Siddharth Rajeev, B.Tech, MBA, CFA
Analyst
Pooneh Ruintan, MEcon, Msc. Finance
Associate
Nicole Engbert, BSc. Geology
Associate
May 3, 2013
West Mountain Capital Corp. (TSXV: WMT) – Reinitiating Coverage –Three Strategic Agreements –
Starts Generating Revenues in China
Sector/Industry: Environmental Services
Market Data (as of May 3, 2013)
Current Price
C$0.24
Fair Value
C$0.45
Rating*
BUY
4 (Speculative)
Risk*
52 Week Range
C$0.13 – C$0.38
Shares O/S
37.89 mm
Market Cap
C$9.09 mm
Current Yield
N/A
P/E (forward)
N/A
P/B
2.5x
YoY Return
50.0%
YoY TSXV
-32.7%
*see back of report for rating and risk definitions
.
Key Financial Data (FYE - December 31)
(C $)
Cash
Working Capital
Total Assets
Revenues
Net Income
EPS
2009
3,255,003
2,505,997
6,920,842
5,884,361
2,508,147
0.07
www.westmountaincapital.com
Highlights
• West Mountain Capital, through its wholly owned subsidiary, Phase Separation
Solutions (PS2), is in the business of thermal treatment of soil, sludge and other
waste streams.
• WMT has exclusive rights to use the patented Thermal Phase Separation (TPS)
technology, currently owned by Schlumberger Limited, in China, Canada, and
the U.S.
• The TPS is a proven “green” technology that helps reduce/eliminate
environmental liability caused by contaminated waste, while recovering oil and
gas from waste streams containing hydrocarbons for reuse/resale.
• PS2 has signed three strategic agreements with three Chinese partners for the
treatment of soil, oily sludge, and industrial sludge, respectively.
• China is one of fastest growing soil treatment markets. The Chinese government
plans to invest US$3 billion in soil investigation / remediation between 2011 and
2016.
• The company started generating its first revenues in China through a soil
treatment contract. Revenues from this project are estimated to be $1.75 million
for WMT in 2013.
• We are reinitiating coverage on WMT after covering the company from March
2010, to January 1, 2011. We are re-initiating with a BUY rating, and a fair
value of $0.45 per share.
Risks
• Regulations requiring environmental protection/cleanup are key for the
company’s long-term growth.
• Old incineration techniques have been the most popular methods for treatment
of contaminated soil in China
• Although WMT has three strategic agreements in China, the company is still
new to the market.
• Operating costs / revenues can vary from management’s initial estimates.
• WMT’s license to use the TPS technology expires in 2019.
• Access to capital and share dilution. The company needs to raise a significant
amount of capital in the next 12 – 24 months to fund its CAPEX.
2010
4,635,278
3,791,168
7,879,923
4,715,649
1,039,717
0.03
2011
1,788,645
1,908,653
6,395,652
1,608,990
(1,699,398)
-0.04
2012
162,499
(523,328)
4,731,155
257,528
(1,839,813)
-0.05
2013E
215,047
(1,860,231)
8,657,216
1,590,000
(1,477,871)
-0.04
2014E
457,086
(1,023,411)
20,785,606
4,935,714
(1,302,154)
-0.03
West Mountain Capital, through its wholly owned subsidiary, Phase Separation Solutions (PS2), is in the business of thermal treatment of soil,
sludge and other waste streams. Currently, the company’s focus is on penetrating China’s contaminated soil, oily sludge and industrial sludge
treatment markets.
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Page 2
Company
Overview
Headquartered in St. John's, Newfoundland, West Mountain Capital, through its wholly
owned subsidiary, Phase Separation Solutions (PS2), is in the business of thermal treatment
of soil, sludge and other waste streams. The company has exclusive rights to use the patented
Thermal Phase Separation (TPS) technology for hazardous waste decontamination treatment
services in Canada, China and the U.S. Unlike incineration (directly burning contaminated
materials), one of the most commonly adopted methods of waste disposal, the TPS
technology produces no harmful air emissions. The main advantages of the TPS
technology are that it reduces/eliminates environmental liability caused by
contaminated waste, while recovering oil and gas from waste streams containing
hydrocarbons for reuse/resale. Although incineration and land filling have been the
primary ways of waste disposal for decades, the growing importance of environmental
protection, real-estate prices, and the need to recover value from brownfield sites (land that
is abandoned / underused due to environmental contamination) is increasing demand for
“green” technologies, such as TPS.
PS2 started generating revenues from soil treatment in 2005, at its facility in Wolseley,
Saskatchewan. The PCB (Polychlorinated Biphenyl) contaminated soil treatment market in
Canada, one of the company’s main focus at that time, was an oligopoly, dominated by PS2
and a bigger company, BENEV Capital Inc. (TSX: BEV; Market Capitalization - $60.03
million as of April 26, 2013). The PCB market in Canada got a big boost in late 2008, when
the Canadian Federal Government came out with new regulations to remove all stored PCB
soils in federally registered storage facilities by the end of 2009 (later extended to 2011). As
a result, 2009, and 2010, were very strong years financially for WMT. However, the
company’s business slowed considerably in 2011, due to the limited remaining volume of
PCB contaminated soil, and the end of the regulatory deadline for the removal of PCB
stockpiles in Canada
Foreseeing the declining market in Canada, in 2010, WMT entered the Chinese
remediation market and announced three strategic joint venture agreements. The first
agreement was with the Nanjing Institute of Environmental Sciences (NIES) of the State
Environmental Protection Agency, Ministry of Environmental Protection (MEP), to establish
a 50/50 partnership. Subsequently, in August 2012, the two firms signed a contract with
Hangzhou DADI Environmental Protection Engineering Company Ltd. for the treatment of
33,000 tonnes of pesticide contaminated soil in Hangzhou, China. The operations started in
December 2012. The second agreement was with a private company (signed in August
2010), Zhoushan Nahai Solid Waste Central Disposal Co. Ltd. (Nahai), to establish a 50/50
partnership to build an oily sludge waste treatment facility in Zhoushan, Zhejiang province.
The facility would process and recover oil from the oily sludge waste generated from oil
storage operations, and oil tanker cleaning activities in the region. In 2012, the company
signed their third agreement; this was with another private company called Huafu
Environmental Engineering Company (“Huafu”), for the treatment of hazardous industrial
sludge in Changquing dictrict, Shandong province.
The three strategic agreements have given WMT a great opportunity to tap into
China’s potentially huge and developing environmental remediation market - which,
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Page 3
we believe, will be the company’s key growth driver going forward.
Thermal Phase
Solution (TPS)
Technology
The company’s management team acquired the Thermal Phase Separation (TPS) technology
from an Alberta-based company (Trimac Transportation – TSX: TMA - one of the largest
providers of bulk transportation services in North America) in the 1990s. Management
further developed the technology, and eventually sold it to M-I Swaco of Houston, TX (now
owned by Schlumberger Limited - NYSE: SLB) in 1999. Since the acquisition, M-I Swaco
has been using the technology exclusively for the treatment of drilling mud, and cuttings
generated by the oil and gas industry.
In 2002, PS2 licensed the technology from M-I Swaco, wherein PS2 received exclusive
rights to use the technology, in Canada and the U.S., for all types of hazardous and nonhazardous waste streams, until 2012. In return, PS2 paid an initial licensing fee of $61,460,
and agreed to pay a royalty of US$10 per tonne of material processed, after the first 15,000
tonnes, or for any material processed after October 31, 2008.
In 2008, M-I Swaco agreed to extend the expiry date of the license to 2019, and in 2009,
granted PS2 the exclusive rights to use the technology in China as well. The royalty
payment due to Schlumberger for the use of TPS in China has not been finalized at this
moment. Management indicated that a final decision will be made in the coming weeks. The
technology is patented in the U.S. and Canada, but not in China. WMT had to still license
the technology as TPS is trademarked and owned by Schlumberger. Note that there is a risk
that Schlumberger might not extend the license after 2019.
Details of the technology: TPS is a type of Thermal Desorption Unit (TDU). Thermal
desorption is a non-incineration technology that utilizes heat to remove contaminants from
solid matrices such as soil or sludge. Thermal desorption units are classified into two
categories: batch-feed and continuous feed (or closed loop). For a batch-feed system, as the
name suggests, waste streams are fed into a facility in batches. As for a continuous-feed
system, large waste streams can be fed continuously and treated. TPS is a continuous feed
(closed loop) indirectly heated thermal desorption unit, capable of separating
hydrocarbons, with boiling points up to 500 ºC, in two stages.
Stage 1: Desorption / Pyrolization - In this stage, contaminated feedstock is fed into an
extraction chamber; which is indirectly heated by a heated combustion chamber using fuel.
The heat in the combustion chamber is transferred to the extraction chamber, and then to the
feedstock. The significant increase in temperature results in volatilization of organic
hydrocarbons, to form gases.
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A schematic representation of the TPS
Source: West Mountain Capital
Stage 2 involves condensation – In this stage, the formed gases in Stage 1 are first cooled
(using water), and the resulting liquid stream is passed through a three-phase oil/water/solids
separator where :
a) the separated solids are re-hydrated, collected, analyzed, and released for landfilling or for
use as backfill material.
b) oil is recovered, and held for reuse/resale; also, non-condensable gases are recovered and
reused by the TPS as fuel
c) recovered water, in most cases, is treated and returned to the system for reuse.
Traditional management of contaminated soil/industrial sludge, and other wastes, involves
incineration or landfilling (burying waste under the ground) techniques. The main benefits of
the TPS technology compared to these techniques are:
•
•
•
TPS treatment produces significantly less greenhouse gas emissions compared to
incineration, as TPS does not involve direct combustion. Incineration, on the other
hand, is widely criticized due to its emissions.
TPS treatment of hydrocarbon-based industrial sludge and other wastes enables the
recovery of oil that can be reused or sold. According to WMT, TPS is the only
technology of its kind capable of extracting up to 90% oil by volume from industrial
waste, paint and pharmaceutical waste.
Compared to landfilling techniques, the TPS technology results in a 85% decrease in
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waste volume, reducing the need for landfill sites. Also, landfilling is a temporary
solution as it does not destroy the contaminants.
Although the TPS technology has significant advantages over traditional techniques
used for waste management, the technology can compete efficiently in only those
applications/regions where - a) it is cost-competitive compared to its competitors, or b)
government policies require proper treatment of waste.
The technology is proven, and according to management, has already been applied to treat
hundreds of thousands of tonnes of contaminated material worldwide. The technology has so
far been used in Australia, the U.S., Japan, U.A.E., Russia, Kazakhstan, Algeria, Bolivia,
Ecuador, and Argentina (Source: Management). In 2011, TPS was selected as one of five
technologies from around the world to present at the Beijing United Nations Industrial
Development Organization (UNIDO) conference.
As for Canada, the company started with a fixed facility at Wolseley, Saskatchewan,
which became operational in late 2005, and was fully commissioned in early 2006.
Although the TPS technology was originally developed as a mobile, onsite remedial
technology, the company decided to deploy the technology at a fixed facility because of its
cost advantages (economies of scale). The company strategically chose Wolseley,
Saskatchewan, so that it could target both eastern and western Canadian markets, and
the U.S. The facility operated in 2009-2010, but is currently not operating significantly.
Source: West Mountain Capital
One of the main advantages of this facility is that it is one of the most broadly permitted
(because of a wide range of applications), and flexible, non-incineration facilities in Canada.
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The Wolseley Facility is also one of only three fixed facilities in Canada permitted for the
treatment of large volumes of PCB and dioxin/furan impacted soil. The facility has an annual
treatment capacity of up to 20,000 tonnes. The following table shows a list of potential
applications:
Facility Capabilities
Tank Sludge
Paint Sludge
Petrochemical Sludge
Refining Catalyst
Solvent Distillation Sludge
PCBs
Dioxin/Furan
PERC
PAH/Creosote
Waste Pharmaceuticals
TPS’s primary applications are listed below:
Contaminated Soil - Contaminates generally comprise less than 0.75% of the volume of the
soil. The TPS technology can be applied for treatment of a large volume of soil contaminated
with PCBs, chlorinated organics (such as dioxins and furans), DDT and other pesticides.
Sludge – PS2’s target in this sector is any hazardous hydrocarbon-based material that has
greater than 50% hydrocarbons, and large volume of recoverable oil.
Competing
Technologies /
Processes
The following section highlights the advantages / disadvantages of the various technologies /
processes used for soil / sludge treatment:
Incineration: There are two types of incineration - old (uncontrolled) and modern (state-ofthe-art). Old incineration is a burning process without energy recovery, while modern
incineration is an environmental-friendly process equipped with pollution control devices. In
China, incineration is the most popular method of waste treatment. Compared to TPS,
according to management, the operating cost of an uncontrolled (non-environmentally
benign) incineration method in China is about $20/tonne less than the TPS, and the operating
cost of a modern incinerator is about three times higher than TPS. Therefore, based on
efficiency and costs, we believe TPS technology has competitive advantages over both
methods of incineration.
Micro-Organism Remediation: This technology uses micro-organism metabolism to
transform pollutants in to easily degradable substances. However, this method has low
efficiency. Also, if the process is not controlled, it is possible that organic contaminants may
not be broken down fully, resulting in toxic by-products. Moreover, the process has a long
duration of treatment time.
Solvent Extraction: This method removes pollutants from contaminated soils with solvent.
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This method can effectively remove organic pollutants from soil, however, the solvent
chemical used may cause secondary pollution to the environment.
Solidification/Stabilization: This method can reduce the fluidity of pollutants, instead of
destroying them. Solidification is cheap, however, it will not destroy the pollutants
permanently.
Thermal Desorption: As mentioned earlier, thermal desorption removes volatile and semi
volatile organic pollutants via heating. This is an environmentally friendly, and efficient
method, however, compared to the other methods mentioned above, has higher installation
and operating costs. The following table shows the operating cost of typical TDUs.
Thermal Desorption Unit Cost ( Per Ton)
Continuous -Feed
Batch-Feed
Small to medium
direct contact dryer
$40-$200
$120-$250
Large direct contact
dryer
$35-$100
$48-$51
Indirect contact
dryer
$80-$150
about $100
Source: Overview of TDU by Foster Wheeler Environmental Corporation and Battelle Corporation
As shown in the table above, TDU costs range between $35 - $250 per ton. The cost of
closed loop indirectly heated systems (which are similar to TPS) range between $80 - $150
per ton. The operating cost of TPS is considered to be lower than other TDUs due to the
following two key factors – 1) TPS recycles / reuses the required fuel and water throughout
the process, and 2) the required personnel for operating a TPS unit is a maximum of 4
people, compared to 6-8 people for typical TDUs. Although management has not disclosed
TPS’s operating costs in China, we estimate them to be $85 - $105 per ton (estimated based
on the revenue and margin figures announced by the company) – which is on the lower-end
of the range of indirect-contact TDUs.
Overall, we believe, WMT has an advantage over other waste and soil treatment
service providers as TPS is proven and cost-efficient.
TDUs in China
In China, thermal desorption has been applied in two projects (we have not identified any
other projects that have used TDUs in China)
1) Thermal desorption was applied by the Ministry of Environmental Protection of China to
treat PCB contaminated soil in a project titled “China PCB Management and Disposal
Demonstration”. This project was conducted in Zhejian province, with the co-operation of
the World Bank. The total cost of the project was $32.1 million. The project lasted 7 years,
from 2005 to 2012. TDUs were only used in the final phase of the project. A TDU unit was
brought in to China from the U.S. (from an undisclosed supplier) and was installed by one of
PS2’s current joint venture partners, Hangzhou DADI Environmental Protection Engineering
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Company Ltd. Although the World Bank website claims that the project was successful,
DADI’s interest in collaborating with NIES and WMT to apply TPS, instead of the TDU
used in the project in Zhejian, can be considered as a testimonial of TPS’s value proposition.
2) In 2008-2009, BCEG Environmental Remediation Co. Ltd. (BCEER), in a project based
in Beijing, utilized three technologies for the remediation of 18,363 tonnes of heavy metals
and organic chemical soil. The technologies used were thermal desorption, incineration, and
solidification (Details on BCEER are presented later in the report).
Company
History
PS2 was formed as a private corporation in 2003 by Stephen Clarke, WMT’s VP of Business
Development. Over the next year, the company completed the necessary environmental
assessment requirements, permitting, site evaluation, design, equipment engineering, facility
planning, and financing to establish the Wolseley Facility. The Wolseley Facility was fully
commissioned in early 2006. Paul Antle joined the company as President and CEO in 2005.
The company commenced commercial operations (providing contaminated soil treatment
services) at the Wolseley Facility in February 2006. In 2007, the company began offering
pharmaceutical waste treatment services to drug manufacturers/distributors. Although the
company generated revenues of $0.42 million in 2007, and $1.10 million in 2008, from this
sector, the company decided to exit the sector due to lower than anticipated margins.
PS2 became public in 2007, through a revere acquisition of a capital pool company,
West Mountain Capital Corp. Shareholders of PS2 received West Mountain shares on a
one for one basis at a deemed price of $0.30. Prior to the transaction, PS2 had an outstanding
debenture of $3.95 million due to Golden Opportunities Fund (GOF). GOF agreed to convert
$3.45 million of this amount into 11.50 million WMT shares. The remaining $0.51 million
was repaid by PS2 in cash.
The company did not generate any revenues from soil treatment in 2008. However, things
turned around in late 2008, when the Canadian Federal Government came out with new
regulations to remove all stored PCB soils in federally registered storage facilities by the end
of 2009 (later extended to 2011). These new regulations had a significant impact on the
company’s performance in 2009 and 2010. However during the last two years (2011/2012),
due to the limited remaining volume of PCB soil in Canada, the company’s activities
significantly declined; which adversely affected its financial performance.
In 2010, foreseeing the unfavorable soil remediation market in Canada, the company
stepped into China – a market with significant potential for contaminated soil
remediation. Since then, WMT has signed three strategic agreements; described in detail
later in this report.
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The following chart shows WMT’s structure:
Source: Company
PS2 in Canada
A few of the major soil remediation projects completed by WMT are listed below:
•
•
•
•
PS2 in China
In 2009, PS2 was contracted to remove/treat 6,300 tonnes of PCB contaminated
soil/debris stored in a storage facility located in Western Canada for approximate
revenues of $6.9 million (or $1,095/tonne).
In 2010, PS2 was contracted to transport/treat approximately 1,500 tonnes of PCB
contaminated soil for approximate revenues of $0.90 million (or $600/tonne). PS2
subsequently received 600 additional tonnes from this contract.
In June 2010, PS2 signed a contract with a customer in Western Canada to transport and
treat about 800 tonnes of PCB contaminated soil for revenues of $0.50 million
($625/tonne).
On December 14, 2010, the company signed a contract to treat 800 tonnes of PCB
contaminated solids from a municipality in Ontario for revenue of $560,000
($700/tonne).
The following section discusses WMT’s agreements with Chinese entities in detail:
First Agreement - Contaminated Soil Treatment
In Q2-2010, the company signed an agreement with Nanjing Institute of Environmental
Sciences (NIES) of the State Environmental Protection Agency, Ministry of Environmental
Protection (MEP), to establish a 50/50 partnership. NIES is a Chinese government
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environmental agency. It conducts scientific and technological research, and promotes
environmentally friendly technologies. According to the Ministry of Environmental
Protection China, there are 600,000+ contaminated sites in China. WMT/NIES believes
approximately 300 of those sites, with total soil volume of between 30 million and 45
million tonnes (on average 100,000-150,000 tonnes per site), will require remediation
within the next 5 years. The key target markets are Beijing, and the provinces of Jiangsu
and Zhejiang – all three regions are in the east coast of China. The average volume of soil
per site in China is significantly higher than Canada, as most sites in Canada averaged
between 5,000 – 30,000 per site.
The partnership plans to:
•
•
•
•
Construct a (mobile) TPS unit, the capital expenditures to be shared 50:50 (completed)
Undertake a demonstration project: 2,000 – 3,000 tonnes (completed)
Design, plan, launch, bid, operate and participate in various remediation projects
throughout China;
Provide solutions and consulting services related to environmental remediation issues.
On December 16, 2010, PS2, and its partner, awarded a contract to CSSC Nanjing Luzhou
Environment Protection Co. Ltd. of Nanjing, China, for the engineering/assembly of the TPS
unit’s steel structure. Subsequently, in February 2011, the venture awarded a contract to
JME (Hunan) Automation Engineering Co. Ltd. of Changsha, China, for the assembly of the
electrical, controls and instrumentation systems of the TPS.
Following the completion of the fabrication of the first TPS unit (capacity – 30,000 tonnes
per year) in mid February 2012, the joint venture transported their first TPS unit in China to
a demonstration site in Suzhou (a major city in Jiangsu province – one of WMT’s key
markets), owned by NEIS. Installation, commissioning and testing of the TPS was
completed shortly after that. Approximately 2,000 tons of soil was treated for the
demonstration. According to management, the total CAPEX of the project was $1.6 million;
of which, WMT funded its 50% share of $0.8 million.
The pilot project enabled the company to assess the operating costs (undisclosed) of the
TPS unit. Also, the project proved TPS’s potential to treat highly contaminated soil
with POPs, pesticides and other organic chemicals.
Following the success of the demonstration project, in August 2012, WMT, and its partner,
signed a sub-contract with Hangzhou DADI Environmental Protection Engineering Co. Ltd.
(“Dadi”). Dadi is a private hi-tech environmental protection company that provides
professional services in the field of contaminated soil and groundwater site treatment. The
company has more than 50 professional / technical staff.
Our research indicates that Dadi is one of the only two companies in China that is licensed
by the State Environment Protection Administration (SEPA) for PCB waste
management. The other licensed firm is Shenyang Institute of Environment Science, which
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has used incineration on three PCB sites in Zhejiang.
The sub-contract with Dadi is for the treatment of 33,000 tonnes of pesticide
contaminated soil in Hangzhou (largest city in Zhejiang province – one of WMT’s key
target markets). Dadi’s head contract for the project (with an undisclosed client) involves the
treatment of approximately 160,000 tonnes of contaminated soil. The initial contract for
33,000 tonnes (which is expected to take one year) is basically a demonstration to evaluate
the efficiency of the TPS technology. If Dadi is satisfied with TPS, WMT expects to
receive contracts for additional volume.
PS2 and NIES moved their 30,000 tonne per year TPS unit (which they built for the pilot
project) to the project site, and started soil treatment in December 2012. The contaminated
soil
includes
carcinogens,
DDT
(dichlorodiphenyltrichloroethane),
DDE
(dichlorodiphenyldichloroethylene) and DDD (dichlorodiphenyldichloroethane). The
project is expected to be completed by the end of 2013, and management’s estimate for
revenues is $3.5 million, or $106 per tonne, split between WMT and NIES. Note that
WMT used to charge $600 - $700 per tonne for their projects in Canada. Management
indicated to us that, once they establish a track record in China, they will be able to
charge a much higher rate than $106 per tonne going forward.
Management has identified two other sites in the Jiangsu province. The company’s goal is
to increase its annual capacity from the current 30,000 tonnes to 150,000 tonnes by
2014, and to 450,000 tonnes by 2015. To put things in perspective, a 450,000 tonnes per
year facility, running at full capacity, could generate $47.70 million in revenues (assuming
$106 per tonne pricing).
WMT’s estimated CAPEX for the expansion, from 30,000 to 150,000 tonnes, is $6.7
million, and from 150,000 to 450,000 tonnes, is $16 million. Although NIES has a 50%
interest in the unit that has already been built (and currently being used for the Dadi project),
management does not expect NIES to have any interest in the expansion.
Second Agreement - Oily Sludge Treatment
In August 2010, the company signed a collaboration agreement with Zhoushan Nahai Solid
Waste Central Disposal Co. Ltd. Nahai is a private, hazardous waste and oily sludge
management company in Zhoushan, Zhejiang (the same province as WMT/NIES’s current
project with Dadi). Nahai is the only enterprise that has a waste management processing
permit in Zhoushan. Their infrastructure includes an oil storage facility (2.5 million
tonnes), a waste oil recovery facility (capacity of 1 million tonnes per year), bilge water
treatment process (20,000 tonnes per day), and a solid waste destruction facility (20
tonnes/day).
The agreement between the two companies is to establish a 50/50 partnership to build
an oily sludge waste recovery facility (non-TPS) in Zhoushan. The facility would process
and recover oil from the oily sludge waste generated from oil storage operations and oil
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tanker cleaning activities. The facility will utilize proprietary thermal, mechanical and
chemical systems.
The JV between the two companies, known as Zhejiang Nahai Phase Environmental Science
and Technology Limited, received a license to operate its oily sludge treatment facility in
March 2011. The 30 year license is valid until 2041, and has an option to be renewed.
Zhoushan, China: Zhoushan consists of a group of islands located at the opening of the
Yangtze River, just south of Shanghai. Zhoushan has one of the largest ports in the world,
and has the biggest commercial petroleum transit base in China (Source: Zhoushan
Municipal Government). According to management, Zhoushan generates about 180,000
tonnes per year of oily sludge waste. Several oil storage facilities are located in this region.
For example, the Aoshan terminal, a large-sized oil transshipment base located in Zhoushan,
has a crude oil tank storage capacity of 2.58 million cubic meters (Source: Sinochem
Xingzhong Oil Staging (Zhoushan) Co., Ltd.). Also, the biggest crude oil dock in China, Alsi
Sinochem Cezi, with a capacity of 300,000 tons, is a part of Zhoushan’s port. All the above
makes Zhoushan a very good market for treating oily sludge.
The JV’s facility will be designed to treat up to 50,000 tonnes per year, with the
potential to expand to 100,000 tonnes per year if required. The JV’s strategy is to buy
oily sludge, process it, and then sell the recovered oil (light diesel). Management estimates
that they would be able to recover at least 85% of the contained oil.
The facility was initially expected to be operational by August 2011. However, due to a
delay in construction, and delivery of a number of equipment, commencement of operations
has been postponed to Q3-2013. According to management, to date, necessary design,
engineering, civil work, and commissioning processes to prepare the site for treatment have
been completed. The treatment equipment is expected to be installed in the next few months.
The company estimates a total CAPEX of $3 million for the project; of which, WMT
will have to pay its 50% share of $1.5 million.
Management estimates that, at full capacity, the facility has the potential to generate
annual revenues of approximately $15 million ($300 per tonne), with a 20% EBIT
margin. Details regarding the cost to purchase oily sludge, the amount of diesel that can be
generated from one tonne of oily sludge, etc were not disclosed.
Third Agreement - Industrial Sludge Treatment
In September 2012, PS2 China entered into a 10 year sub-contract agreement with Huafu
Environmental Engineering Company, a subdivision of Liaoning Huafu Group of China.
Formed in 1992, the Huafu Group provides services in the area of heavy oil recovery,
wastewater treatment, and energy conservation to various industries. Huafu also provides
services in R & D, consulting, procurement, manufacturing, engineering, etc. According to
Huafu’s website, the group has developed about 300 products and technologies in the fields
of oil recovery and water treatment, which are being used by major Chinese oil producers,
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such as Sinopec / China Petroleum & Chemical Corporation (NYSE: SNP), China National
Petroleum Corp (CNPC), and China National Offshore Oil Corporation (CNOOC; NYSE:
CEO). Huafu’s website also mentions that they hold 45+ patents related to environmental
equipment.
Huafu is expecting to sign a head contract with an undisclosed client to design, build and
operate a hazardous industrial sludge treatment facility in Changquing, Shandong province
(eastern China). The contract is expected to have a 10 year term. Management expects that a
definitive agreement will be signed before the end of the year. Huafu signed a sub-contract
agreement with WMT to jointly operate the project, wherein TPS will be integrated into
Huafu’s sludge treatment facility. WMT and Huafu are contemplating a 15,000 tonne per
year facility (CAPEX - $1 million). WMT believes that, if this facility is successful, they
will be able to expand to at least 6 more locations. In February 2013, WMT announced that
they intend to form a JV with Huafu, targeting industrial sludge management projects. A
definitive agreement, or details of the JV, are yet to be finalized.
Management believes they can generate approximately $2.3 million per location (or
15,000 tonnes per year facility), with an EBIT margin of 25%.
Competition
In Canada, WMT’s main competitor was BENEV Capital Inc., formally Bennett
Environmental Inc. BENEV had a larger treatment facility with an annual processing
capacity of 100,000 metric tonnes. Just like WMT, BENEV’s business suffered heavily in
the past two years. BENEV uses an incineration based technology, and to date, has not
stepped into Chinese market. BENEV recently entered into a purchase and sale agreement to
sell its waste treatment plant, and related assets and liabilities, to one of its employees
(manager) for $10 million.
In China, one of WMT’s main competitors is FMC Corporation (NYSE: FMC; market
capitalization - US$8.3 billion; 2012 revenues – US$3.7 billion). In September 2012, The
Environmental Solutions Division of FMC Corporation, and two other private companies,
BCEG Environmental Remediation Co., Ltd. (BCEER) and BRISEA Group, Inc, signed a
joint venture agreement to manufacture and market cost-effective technologies and
environmentally friendly products for soil and groundwater remediation in China for the first
time. The venture, named Beijing Enviro- Chem, plans to also provide research and
development, design and technical support services. Below is a short description of the three
partners:
FMC Corporation: FMC Corporation, headquartered in the U.S., is a diversified chemical
company which operates globally with about 5,700 employees. FMC Environmental
Solutions is a division of FMC Corporation. The division specializes in air pollution control,
soil and groundwater remediation, and water treatment. This company provides products and
services to assist businesses in managing cost and compliance issues related to the
environment.
BCEG Environmental Remediation Co., Ltd. (BCEER): BCEER, based in Beijing, is a
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subsidiary of Beijing Construction Engineering Group Co., Ltd. BCEER supplies
environmental remediation services. As we mentioned earlier, in 2008-2009, BCEER, in a
project based in Beijing, treated 18,363 tones heavy metals and organic chemicals soil by
utilizing three technologies (TDU, incineration, and solidification).
BRISEA Group, Inc. - BRISEA Group, Inc., founded in 1999, in New Jersey, USA, provides
environmental and energy services, as well as technology transfer, to developing nations.
BRISEA has completed over 100 projects in China in the environmental and energy sections.
FMC and its partners have yet to announce any contracts.
Types of
contaminated
sites in China
The following are the major types of contaminated sites in China:
Brownfields: Brownfields, which are typically sites of previous chemical plants or factories,
are abandoned and underused due to pollution. There is an increasing need for remediating
these sites for reuse. The following images shows some examples of brownfields:
Source: World Bank
According to World Bank, brownfield remediation / redevelopment was included in the
(Chinese) government priority list for World Bank assistance in 2009.
Polluted Farmland: According to the State Environmental Protection Administration, it is
estimated that about 100,000 sq.km. of China’s cultivated land is currently polluted. These
polluted land are mostly in economically developed areas and account for 1/10th of China’s
cultivatable land. As China has only 7% of the world’s farmable land, but has 22% of
the world population, it is essential that its farmland are preserved. As an example to
show the extent of pollutions for farmland in China, the following picture, from the China
Environmental Remediation’s website shows containers filled with dangerous chemicals,
abandoned in a field, without treatment.
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Source: China Environmental Remediation
It should be noted that crops grown in, or near polluted land, can absorb chemicals and
heavy metals, and cause serious health damage. As a result, the importance of treating
polluted farmland is increasing in China.
Major types of
contaminants
The following section discusses the primary contaminants:
Persistent Organic Pollutants (POP): The following image shows the various types of
POPs contaminating sites in China.
Source: POP Actions for Contaminated Sites in China- September 2011
According to Article 6 of the Stockholm Convention on POP, China should endeavor to
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develop strategies to identify sites contaminated by chemicals, and remediation of these sites
should be undertaken by applying environmental friendly methods. The Stockholm
Convention on POP is an international environmental agreement, effective May 2004, which
aims to eliminate or restrict the production and application of POPs. By 2015, China plans
to establish an inventory of POP contaminated sites and treatment plans.
Some of the actions taken by the Chinese government for controlling POP contamination are
as follows:
2008-2011
2009-1010
Central
World Bank and
Government Central Government,
prepared an prepared technical
action plan
guideline for site
investigation,
remediation and risk
assessment and
monitoring.
2009-2011
UNDP ( United Nation of Development
Program), World Bank and Central
Government completed Environmental
Impact Assessment (EIA) for pesticide
POP sites.
2010-2011
2011-2012
UNDP and
Central
World bank
Government
conducted pilot
established a
project for site national data base
remediation
for contaminated
sites.
Source: POP Actions for Contaminated Sites in China- September 2011
We believe the above mentioned plans/actions demonstrate the increasing importance the
Chinese government places on POP contamination – which is encouraging for remediation
companies such as WMT.
Heavy Metals: The annual heavy metal polluted grains in China is estimated at 12 million
tonnes, which lead to an economic loss of over US$3 billion. (Source: Xinhua). According to
the European Times, approximately 16% of the polluted farmland in China is polluted
by heavy metals. According to the Shanxi Provincial Agriculture Department, Shanxi will
invest $2.46 million, during 2011 - 2015, for the treatment of heavy metal polluted sites.
Government
action /
regulations
related to soil
remediation
China has one of fastest growing soil treatment markets, however, the country is not as
experienced in site cleanup as Western countries. The main priorities for China in the
environmental remediation sector are the restoration and disposal of soil contaminated with
pesticides, PCBs, industrial water treatment and brownfield remediation.
In the beginning of 2011, the Chinese government announced a five year plan to invest about
US$3 billion in soil investigation, remediation and improving regulations.
There are currently two national laws in China related to sites with contaminated soil – the
Environmental Protection Law and the Solid Waste Law. Under these laws, an enterprise
which generates environmental pollution has the obligation to prevent the pollution and
should adopt measures to eliminate and control the waste (Source: A Hidden Problem:
China’s contaminated site soil pollution crisis). There are also regulations that directly
consider soil pollution at the provincial and city levels. WMT’s three key target markets,
Zhejiang, Jiangsu, and Beijing, have local laws/regulations regarding the prevention/control
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of environmental pollution.
The following two developments are very positive for the industry:
•
•
The Chinese Government recently announced that soil pollution prevention
regulations will be nationally legislated.
Recently, four Chinese Ministries – the Ministry of Environmental Protection,
Ministry of Land and Resources, Ministry of Industry and Information Technology,
and the Ministry of Housing and Urban-Rural Development – passed a regulation
called the “China Soil and Factory Relocation Policy”. The new regulation has been
enforced to govern remediation and to guarantee the environmental safety of the
development/utilization of industrial fields for reuse.
As mentioned earlier, we believe, TPS technology can compete efficiently in only those
applications/regions were it is cost-competitive compared to its competitors, or where
government policies require proper treatment of waste. Therefore, the new legislation and
government actions in China are very good for WMT’s prospects.
Management
Team
The company has a strong management team with extensive experience in the industry.
Management and the board hold approximately 60 – 65% of the outstanding shares. Brief
biographies of the management team and board of directors, as provided by the company,
follow:
Paul Antle, B.Sc., M.Eng., CCEP: Chairman, President and CEO - Mr. Antle is a native
of St. John's, NL and possesses a Bachelor of Science Degree (Chemistry) from Memorial
University and a Master of Engineering Degree (Chemical Engineering) from the University
of New Brunswick. In 2007 he graduated from Harvard Business School after completing
the OPM Executive Education Program. He is currently President and CEO of Phase
Separation Solutions Inc., a wholly owned subsidiary of West Mountain Capital Corp.. Prior
to this he spent over 20 years in the environmental industry where he started, operated, grew
and sold numerous businesses. Over the last five years he has been Chair of the Board of
the Newfoundland Symphony Orchestra; Chair of the Newfoundland and Labrador Legacy
Nature Trust; a member of the UNB Campaign Cabinet; and Chair of a Special Advisory
Group on International Trade for the Environment. From 1997 to 2002 Mr. Antle was a
member of the Prime Minister’s National Round Table on the Environment and
Economy. Mr. Antle was inducted into the Academy of Entrepreneurs in September 1995,
was a Finalist for Atlantic Canada’s Entrepreneur of the Year Award in 1995, received
a World Young Business Achiever Award in 1997, was recognized for his contribution to
the Newfoundland Environmental Industry in 2002, in August 2002 was part of Canada’s
Official Delegation to the United Nations World Summit on Sustainable Development held
in Johannesburg, South Africa, in May 2003 was named one of Canada’s Top 40 Under
40 and in November 2003 named Alumnus of the Year for Gonzaga High School. In October
2012. Mr. Antle received the Queen Elizabeth II Diamond Jubilee Medal. In May 2012, he
was selected by Atlantic Business Magazine as one of the Top 50 CEOs in Atlantic Canada.
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Stephen Clarke, BA. CEA, CCEP: VP Business Development - Mr. Clarke has been
involved in the hazardous waste, biomedical waste, oilfield solids control and thermal
remediation sectors of the environmental industry since 1995 both in the public and private
sectors. While employed with the Newfoundland and Labrador Department of the
Environment he served as Secretary to the Provincial Round Table on the Environment and
the Economy acting as liaison with its National counterpart and with the Irish-Newfoundland
Business Development Partnership. He has been integral in the international success of the
Canadian designed mobile thermal remediation system, TPS, having worked as Director of
International Marketing for the technology with its developer SCC Environmental Group
and with the Global Support Division of an oilfield service industry leader. As founder and
Vice President of Phase Separation Solutions, Mr. Clarke has been central to the creation,
implementation and growth of one of Canada's premier integrated thermal treatment
facilities.
Paul Coombs, C.M.A., C.G.A., M.B.A. - CFO
Mr. Coombs has over 15 years experience in the financial management of both public and
private companies. He has worked with Fisheries Products International and Northern Light
Fisheries overseeing their global financial, administrative and supply chain management
systems Additionally, Mr. Coombs has a number of years experience in the mining industry,
having worked in various financial management capacities with Xstrata, Falconbridge,
Noranda and Aurora Energy.
Glenn Antle, P.Eng. - COO - Mr. Antle is a native of St. John’s, Newfoundland and
possesses a Bachelor of Science Degree in Engineering (Civil) from the University of New
Brunswick. During his 15-year career in the environmental industry he has gained has
extensive experience in the management of hazardous waste, remediation of contaminated
sites, and oilfield environmental services. He has been instrumental in the development of
thermal, mechanical, and chemical environmental technologies for waste treatment for use in
site remediation and oil and gas drilling. Prior to joining Phase Separation Solutions he held
various positions within a major international oil field services company in research and
development, technical services, operations, and business development. He is named as a
co-inventor on a United States Patent for the Thermal Phase Separation technology. Mr.
Antle is a registered professional engineer with the Association of Professional Engineers,
Geologists, and Geoscientists of Alberta
Board of
Directors
Daniel E. Kenney, LLB, Corporate Secretary - Mr. Kenney is a partner at Davis &
Company in Calgary. His practice is focused on securities and corporate finance
transactions, mergers and acquisitions and corporate governance matters. He has extensive
experience with public and private offerings of securities, including initial public offerings,
business combinations and restructuring's through assets and share acquisitions, plans or
arrangements and takeover bids. He also has considerable experience in all dealings with
securities regulators including stock exchanges and securities commissions.
Grant Kook: Director - Mr. Kook is a Saskatchewan based fund manager. He is the
President and CEO of Cheung On Investments Group Ltd., owner and manager of a number
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of international investor syndicated funds. He is Chairman, President and CEO of the
Ramada Hotels in Regina and Saskatoon, both of which are wholly owned properties of the
above noted funds. Mr. Kook is also the founder, Chairman, and Fund Manager of Golden
Opportunities Fund, a Labour Sponsored Venture Capital Corporation.
Dr. John Wiebe: Director - Dr. Wiebe is currently President and CEO of the Globe
Foundation of Canada, an organization that engages Canadian industries, government
agencies and financial institutions in environmental and energy business opportunities and
projects around the world.
Steven Thompson: Director - Mr. Thompson acted as the VP of Banyon Engineering, an
oilfield engineering firm, for 10 years prior to becoming the current President of Triumph
EPCM Ltd. of Calgary.
Anthony Vysniauskas: Director - Mr. Vysniauskas, now an independent businessman was
co-founder of Calgary based process simulation and engineering software leader,
Hyprotech. He acted as Vice President from 1982 through 1992 then serving as President
and CEO through 1997 when the company was acquired by AEA. Following the acquisition
he served for 3 years as the new amalgamated company Executive VP.
Financials
The following chart shows the company’s revenues since 2005 (when the company started
generating revenues).
Revenues (2005 – 2014E)
As shown in the chart, 2009 (12 months ended December 31, 2009) was the best year so far,
when the company posted record revenues of $5.88 million. The second best year was 2010,
with revenues of $4.72 million. As mentioned earlier, 2009/2010 were the company’s best
years financially, due to the significant increase in the utilization of the Wolseley facility.
Revenues have dropped significantly since then. In 2012, the company generated just $0.26
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million, of which, $0.15 million came from two soil processing projects in Canada, and the
remaining $0.11 million came from the company’s first project in China (with Dadi). The
project started generating revenues in December 2012.
We made the following assumptions for our revenue projections:
-
-
-
No revenues from the U.S./Canada
Soil treatment – we assume the company will gradually increase annual capacity to
450,000 tonne per year by 2016 - the company will process 30,000 tonne in 2013, and
45,000 tonne in 2014. Over the long-term, for conservatism, we have assumed the
company’s facilities will operate at just 50% capacity.
Oily sludge – commence generating revenues from the agreement with Nahai through a
50,000 tonne per year facility – like the soil treatment segment, we have assumed the
company’s facility will operate at just 50% capacity.
Industrial sludge - commence generating revenues from the collaboration with Huafu
through a 15,000 tonne per year facility – we have assumed the company’s facility will
operate at 100% capacity, but do not assume any expansion beyond the 15,000 tonne
annual capacity.
Our revenue forecasts for 2013, and 2014, are $1.59 million and $4.94 million,
respectively.
Except 2009, and 2010, the company reported net losses every year since 2005. The
following chart shows a summary of performance since 2009.
The following table shows margins since 2009.
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Margins
2009
2010
2011
2012
2013E
Gross
EBITDA
EBIT
EBT
Net
65.85%
49.57%
42.41%
40.43%
42.62%
73.15%
40.78%
29.67%
28.64%
22.05%
5.00%
-92.67%
-126.95%
-128.43%
-105.62%
-49.17%
-476.93%
-684.73%
-703.61%
-714.41%
25.00%
-53.71%
-91.60%
-92.95%
-92.95%
Environme ntal and
Facilities Service s
Industry
18.30%
6.50%
3.20%
1.20%
Gross margins were between 65 – 75%, and EBIT was between 25% - 45% in the
company’s peak years, 2009 and 2010. The company expects EBIT to be between 20% 25% for their operations in China.
In the company’s best year, 2009, it generated $2.51 million (EPS: $0.07) in net profit. The
company reported a net loss of $1.84 million in FY2012 (EPS: -$0.05). Our forecasts for
2013, and 2014, are net losses of $1.48 million (EPS: -$0.04), and $1.30 million (EPS: $0.04), respectively.
Cash Flow
Summary
The following table shows a summary of cash flows since 2009. As shown, cash flows from
operations have been negative in the past two years. We expect CAPEX of $4.50 million,
and $12.50 million, in 2013, and 2014, respectively – which are our estimates of the funds
required for expansion.
Summary of Cash Flows
2009
2010
2011
2012
2013E
2,929,119
2,197,192
(1,546,679)
(1,027,857)
(393,378)
Cash Flows from Investing
(89,868)
(734,306)
(1,307,953)
(932,788)
(4,500,000)
Cash Flows from Financing
(194,837)
(82,611)
7,999
334,499
4,945,926
2,789,262
1,550,775
(2,799,202)
(1,945,195)
(4,893,378)
Cash Flows from Operations
Free Cash Flows
Liquidity
At the end of 2012, the company had $0.16 million in cash. Working capital was negative
$0.52 million.
Liquidity Analysis
Cash
Working Capital
Current Ratio
Debt / Capital
EBIT Interest Coverage Ratio
2009
$3,255,003
$2,505,997
2.74
11.3%
21.4
2010
$4,635,278
$3,791,168
5.25
1.8%
29.0
2011
$1,788,645
$1,908,653
3.68
1.9%
(85.8)
2012
$162,499
-$523,328
0.40
10.6%
(36.3)
2013E
$215,047
-$1,860,231
0.17
24.9%
(68.0)
The company had a low debt to capital of 11% at the end of 2012, significantly lower than
the industry average of 24.6%.
In order to fund its CAPEX for the next two years, the company has arranged or is arranging
the following:
-
Executed a Commitment Letter for $3.5 million in debt financing with HSBC Bank of
Canada
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-
-
In February 2013, the company announced its plans to pursue a non-brokered private
placement of up to $1.50 million by issuing 8% unsecured convertible bonds (maturity
date – 24 months; conversion price - $0.35 per share).
In March 2013, the company announced it plans to undertake multiple rounds of equity
financing (of up $25 million) over the next 12 months to fund its costs in China
Stock Options and Warrants – At the end of December 2012, the company had 2.66
million stock options outstanding, with a weighted average exercise price of $0.22 per share.
Approximately 0.66 million are currently in the money. The company has no outstanding
warrants.
Valuation
Our Discounted Cash Flow (DCF) valuation model on the company gave a fair value of
$0.45 per share. A summary of our valuation model is shown below.
DCF Valuation
(C$)
FFO
Change in WC
CFO
CAPEX
Free Cash Flow
PV
Discount Rate (WACC)
Terminal Growth
Present Value
Cash - Debt
PV Equity
Shares O/S (dil)
DCF Value/Share
2014E
2015E
2016E
2017E
2018E
2019E Terminal
(795,890)
(163,180)
402,512
(583,500)
(393,378)
(746,680)
(4,500,000) (12,500,000)
(4,893,378) (13,246,680)
(4,456,637) (10,650,506)
2013E
3,481,571
303,293
3,784,864
(8,000,000)
(4,215,136)
(2,991,848)
6,297,817
246,616
6,544,433
(500,000)
6,044,433
3,787,461
6,298,180
(234,023)
6,064,157
(500,000)
5,564,157
3,077,915
6,223,560
(239,630)
5,983,930
(500,000)
5,483,930
2,678,020
6,145,210
(239,630)
5,905,580
(500,000)
5,405,580
25,690,269
13%
3%
$17,134,675
-$23,327
$17,111,348
38,273,415
$0.45
The following table show how we estimated the Weighted Average Cost of Capital
(WACC):
Cost of Equity
Environmental and Facility Services Industy Beta*
10-year Government bond yield
Market Risk Premium*
Discount Rate
1.17
1.71%
8.00%
11.1%
WACC
Environmental and Facility Services Industy - Debt
to Capital Ratio
Cost of Debt
Return on Equity
Tax rate
WACC
Adusted WACC**
*Consensus estimates (from several sources)
** Adjusted for size, liquidity and operations in an emrging market
Source: Fundamental Research Corp and Capital IQ
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11.1%
26.0%
9.3%
13.3%
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Comparables: As WMT’s current revenues/EPS do not reflect their potential to expand in
China, we do not believe a comparables analysis is appropriate at this time.
Sensitivity
Analysis
The following table shows the sensitivity of our valuation to changes in the discount rate and
capacity utilization.
Sensitivity
Discount Rate
Value Per Share
Utilization - soil treatment
Value Per Share
Utilization - oily sludge
Value Per Share
Utilization - industrial sludge
Value Per Share
8.0%
$1.61
25%
-$0.15
25%
$0.39
10.0%
$0.95
50%
$0.45
50%
$0.45
13.3%
$0.45
75%
$0.87
75%
$0.47
15.0%
$0.30
100%
$1.36
100%
$0.49
25%
50%
75%
100%
$0.40
$0.42
$0.44
$0.45
Rating
Based on our review of the company, and our valuation, we reinitiate coverage on
WMT with a BUY rating, and a fair value estimate of $0.45 per share.
Risk
• Due to the end of the regulatory deadline for the removal of PCB soil stockpiles, Canada’s
PCB soil treatment market is slow, and we do not expect any revenues from this market in
the near future.
• Regulations requiring environmental protection/cleanup are key for the company’s longterm growth.
• Old incineration techniques have been the most popular methods for treatment of
contaminated soil in China, and are more cost effective compared to TPS.
• Although WMT has three strategic agreements in China, the company is still new to the
market.
• Operating costs / revenues can vary from management’s initial estimates.
• Our valuation is highly dependent on the company’s ability to capitalize on the three
agreement/partnerships.
• Huafu has yet to sign the head contract with its client.
• WMT’s license to use TPS technology expires in 2019.
• Access to capital and share dilution. The company needs to raise a significant amount of
capital in the next 12 – 24 months to fund its CAPEX.
We rate the shares a Risk of 4 (Speculative).
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Appendix
S TATEMENTS OF OPERATIONS
(in C$)
S ales
2009
5,884,361
2010
4,715,649
2011
1,608,990
2012
257,528
2013E
1,590,000
2014E
4,935,714
COGS
2,009,746
1,266,022
1,528,592
384,143
1,192,500
3,739,286
Gross Profit
3,874,615
3,449,627
80,398
(126,615)
397,500
1,196,429
886,620
1,478,571
1,065,439
1,171,983
1,289,181
36,187
79,500
246,786
(853,983)
(339,538)
602,482
892,188
Expenses
G&A
Stock-based compensation
71,244
47,934
1,167,859
387,697
15,855
Bad Debt
EBITDA
Amortization
EBIT
Interest & Bank Charges
EBT
2,916,751
1,923,122
420,941
524,134
2,495,810
1,398,988
116,693
2,379,117
48,271
1,350,717
Exchange rate gain(loss)
Gain from sales of the assets
EBT
 2013 Fundamental Research Corp.
551,547
(2,042,560)
23,804
(2,066,364)
20,966
35,000
2,379,117
Discontinued operations, net of income taxes
Income Taxes
Net Earnings for the period
(1,491,013)
129,030
2,508,147
(1,228,241)
535,126
(1,763,367)
48,634
(1,812,001)
(1,456,465)
21,407
(1,231,726)
70,428
(1,477,871)
(1,302,154)
(27,812)
1,350,717
(2,010,398)
(1,839,813)
(1,477,871)
(1,302,154)
(311,000)
1,039,717
311,000
(1,699,398)
(1,839,813)
(1,477,871)
(1,302,154)
“10 Years of Bringing Undiscovered Investment Opportunities to the Forefront “
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Page 25
BALANCE SHEETS
(in C$)
2009
2010
2011
2012
2013E
2014E
Assets
Cash and cash equivalents
Cash held by Joint venture
3,255,003
4,635,278
1,788,645
225,000
162,499
27,161
215,047
27,161
457,086
27,161
681,075
9,144
6,984
40,566
249,926
311,000
45,144
115,178
41,199
118,353
14,019
367,394
43,517
Current Assets
3,945,222
4,682,828
2,619,715
346,037
374,579
895,157
Restricted Cash
Property Plan and Equipment
Intenginble Asset
217,394
2,716,322
41,904
305,283
2,855,028
36,784
360,713
3,383,560
31,664
376,163
3,982,411
26,544
376,163
7,885,049
21,424
376,163
19,497,981
16,304
Total Assets
6,920,842
7,879,923
6,395,652
4,731,155
8,657,216
20,785,606
864,972
474,203
38,732
61,318
5,000
530,431
30,000
648,426
405,647
439,376
1,405,647
817,882
1,405,647
512,922
45,229
311,000
891,660
32,636
24,342
11,281
711,062
869,365
2,234,810
1,918,569
75,775
43,867
11,013
500,000
500,000
150,471
150,471
150,471
7,452,298
714,518
10,952,298
794,018
24,452,298
1,040,804
(7,276,535)
Accounts receivable
Income tax receivable
Assets related to discontinued operations
Prepaid Expenses and deposits
Liabilities & Shareholders' Equity
Bank loan
Accounts Payables & Accrued Liabilities
Deferred Revenue
Convertible debentures
Liabilities related to discountinued operations
Current Portion of Obligations Under Capital Lease
Income Tax payable
Current Liabilities
Obligations under capital lease
Convertible debentures
Shareholders' loans
Long-term debt
Asset retirement obligation
Shareholder's Equity
Share Capital
Contributed surplus
Equity component of convertible debentures
Deficit
Total Liabilities & Shareholders' Equity
 2013 Fundamental Research Corp.
1,439,225
97,631
113,052
124,355
136,791
6,935,817
252,940
49,193
(1,967,016)
7,419,168
296,264
(927,299)
7,452,298
678,331
(2,626,697)
(4,466,510)
(5,974,381)
6,920,842
7,879,923
6,395,652
4,731,155
8,657,216
“10 Years of Bringing Undiscovered Investment Opportunities to the Forefront “
-
20,785,606
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PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Page 26
STATEMENTS OF CASH FLOWS
(in C$)
Operating Activities
Net earnings for the period
Discontinued operations, net of income taxes
Items not involving cash
Asset retirement obligation
Amortization
Gain on settlements of debentures
Stock-based compensation
2009
2010
2011
2012
2013E
2014E
2,508,147
(129,030)
1,039,717
(1,699,398)
(1,839,813)
(1,477,871)
(1,302,154)
531,158
(2,013)
47,934
1,616,796
551,547
(35,000)
387,697
(795,154)
535,126
48,868
410,664
(5,621)
71,244
2,904,272
602,482
892,188
36,187
(1,268,500)
79,500
(795,890)
246,786
(163,180)
134,748
311,000
3,945
(209,050)
(3,175)
(249,041)
(31,422)
(334,541)
(242,942)
(311,000)
(4,578)
117,995
Accounts receivable
Income tax recoverable
Prepaid deposits
Accounts payable and accrued liabilities
Deferred revenues
Accrued convertible interest payable
Income tax payable
Changes in non-cash operating working capital
Cash prvided by (used in) operating activities- continuing operations
Cash provided by (used in) operating activities- discontinued operations
(173,404)
2,904,272
24,847
311,000
619,128
2,235,924
(38,732)
(311,000)
(751,525)
(1,546,679)
-
Cash from (used in) operations
2,929,119
2,197,192
Financing activities
Deferred financing costs
Shareholders loans
Cash aquired on reverse takeover
Repayment of long-term debt
Proceeds from bank loan
Bank loan
Payment of capital lease obligations
Payment of promissory note payable
Proceeds from capital lease obligations
Proceeds from long-term debt
Proceeds (repayment ) of debentures - net
Proceeds from finance lease obligations
Proceeds from issurance of common share and excersice of stock options
Cash provided by (used in) financing activities
674,091
27,180
378,506
(29,498)
(304,960)
240,643
(1,027,857)
402,512
(393,378)
(583,500)
(746,680)
(1,546,679)
(1,027,857)
(393,378)
(746,680)
5000
25000
375,647
1,000,000
(73,145)
(44,501)
(41,148)
(24,074)
(82,165)
35,200
32,499
27,500
(194,837)
(82,611)
7,999
(50,011)
(87,889)
(107,000)
(56,115)
(31,722)
-
Investing activities
Increase in restricted cash
Cash Advanced to Join Venture
Purchase of capital assets
Purchase of license
Porceed from disposal of property, plan and equipmet
Cash used in investing activities- continuing operations
Cash provided by investing activities- discontinued operations
Cash provided by (used in) investing activities
(139,857)
(189,868)
100,000
(89,868)
Increase (decrease) in cash
Cash beginning of period
Cash end of period
 2013 Fundamental Research Corp.
(11,281)
470,000
334,499
3,500,000
13,500,000
4,945,926
13,488,719
(646,417)
(55,430)
(225,000)
(1,062,523)
(15,450)
197,839
(1,115,177)
(4,500,000)
(12,500,000)
(734,306)
35,000
(1,307,953)
(932,788)
(4,500,000)
(12,500,000)
(734,306)
(1,307,953)
(932,788)
(4,500,000)
(12,500,000)
2,644,414
1,380,275
(2,846,633)
(1,626,146)
52,548
242,039
216,440
2,860,854
4,241,129
1,788,645
162,499
215,047
2,860,854
4,241,129
1,394,496
162,499
215,047
457,086
“10 Years of Bringing Undiscovered Investment Opportunities to the Forefront “
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Page 27
Fundamental Research Corp. Equity Rating Scale:
Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk
Hold – Annual expected rate of return is between 5% and 12%
Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk
Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events.
Fundamental Research Corp. Risk Rating Scale:
1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry.
The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is
conservative with little or no debt.
2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive
to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash
flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt.
3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive
to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and
coverage ratios are sufficient.
4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a
turnaround situation. These companies should be considered speculative.
5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products.
Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding.
These stocks are considered highly speculative.
Disclaimers and Disclosure
The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and
opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness.
There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not own any shares
of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject
company. Fees were paid by WMT to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence
including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts
may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are
protected contractually. To further ensure independence, WMT has agreed to a minimum coverage term including four updates. Coverage can not be unilaterally
terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access
users through various other channels for a limited time. The performance of FRC’s research is ranked by Investars. Full rankings and are available at
www.investars.com.
The distribution of FRC’s ratings are as follows: BUY (67%), HOLD (8%), SELL (5%), SUSPEND (20%).
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This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and
uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are
not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services;
competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in
the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making
these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or
changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent
updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter.
Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS
INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT
ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS
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UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN
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complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared
unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available
upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit,
including citing Fundamental Research Corp and/or the analyst, when quoting information from this report.
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in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction.
 2013 Fundamental Research Corp.
“10 Years of Bringing Undiscovered Investment Opportunities to the Forefront “
www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT