for avoiding €40 per ton penalties.
___________________________________ 1. http://carbonfinance.org/docs/Carbon_Trends_2007-_FINAL_-_May_2.pdf 2. www.triplepundit.com/pages/-carbon-point-study-estimates--003165.php
EcoloCap Solutions, Inc. (OTCBB: ECOS)
2
Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
Business model capitalizing on Carbon Credits ECOS is focusing on projects that create Carbon Credits (CERs) registered under the United Nations Kyoto Protocol Clean Development Mechanisms, which are then sold on the world market at prevailing prices. The Company generates CERs by offering its expertise and resources to Asian governments and enterprises for the reduction of greenhouse gases. The Company provides an integrated “turn-key” solution which includes U.N. certification, technology, engineering, management and capital. A growing portfolio of carbon projects The Company provides its expertise to developing economies like China, India and Vietnam as well as to countries in Africa and South America. At present, ECOS is developing 16 projects in China and Vietnam. Most of its contracts have a 17-year length. These contracts are expected to result in an equivalent reduction of 5.8 million tons of CO2. The Net Present Value of ECOS’ portfolio is estimated at $50 million, assuming a six-year period of CERs and prices of $22 per CER. Meaningful revenues projected in 2009 ECOS purchases CERs at a contracted price from abatement projects and re-sells them in the secondary market. The Company launched its new business in late 2007 and expects to begin generating meaningful revenues from its projects in 2009. We estimate ECOS will produce annualized revenues ranging from $12 million-$14 million between 2009 and 2014, assuming $24 CER prices. Our estimates may prove conservative, given the Company’s objective to double its CER reserves over the next six to nine months and build a portfolio of five million CERs annually. Seasoned management team Dr. Tri Vu Truong, the Company’s CEO and president, has had a professional career that includes the realization of many major scientific and technical studies and environmental projects since 1970. Dr. Truong was responsible for the creation and operation of the Permits & Inspections Division of the Montreal Urban Community–Environment Department in 1977. As president of the Sodexen Environmental Engineering Group since 1981, Dr. Truong managed numerous major environmental impact projects, including comparative studies of the environmental impact of dust-palliatives; environmental decommissioning of a polystyrene production complex; and a solid waste management study relating to the closure of the Miron landfill.
EcoloCap Solutions, Inc. (OTCBB: ECOS)
3
Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
Business Model The Company’s business focuses on reducing carbon dioxide emissions, the principal cause of global warming. Although appearing complex in practice, ECOS’ business model is simple in theory. ECOS develops projects that reduce carbon dioxide emissions. Every ton of emissions reduced results in the creation of one Carbon Credit, known as a Certified Emission Reduction (CER), which is issued according to Kyoto Clean Development Mechanisms. As a project developer, the Company purchases units of carbon credits at a contracted price from abatement projects and then re-sells these CERs on one of the Carbon Credit exchanges at a profit, while at the same time maximizing alternative energy generation co-products for additional revenues. The cost of complying with Kyoto would be expensive for the 37 industrialized nations that signed the agreement. To address this issue, the Kyoto Protocol includes flexible mechanisms that allow industrialized economies to meet greenhouse gas emission targets by purchasing emission-reduction credits from developing economies. These can be purchased either from financial exchanges or from emissions reduction projects under the Clean Development Mechanism (CDM). Under the CDM, emission-reduction (or emission removal) projects in developing countries can earn CER credits, each equivalent to one ton of CO2. These CERs are analogous to stock certificates and can be traded and sold, and used by industrialized countries to meet all or part of their emission reduction targets under the Kyoto Protocol. The fact that CERs can be generated in developing countries at an advantageous cost and then re-sold at market price creates a significant trading profit opportunity. CDM project process The CDM project cycle involves a series of steps beginning with project identification, project description with details of the baseline, stakeholder input, and a monitoring plan. In the next step, the project must secure a letter of approval from the CDM National Authority in the host country and have the project baseline validated by an operational entity that also provides an opportunity for NGOs, stakeholders and the public to comment on the project. Projects must qualify through a rigorous public registration and issuance process designed to ensure real, measurable and verifiable emission reductions. The mechanism is overseen by the CDM Executive Board (EB), answerable ultimately to the countries that have ratified the Kyoto Protocol. However, virtually all of the NonAnnex I countries have also set up their own Designated National Authorities to manage the Kyoto process (and specifically the “CDM process” whereby these host government entities decide which Greenhouse Gas Projects to support for accreditation by the CDM Executive Board). If accepted, the project will be registered and proceed with ongoing monitoring and verification of emission reductions. A certificate is issued by the Executive Board for the credits accrued from the project. To create CERs, certain steps defined in the Kyoto Protocol must be followed. There are two phases to the process leading up to CER approval: (1) the project design or validation phase; and (2) the operational or verification phase. Validation requires an assessment of whether the project, if implemented, will fulfill the CDM criteria and generate tradable CERs, as well as obtaining approval from the host country. Upon successful validation, the CDM Executive Board registers the project. Verification is a periodic review to determine the actual emission reductions of the CDM project. EcoloCap Solutions, Inc. (OTCBB: ECOS)
4
Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
The diagram below describes the CDM project cycle.
Project identification CDM Project description
Baseline
Stakeholders comments
Letter of Approval by National Authority
Monitoring plan
EIA
Make PDD Public
Validation by Operational Entity
Advice to Executive Board
Publicize Comments
Validation
Executive Board
Positive Decision
Negative Decision
Registration Realisation CDM-project Avoided Emissions Issuance of Certificates by EB
Monitoring Emissions
Verifying Emissions
Verification Report
Source: www.crl.co.nz/downloads/CDMBusinessOpportunities.pdf; Analyst estimates.
Corporate Strategy The Company is building a best-in-class portfolio of solutions, technologies and services leading to the generation of carbon credits from the reduction of fugitive emissions. ECOS’ goal is to accumulate 5 million CERs annually within two-to-three years. ECOS is using an integrated development approach that focuses on generating Carbon Credits in developing countries to produce substantial value in the form of tradable CERs, while also maximizing alternative energy generation co-products for additional revenues. EcoloCap Solutions, Inc. (OTCBB: ECOS)
5
Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
The relative novelty of the CDM mechanism, the scale and complexity of the projects, and related regulatory, political and market issues make CDM projects more complex than traditional finance projects. ECOS uses the following guidelines to determine the legality and practical feasibility of projects: • • • • • • • •
the host country is a party to the Kyoto Protocol; the host country has designated a domestic national authority for approving CDM projects; the project would meet CDM criteria; the CERs would be subject to taxes and/or financial products regulations; the advantages of the project in terms of time, cost, safety and other factors outweigh the disadvantages; the project would be regulated; changes in law can be reasonably anticipated; and contractual provisions with the various participants in the project would be enforceable.
Poyects ECOS concentrates exclusively on projects that offer high contents of Methane (CH4) and Carbon Dioxide (CO2). The Company’s portfolio of carbon reduction projects includes four project types: Landfill Gas (LFG) LFG typically refers to methane gas produced by the biological breakdown of organic matter in the absence of oxygen. The reduction of CH4 gas emissions from landfills (LFG) represents the transformation of a significant environmental concern into an extraordinary opportunity to generate CERs. CH4 is 20 times more effective than CO2 at trapping heat in the atmosphere. As a result, projects that reduce CH4 emissions have the potential to achieve higher returns on investment. ECOS’ revenue generation approach is to sell Carbon Credits obtained from methane emissions reduction projects and, at a later phase, sell renewable energy recovered from CH4 as a secondary value creation. The Company is currently developing three LFG projects in China together representing average annual production of 252,000 CERs over the next six years. Hydro Power In close association with owners and developers of new small and medium-size hydro power projects, ECOS offers its expertise in the CER certification process and the carbon trading market in exchange for the right to sell credits generated from hydro power projects. In Asia alone, where the Company has already signed several agreements with project developers, it is estimated that some 30,000 small or medium-sized hydro power projects will be developed over the next few decades. The Company is developing eight hydro power projects in Vietnam, together representing average annual production of 357,000 CERs over the next six years. EcoloCap Solutions, Inc. (OTCBB: ECOS)
6
Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
Biomass Valorization Residual biological matter, also known as biomass, is becoming a viable source of energy. Biofuels in general originate from biomass. The most common biofuels are bioethanol and biodiesel. The Company is pursuing opportunities in the valorization of biological matters, and is focusing especially on projects that involve cow manure, afforestation, composting and similarly derivative bio products. ECOS is currently developing one biomass valorization project in Vietnam expected to produce 98,000 CERs annually over the next six years. Industrial Complex Improvement Industrial complexes can help lower the level of CO2 emitted into the atmosphere by improving efficiency through the capture and reuse of heat emissions. Some of the Company’s most attractive investments revolve around improving plant energy efficiency and economics. ECOS supplies expertise and financing, and offers facility operators large-scale solutions that generate energy savings through the intelligent exploitation of combined new sources. The Company has Letters of Intent and is negotiating agreements with industrial complexes in eastern Asia. ECOS is currently developing four industrial complex improvement projects in China, including two steel mills, one cement production complex, and one coal mine. Average annual CERs associated with these projects total 255,000 over the next six years.
Industry Outlook The Kyoto Protocol was adopted on December 11, 1997 and it entered into force on February 16, 2005. As of May 2008, 182 parties had ratified the protocol. The major feature of the Kyoto Protocol is binding targets for 37 industrialized countries and the European Community for reducing greenhouse gas emissions. Reductions averaging 5.2% against 1990 levels are targeted over the five-year period 2008-2012. The carbon market grew in value to $30 billion in 2006, three times greater than the previous year [3]. The market was dominated by the sale and re-sale of European Union Allowances (EUAs) at a value of nearly $25 billion under the EU ETS. Project-based activities, primarily through the Clean Development Mechanism and Joint Implementation (JI), grew sharply to a value of about $5 billion in 2006. Cap and trade schemes, which place a limit on industry emissions of heat-trapping gases like carbon dioxide, supported global trade in carbon permits worth $64 billion in 2007 [4]. ___________________________________ 3. http://carbonfinance.org/docs/Carbon_Trends_2007-_FINAL_-_May_2.pdf 4. http://economictimes.indiatimes.com/Earth/Carbon_market_is_no_safe_haven_yet/articleshow/3578905.cms
EcoloCap Solutions, Inc. (OTCBB: ECOS)
7
Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
A study released in May 2008 by Point Carbon, a European consultancy and analyst service in global power and carbon markets, estimates the world carbon market could be worth $3.1 trillion by 2020 [5]. This estimate assumes that the United States adopts a cap and trade mechanism similar to the plan introduced in the Lieberman-Warner Climate Security Act and that the E.U. sets a 25% emissions reduction target. Given the Point Carbon’s scenario, 67% of the carbon market will be in the United States. This projection implies trading volume of 38 billion tons of carbon equivalent per year by 2020. CDM projects The central feature of the Kyoto Protocol is its requirement that countries limit or reduce their greenhouse gas emissions. To help countries meet their emission targets and to encourage the private sector and developing countries to contribute to emission reduction efforts, negotiators of the protocol included three market-based mechanisms – Emissions Trading, the Clean Development Mechanism (CDM) and Joint Implementation. CDM accounts for 88% of the value of the project- based market. As of October 2008, 1,186 projects have been registered by the CDM Executive Board as CDM projects. These projects will reduce greenhouse gas emissions by an estimated 227 million tons of CO2 equivalent per year. There are about 3,000 projects yet to be certified. These projects would reduce CO2 emissions by another 2.7 billion tons by 2012 [6]. India is currently the world leader in the development of CDM projects. Due to the effective operation of the Indian Designated National Authority for approval of CDM projects, more than 297 project proposals with an emission reduction potential of over 297 million tons of CO2 have been approved [7]. China has 260 CDM projects registered with the U.N., accounting for about 24 % of program projects. 1,186 registered projects Others; 20%
China; 24%
Chile; 2% Malaysia; 3% Mexico; 9% India; 30% Brazil; 12% Source: http://cdm.unfccc.int/Statistics/Registration/NumOfRegisteredProjByHostPartiesPieChart.html
___________________________________ 5. www.triplepundit.com/pages/-carbon-point-study-estimates--003165.php 6. http://cdm.unfccc.int/Statistics/index.html 7. www.cdmindia.com/India%20CDM%20Potential.pdf
EcoloCap Solutions, Inc. (OTCBB: ECOS)
8
Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
Investors have pursued so-called ‘low-hanging fruit’, meaning large, CDM projects that yield millions of CERs instead of smaller projects. This is because administration costs, often up to $200,000, tend to be unrelated to project size. Transaction costs for small and medium-sized projects Monitoring & verification Registration/CDM taxes Legal/Due Diligence Validation PDD, DNA approval Prefeasibility, PIN development
$5,000$15,000
$0$30,000
$10,000$40,000 $10,000$40,000
$50,000$225,000
$10,000$40,000 $15,000$60,000
Source: www.cd4cdm.org/sub-Saharan%20Africa/Tanzania/Second%20National%20Workshop/FinancialsCDMCarbonMarket_Hodes.pdf
Project-based credits: CERs There are two types of carbon instruments in the carbon market: allowances and project-based credits. Allowances are generally used for compliance with government schemes. An allowance is a permit to emit a specific quantity of CO2e (normally one ton). A project-based credit represents an emission reduction below a baseline (“business as usual”). Most credits/allowances are not interchangeable with each other for regulatory purposes. Prices vary widely between instruments. Structure of Regulated Market Regulated Market Project Based Credits
Allowance
AAUs
CERs
EUs
ERUs
Source: www.carbonneutral.com
EcoloCap Solutions, Inc. (OTCBB: ECOS)
9
Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
Certified Emission Reductions (CERs) are climate credits issued by the Clean Development Mechanism Executive Board for emission reductions achieved by CDM projects and verified under the rules of the Kyoto Protocol. CERs are becoming the most common type of project-based carbon credit. Some 140 million tons of CERs have been issued by the United Nations since 2005. A few countries dominate the CDM market – China, India and Brazil. Chinese projects are expected to reduce about 114 million tons of CO2 emissions annually, accounting for more than 50% worldwide in terms of emissions reduction under the mechanism [8]. Most CER recipients in China sell their credits before receiving them. According to a World Bank report, China is still the destination of choice for buyers of credits, who cite that country’s large size, economies of scale in origination, and favorable investment climate. Average annual CERs from registered projects total 227,847,823 Others; 16%
Malaysia; 1% Argentina; 2% Chile; 2% Mexico; 3%
China; 53%
Rep. of Korea; 5%
Brazil; 9%
India; 14% Source: http://cdm.unfccc.int/Statistics/Registration/AmountOfReductRegisteredProjPieChart.html
In 2007, buyers continued to show a strong appetite for primary project-based emission reductions, reflected by continued growth in the project pipeline, which showed 68 countries had identified and offered to reduce 2,500 million tons of carbon dioxide equivalent through over 3,000 projects. This potential supply has attracted strong interest from private sector buyers and investors, who in 2007 transacted 634 million tons of CO2 equivalent from primary project-based transactions (up 8% from 2006) for a corresponding value of $8.2 billion, up 34% from 2006 [9]. ___________________________________ 8. http://cdm.ccchina.gov.cn/english/NewsInfo.asp?NewsId=3008 9. http://siteresources.worldbank.org/NEWS/Resources/State&Trendsformatted06May10pm.pdf
EcoloCap Solutions, Inc. (OTCBB: ECOS)
10
Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
CDM CER pricing Average prices for CERs from developing countries were up marginally in 2006 at $10.90. The vast majority of transactions were in an $8-$14 range. European buyers dominated the primary CDM & JI market with 86% market share versus 50% in 2005. The main buyers of carbon credits are based in the United Kingdom (about 50%), followed by Canada and Japan. The growth in transacted values reflected higher prices for primary forward contracts, which had an average price of $15 in 2007. Prices for primary market forward transactions were in the range of $12-$19 in 2007 and early 2008. Spot contracts of issued CERs were transacted at $24-$26, a nice premium to the primary CER. The major market development in 2007 and early 2008 was the emergence of secondary markets. China continued to dominate CDM with a 61% share and set a relatively stable price floor for global CER supplies. Primary market CER prices in China ranged between $12.25 and $16.85 in 2007; prices edged up above $19.90 in early 2008. The total value of the primary CDM market was $7.4 billion in 2007, up 28% from 2006. The secondary market, which encompasses all subsequent transactions following the primary sale, swelled 11-fold to $5.5 billion last year. Prices for secondary market CERs averaged $25.07 a ton in the first half of 2008 [10].
Financial Analysis Income statement The Company recorded no revenues in the first six months of 2008. This is attributable to ECOS’ exit from its former line of business and the initial development of a new business focused on supplying services and support for emissions reduction credit projects. Income statement, $ H1 2008
H1 2007
%Chg
Revenue
-
-
n/m
Cost of Sales
-
-
n/m
379,199
402,657
39%
-
-
n/m
(8,013,125)
-
n/m
842,354
-
n/m
-
3,500,000
n/m
(6,736,834)
4,036,685
n/m
6,736,834
(4,036,685)
n/m
0.20
(0.11)
n/m
Selling, General and Administrative Provision for note receivable Gain on settlement of debts Compensation expense Reserve for compensation expense Total Operating Expenses Net Income / (Loss) Diluted EPS
Source: Company’s filings; year ending December 31.
___________________________________ 10. http://chinadaily.com.cn/bizchina/2008-05/08/content_6670878.htm
EcoloCap Solutions, Inc. (OTCBB: ECOS)
11
Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
During the six months ended June 30, 2008, and 2007, the Company incurred net losses of $4,036,685 and net gains of $6,736,834, respectively. Net income in 2007 benefited from an $8.0 million gain on the settlement of debts related to a foreign subsidiary, XLG AG. The net loss in the first six months of 2008 was primarily due to stock-based compensation expense resulting from a five5-year exclusive service agreement with United Best Technology Limited of Hong Kong. United provides advice to the Company regarding Clean Development Mechanisms projects and has agreed to help ECOS find, negotiate and close contracts and projects totaling 3.6 million CERs. In exchange for these services, United was granted 3.5 million restricted shares of ECOS stock. ECOS recognized the cost of the agreement as compensation expense. Liquidity and capital resources To date, ECOS has financed its operation from private placements of equity and external financing. At June 30, 2008, ECOS had $267,503 in cash. Total cash requirements for operations for the first half of 2008 were $401,937. As a result of its new business plan, management estimates that cash requirements through year-end 2008 will total between $2.5 million to $3.5 million. On December 31, 2007, ECOS received $3.0 million in loans from CAPEX Investment Limited, a shareholder. These loans were received over a three-year period and carried an interest rate of 10%. As the loan was convertible, on June 11, 2008, Toniland S.A and Larinton Investments S.A elected to convert loans of approximately $1.5 million and $1.6 million, respectively into 1,659,295 and 1,811,176 shares of ECOS common shares after CAPEX Investment Limited transferred the loans plus accrued interest to them. In 2008, the Company received loans totaling $525,000 from DT Crystal Limited, a shareholder. Balance Sheet items, $ 31-Dec-07 Cash and equivalents Net Working Capital Total Assets Liabilities, including Debt Stockholders’ Equity (Deficit)
31-Mar-08
30-Jun-08
166,470
231,637
267,503
(2,949,932)
(3,197,340)
(369,857)
166,470
248,013
299,479
3,116,402
3,434,978
648,796
3,019,332
3,269,332
525,000
(2,949,932)
(3,186,965)
(349,317)
Source: SEC Filings; year ending December 31.
The Company’s existing capital reserves are not sufficient to fund the 2008/09 business plan and ECOS will likely seek external financing. Management plans to raise capital through debt and/or equity sales.
EcoloCap Solutions, Inc. (OTCBB: ECOS)
12
Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
Valuation Outlook ECOS essentially operates a “Clean Development Mechanism Hedge Fund” through contracts with owners of landfill & hydro power projects offering services that help project owners create CERs. The Company purchases CERs from abatement projects and re-sells them in the secondary market. ECOS launched its new business in late 2007 and has already identified and negotiated numerous projects offering strong profit potential. Total annual CERs count 1,040,000 1,020,000 1,000,000 980,000 960,000 940,000 920,000 900,000 880,000 860,000 840,000
1,002,475
1,018,257
974,697 953,779 930,740 901,692
2009
2010
2011
2012
2013
2014
Source: Company’s presentation
To date, ECOS has been involved in the development of 16 greenhouse gas emissions reduction projects across China and Vietnam, which have the potential to generate more than 5.8 million CERs over the next six years. The average life of these projects is 17 years. CERs generated from these projects should allow ECOS to generate annualized revenues in a $12-$14 million range between 2009 and 2014, assuming average sales prices of $24/CER. Projected revenues at $24 price/CER, $ millions 16 14 12 10 8 6 4 2 0
11.7
0.9 2009
12.2
0.93
0.95
2010
13.4
12.9
12.6
1.0
0.97
2011
CERs
2012
2013
13.7
1.1 2014
Net revenue
Source: Analyst estimates
EcoloCap Solutions, Inc. (OTCBB: ECOS)
13
Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
DCF valuation We value the Company’s existing projects using the Discounted Cash Flow (DCF) method. Based on conversations with management, we estimate 73% gross margins and roughly $2 million in annual operating expenses, adjusted annually to inflation. Our model projects the following operating results through 2014. Free cash flow forecast, $Thousand 2009
2010
2011
2012
2013
2014
11,708
12,207
12,604
12,968
13,441
13,713
Gross margin
7,610
8,911
8,193
9,467
8,737
10,010
Operating expenses
2,000
2,200
2,420
2,662
2,928
3,221
EBIT
5,610
6,711
5,773
6,805
5,808
6,789
EBIT (1-T)
3,647
4,362
3,752
4,423
3,775
4,413
Net revenue
Terminal value
46,338
Source: Analyst estimate
Discounting the Free Cash Flow stream at 15% and subtracting the value of net debt, we obtain a fair equity value of $35 million and a $0.82 target price for ECOS shares. We think our estimates may prove conservative, given the Company’s goal of doubling total CER reserves over the next six to nine months and accumulating a portfolio of 5 million CERs annually.
Investment Risks Development-stage business Although the Company has developed a solid portfolio of projects, ECOS has also accumulated significant debts and has negative working capital. Balance sheet concerns raise questions about the Company’s viability as a going concern. Need for additional capital ECOS will require significant financing to implement its business plan. There is no assurance that the Company will ever be able to generate sufficient cash from operations to finance its future needs. The Company will likely seek to raise additional funds in 2008 by issuing new debt and/or equity, increasing its financial risks and/or causing dilution.
EcoloCap Solutions, Inc. (OTCBB: ECOS)
14
Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
Failure to obtain host country approval Any project wishing to participate in the CDM must obtain approval from the host government. A proactive government national authority for CDM facilitates this process. In addition, the host government must determine whether the project will lead to sustainable development benefits. If national authorities fail to approve ECOS’ projects, implementation of the Company’s business plan will stall. Projects rejected by CDM Executive Board Proposed CDM project must present an approved baseline and monitoring methodology which can be validated, approved and registered. Using methodologies approved by the CDM Executive Board, the applicant must make the case that the carbon project would not have happened anyway, and must establish a baseline estimating future emissions in the absence of the registered project. The case is then validated by a third-party agency, called a Designated Operational Entity, to ensure the project results in real, measurable, long-term emission reductions. The Executive Board then decides whether or not to register the project. If Executive Boards reject ECOS’ projects, implementation of the Company’s business plan will stall. Changes in energy-related policies In 2012, the commitment period of the Kyoto Protocol ends. The international climate community is currently working on a replacement policy that will ensure ongoing global cooperation regarding the reduction of greenhouse gas emissions. However, the architecture of the global climate regime for the post-2012 period is far from certain, with a number of possible policy frameworks under development. These uncertainties raise questions regarding the future development of ECOS’ business. Uncertainty of CER prices CER prices entail risks and uncertainties. Like any commodity, CER prices are based on market supply and demand. Although CER demand appears robust in the short-term, there is great uncertainty regarding long-term demand. Certain countries may use CERs to achieve up to 20% of their emissions reduction target. However, in many countries, the percentage is far less than 20%. Moreover, there is no clear vision of post-2012 greenhouse gas emissions reduction policy.
EcoloCap Solutions, Inc. (OTCBB: ECOS)
15
Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
Management Team Dr. Tri Vu Truong CEO and President
Dr. Truong has served as a director, CEO and president of the Company since February, 2008. His professional career includes the realization of many major scientific and technical studies and projects. He has worked in the environmental sector since 1970. In 1977, Dr. Truong was responsible for the creation and operation of the Permits & Inspections Division of the Montreal Urban Community–Environment Department. As president of the Sodexen Environmental Engineering Group since 1981, Dr. Truong managed numerous major environmental impact projects, including comparative studies of the environmental impact of dust-palliatives; environmental decommissioning of a polystyrene production complex; and solid waste management studies relating to the closure of the Miron landfill. Dr. Truong has led studies, projects and training seminars worldwide in the fields of solid waste management and urban planning. Dr. Truong has an undergraduate engineering degree, a master’s degree in chemical engineering and a Ph.D. in civil engineering with environmental option.
Robert Clarke MBA, Director and Chairman of the Board
Since June 2000, Mr. Clarke has been the chairman of 7bridge Capital Partners, a private venture capital group in Hong Kong. Prior to relocating to Hong Kong in June 2001, Mr. Clarke was based in Vancouver, and played a key role in the start-up and financing of several Canadian and U.S. companies in the high technology and the telecommunication sectors. Mr. Clarke has served as a director and CEO of several public companies, including Waverider Communications Inc., TEK Digitel Corp., ePhone Telecom Inc. and Manaris Corporation (now Avensys Corporation). He served as chairman of Cardtrend International Inc. until January 2008.
Michel St-Pierre CFO
Mr. St-Pierre has served as an officer of the Company since July 2006. He is a chartered accountant in Quebec, Canada. Prior to joining the Company, Mr. St-Pierre served as CFO of a public company, Tiger Renewable Energy Limited (formerly known as Tiger Ethanol International Inc. and Arch Management). He also served as finance director for SPB Canada Inc. from 2004-2006, Symbior Technologies Inc. from 2003-2004, and Boulangeries Comas Inc. from 2000-2003.
Cherry Lim P.Eng. MBA, Director
Ms. Lim brings to the Company more than 20 years experience in manufacturing, telecommunications, and Venture Capital investments. She has worked in the telecom industry since 1990, first for SingTel in Singapore and Deustsche Telekom in Hong Kong. In 1996, she joined eGlobe Inc. where she was responsible for spearheading and fostering partnerships with major Telcos and ISPs in the Asia Pacific region, and was involved in a number of M&A transactions. She served as president of 7bridge Capital Partners Ltd., a privately held company investing in IT and Telecom startups in China and North America, between 2000 and 2005. Ms Lim is a Hong Kong native fluent in three dialects of Chinese as well as English. She was educated in the United States and received a Bachelor of Science from the University of South Florida, followed by an Executive MBA from the Chinese University of Hong Kong and a Professional Certificate in Chinese Civil and Commercial Law from Tsinghua University.
Claude Pellerin Secretary
Mr. Pellerin is a corporate attorney and a partner in the law firm of Pellerin Lawyers S.N. From December 2003 to July 2007, Mr. Pellerin was partner in the law firm of Hovington Pellerin S.e.n.c. Since 2002, Mr. Pellerin has served as director, president, treasurer and secretary of Capex Investments Limited, an investments and financing corporation based in Montreal, Quebec. From 2001-2002, Mr. Pellerin served as secretary for Equilar Capital Corporation, a TSE—listed company. Between 2002 and 2004, Mr. Pellerin served as vice president for legal affairs of publicly-traded Manaris Corporation. Since 2003, Mr. Pellerin has served as secretary of Gourmet Flash Inc., a Quebec corporation, and from 2004-2005, as a director of Canadian Security Agency Inc.
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Analyst: Victor Sula, Ph.D. Initial Report October 27th, 2008
Disclaimer DO NOT BASE ANY INVESTMENT DECISION UPON ANY MATERIALS FOUND ON THIS REPORT. We are not registered as a securities broker-dealer or an investment adviser either with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. We are neither licensed nor qualified to provide investment advice. The information contained in our report should be viewed as commercial advertisement and is not intended to be investment advice. The report is not provided to any particular individual with a view toward their individual circumstances. The information contained in our report is not an offer to buy or sell securities. We distribute opinions, comments and information free of charge exclusively to individuals who wish to receive them. Our newsletter and website have been prepared for informational purposes only and are not intended to be used as a complete source of information on any particular company. 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Information contained in our report will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Subscribers are cautioned not to place undue reliance upon these forward looking statements. These forward looking statements are subject to a number of known and unknown risks and uncertainties outside of our control that could cause actual operations or results to differ materially from those anticipated. Factors that could affect performance include, but are not limited to, those factors that are discussed in each profiled company’s most recent reports or registration statements filed with the SEC. You should consider these factors in evaluating the forward looking statements included in the report and not place undue reliance upon such statements. We are committed to providing factual information on the companies that are profiled. However, we do not provide any assurance as to the accuracy or completeness of the information provided, including information regarding a profiled company’s plans or ability to effect any planned or proposed actions. We have no first-hand knowledge of any profiled company’s operations and therefore cannot comment on their capabilities, intent, resources, nor experience and we make no attempt to do so. Statistical information, dollar amounts, and market size data was provided by the subject company and related sources which we believe to be reliable. To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided in the report, or for any direct, indirect, consequential, incidental, special or punitive damages that may arise out of the use of information we provide to any person or entity (including, but not limited to, lost profits, loss of opportunities, trading losses, and damages that may result from any inaccuracy or incompleteness of this information). We encourage you to invest carefully and read investment information available at the websites of the SEC at http://www.sec.gov and FINRA at http://www. finra.org. All decisions are made solely by the analyst and independent of outside parties or influence. I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report. Victor Sula, Ph.D. - Senior Analyst Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant positions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.
EcoloCap Solutions, Inc. (OTCBB: ECOS)
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