Shareholders Newsletter - April 2012

Dear Shareholder,

We are pleased to provide you with an update on the business activities and progress of Australian Renewable Fuels Limited (ARF) for the quarter ending 31 March 2012. Over the past few months we have continued to make progress on several fronts whilst also dealing with the setback of the Largs Bay (Adelaide) plant fire. A general update of our position is outlined below.

Highlights

  • For the March 2012 quarter, as reported in the Appendix 4C cashflow report, ARF generated net operating cash flows of A$2.3m. This is attributable to the underlying trading and operations of the business and represents a substantial improvement from the prior quarter and the last twelve months performance of the business;
  • 15 tonnes of Recycled Mill Oil (RMO) has been successfully processed at the Barnawartha plant. Yield results and processing costs were consistent with other feedstocks used in the plant and quality tests confirm the quality exceeds the Australian, USA and European Biodiesel Standards;
  • The second shipment of biodiesel to Gavilon (USA) of 4000 tonnes was loaded and exported on 24 March 2012;
  • Discussions have commenced with Gavilon (USA) on the continuation of the export program with the next export order expected to cover the next six months for substantial volumes including production from the Picton (WA) plant;
  • The insurers have accepted indemnity for the Largs Bay fire and the rebuild program is in progress. This is estimated to cost approximately A$8 million and is expected to be completed by November 2012. The insurance policy is expected to fully cover this rebuild amount. The business interruption/loss of profits claim is in progress and expected to be finalised over the next few months.

Sales

Sales are becoming more consistent with the export program providing a base line level of sales for the business. Over the next few months we expect to see increased sales volumes driven by:

  • Shell sales volumes to increase as the Shell Victorian biodiesel facility is brought on line – this will complement the existing sales to Shell in NSW;
  • The inclusion of production from the Picton plant in future export orders, which will drive the Picton plant back towards material production levels;
  • The successful conclusion of a range of domestic sales opportunities. Biodiesel generates some favourable outcomes to industry faced with a carbon impost and ARF have recognised a number of opportunities to work with mining and transport companies to lessen their carbon footprint and any resulting carbon cost.

Our sales capacity will be constrained until the Largs Bay plant comes back on line in November 2012, although the financial consequences of this are the subject of the insurance claim referred to above.

Biodiesel Sales Litres March 2012

Production

The plants are currently running below their name plate capacities and this is an ongoing focus to increase sales orders from both export and domestic customers. As stated, the Largs Bay plant is anticipated to come back on line later this year.

plant production March 2012

Feedstock

Feedstock prices for tallow and used cooking oils softened during the March quarter with average prices between A$700 and A$800 per tonne. We expect these levels to increase during the June quarter by around $100 per tonne and we continue to investigate all feedstock options for used and waste vegetable oils and low grade tallows.

We have now processed RMO through the Barnawartha plant and confirmed its technical viability as a feedstock for biodiesel. We continue to work on the logistics and supply chain requirements to utilise RMO in the ARF plants and also on ensuring the sustainability and environmental credentials of RMO.

As advised previously, we have contracted for the supply of RMO at US$350/tonne from Global Biofuels Trading Inc. (GBTI). There are still several challenges to overcome and work to be completed in establishing the treatment facilities to process low grade RMO in Indonesia, prior to shipping to Australia. GBTI is in the process of design and construction of the treatment plant and we are advised that it will be completed in 2012.

In the interim, we are working on procuring a higher quality RMO over the next few months on a spot basis. Whilst this is likely to be at a higher price than the above contract, it would still be more favourable than the cost of local tallows and other waste vegetable oils.

RMO Capital Works

In order to process RMO (any grade) at Picton or Largs Bay, pre-treatment plants are required to be installed. The design of those plants has been completed however the estimated cost of establishing the pre-treatment plants has increased significantly against the estimates used in 2011.

In addition to the capital cost review, we have reviewed the timing for each site installation. The first pre treatment plant will be installed at Largs Bay (either after or in conjunction with the post-fire plant restitution), and not at Picton as originally planned. Largs Bay offers a better strategic and financial result as ARF owns import and export tanks at the site as opposed to leasing these tanks at Picton. Whilst this delays the construction of the first plant, the reduced costs of operating from that site more than offset the time delay.

An update on the capital works and funding requirements will be finalised over the next few months. In the interim, when RMO is available it will be processed at the Barnawartha plant which does not require any plant modifications for low level inclusion.

Financial Position

An update of the company’s cash position was provided in the Appendix 4C cashflow report for the March quarter released today, which reports a positive net operating cashflow of A$2.3m for the quarter. This was driven by sales resulting from increased volume and a favourable sale price position. Favourable feedstock prices were also a contributing factor. This resulted in a net cash inflow at the end of the quarter of A$1.1m. Importantly, this was driven by the business trading results and not by capital raisings or other one offs.

Board Appointment

As previously advised, Ms Deborah Page AM has joined the Board as a non-executive independent Director. Ms Page will also be the Chair of the company’s Audit Committee.

Ms Page has extensive financial experience from a diverse range of finance and operational executive roles, as well as external audit and corporate advisory roles. Ms Page was a partner at Touche Ross/KPMG Peat Marwick until 1992 and subsequently held senior executive positions with the Lend Lease Group, Allen Allen and Hemsley and the Commonwealth Bank. Ms Page is on the Boards of several listed and unlisted companies.

Ms Page is a Fellow of the Institute of Chartered Accountants, a member of the Institute of Company Directors and holds a Bachelor of Economics (USyd).


If there are any queries in relation to the business of the company or the matters outlined above, please do not hesitate to contact Andrew White on 03 9981 0010 or .

Yours Sincerely,
andrew-white-sgn
ANDREW WHITE
Managing Director
30 April 2012

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