The New Criterion: Leaf Resources and Bio-gene Technology

Tim Boreham

Independent Investment Research

The common thread with Leaf and the soon to be listed Bio-gene is not just a greener approach to chemical processes. They also boast former long-serving Nufarm chief Doug Rathbone on their boards.


Leaf Resources (LER) 10c

The paradox of one of the greenest of ASX listed stocks is that its planned biomass operation will rely on waste feedstock from Malaysian palm oil -- not the most politically correct of industries.

But Leaf’s noble charter is to provide industrial sugars that eventually may replace many forms of plastic packaging.

So should Leaf pass the ethical funds’ screening process? It’s one for the fundies to ponder over their morning latte before mistakenly tossing the disposable plastic-lined cups (which Leaf will also help eliminate) in the recycling bin.

Currently the global biodegradable packaging market is worth $US5bn ($6.5bn) – a fraction of the total packaging sector – but is forecast to grow to $US22bn by 2022. Consumer multinationals such as Coca-Cola and Procter & Gamble have pledged to phase out petroleum products in their packaging.

Leaf back-door listed from a disastrous aquaculture play a decade ago but is only just gaining traction with its patented Glycell process, which was invented in house.

Glycell breaks down waste plant material to produce the fermentable sugars used as feedstock for renewable chemicals.

Leaf plans to build a 100,000 tonnes a year processing plant in the Malaysian state of Johor which has an active program of tax and other incentives.

The other key reason for choosing Malaysia is the availability of the plant material: palm oil plantations produce a fibrous waste from annual harvesting, which is otherwise burnt (contributing to the smoke hazes that so irritates neighbouring Singapore).

“The material is plentiful and cheap and the process works well with it,” says chief Leaf Ken Richards.

Richards says the country’s Industrial Collaboration Program is a promising source of equity funding for the plant, costed at circa $US120m.

Similar to programs elsewhere, in effect the ICP taxes foreign suppliers to the public sector, to fund projects that fulfil the country’s “national objectives”.

One of these is the National Biomass Strategy 2020, which aims to reduce Malaysia’s carbon emissions by 12% and create $8bn of new investments.

 With a $14bn kitty, the ICP is not short of funds.

Richards says a likely funding structure could involve equity from the ICP as well as separate debt, with ICP’s returns capped. “Think debt return for equity participation,” he says.

There’s nothing new about turning sugars into chemicals, given the Sumatrans dabbled with a substance called beer around 5000 BC.

The secret sauce of the Glycell process is that it’s done at a much lower temperature than the current method high pressure and acids. It is more energy efficient and produces 25 per cent more sugars than rival processes.

The process uses glycerol as a catalyst, but what seals the deal economically is that Glycell recovers this material – a waste product of biodiesel but widely used in cosmetics, animal feeds and lubricants – in purer form.

Along with the sugars and the glycerol the process would produces the rigid fibrous material lignin, a natural polymer used to produce steam and renewable energy.

With further processing lignin can create a biodegradable and waterproof lining, to replace wax-coated cardboard and those billions of plastic-lined coffee cups.

It’s all too late for the displaced orang-utans, but Richards argues that Leaf is merely deploying the waste from an established industry rather than encouraging land clearing for more plantations.

“We are just utilising what’s there.”

On paper, the $20m market cap Leaf stands to make vast returns on the vaunted project: house broker Lodge Partners estimates a $570m net present value for the project, based on current prices for both the input and output materials.

Of course with such projects there’s many a slip between the eco-friendly cup and the lip, especially in Malaysia.

With $1.5m of cash on hand, Leaf will need to raise capital and until it does investors will hesitate.

Bio-gene Technology (not yet listed)

Former long-serving Nufarm chief Doug Rathbone has been a busy chap since leaving the listed agrichemicals giant in early 2015.

While not engaged in winemaking he’s a director of Leaf Resources (see above) and medical pot play Cann Group. He’s also an adviser to (and director-in-waiting of) alternative pesticides play Bio-gene.

Bio-gene is slated to list on November 30, having raised $7m in an oversubscribed issue at 20c apiece.

The company’s premise is that pests such as cattle mites, mosquitoes and grain weevils have become resistant to the standard treatments that have been around for decades.

In a household context, look no further than those pesky blowflies that resurrect themselves despite being sprayed with half a can of Mortein.

Or else the treatments are so toxic they destroy ‘innocent’ species such as bees.

Bio-gene’s products, Flavocide and Qcide are based on a naturally occurring chemistry called beta triketones first identified in eucalyptus oil in 2001.

The company is coy about the exact mechanism of action but says it differs to that of the 30 or so existing classes of insecticides (mainly neuro-toxins).

Bio-gene’s testing was promising enough to attract French ag-chem house Virbac as a partner, in view of developing treatments for ruminant animals such as cows, sheep and pigs.

Virbac is funding its own trials on cattle ticks and buffalo flies and if all goes well the tie-up could lead to a more full-blow arrangement with royalties and milestones and the like.

Management expects to strike deals with other global pesticide majors, with Bio-gen’s magic molecules likely to be used in combination with existing treatments.

Bio-gene executive director Robert Klupacs says any one of the targeted pests is markets in themselves.

Insects destroy an estimated 18-26 per cent of crops, with 586 species resistant to at least one class of insecticide.

In the case of grain, about 5 per cent of Australian and US crops are wasted in the silo and in India the figure can be as high as 30 per cent.

In the case of cattle ticks, northern Australian growers are limited to stocking the hardy Brahman variety rather than higher-yielding breeds such as Wagyu.

Bio-gene has raised $4.3m in pre-IPO funding over three raisings. While some of these holders are escrowed, there’s a danger of them taking profits post listing and subduing the price.

As well as availing of Rathbone’s contacts and know-how, Bio-gene has hired a former Monsanto heavy hitter, Richard Jagger, as CEO.

Kluvacs concedes that the creepy crawlies eventually will become inured to Bio-gene’s product as well. But as that won’t happen for decades, Bio-gene will have a head start on the next generation of bug busters.

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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Tim Boreham
Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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