Synthesis Energy Systems, Inc. (SYMX) Q2 2016 Earnings Conference Call February 11, 2016 4:15 PM ET
Susan Roush - MDC Group, Inc.
Robert Rigdon - President, Chief Executive Officer and Director
Roger Ondreko - Chief Financial Officer, Chief Accounting Officer and Principal Financial Officer
DeLome Fair - President and Chief Executive Officer
Mike Niehuser - Scarsdale Equities
Robert Smith - Center for Performance Investing
Good afternoon and welcome to the Synthesis Energy Systems Inc., Fiscal 2016 Second Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Susan Roush of the MDC Group. Please go ahead.
Thank you. Good afternoon and thank you for joining Synthesis Energy Systems’ conference call. Today, SES management will discuss financial results for the Company’s 2016 fiscal second quarter ended December 31, 2015, and will provide an update on corporate developments. Following management’s prepared remarks, we will open the line for questions.
Before we begin, I would like to remind you that during the call, management will be making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended. All statements other than statements of historical fact are forward-looking statements.
Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Although the Company believes that in making such forward-looking statements, its expectations are based upon reasonable assumptions such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. There can be no assurances that the assumptions upon which these statements are based will prove to have been correct.
Please refer to the Company’s Annual Report on Form 10-K and its subsequent SEC filings for further discussion on risk factors. The SES 10-K and other SEC filings are available on the Securities and Exchange Commission’s website at sec.gov or on the Company’s website at synthesisenergy.com.
Please note that there were technical issues pertaining to the presentation that was planned to accompany today's conference call. The presentation will be posted on the Investor Center of SES' website. Again that URL is synthesisenergy.com.
And now, I will turn the call over to SES’ President and CEO, Robert Rigdon.
Thank you, Susan and good afternoon everyone. For those of you who may not have read today’s announcement and speaking on behalf of Chairman, Lorenzo Lamadrid and my fellow Board members. We congratulate DeLome Fair in her new position as President and CEO, which will be effective on Monday February 15. We’re taking bold steps at SES to seize what we believe is the greatest opportunity for growing the Company based on a clean energy business model that is broader than the gasification technology model alone.
We have now aligned and focused our leadership in this direction. It was immediately evident that we have the right leadership inside SES, but we chose to modify roles in order to aggressively position SES for the large clean energy opportunity emerging in China and many other parts of the world.
We have selected DeLome Fair, who is one of the world’s leading experts in gasification, IGCC, and technology commercialization having led or contributed to numerous global gasification project were several billion dollars in total over her 25-year career to assume the executive range, leading the day-to-day business and operations of SES.
Lorenzo and I serving as Chairman and Vice Chairman will be steering the strategic growth and enhanced business model of the Company and lending strong support to DeLome and her management team especially regarding our new initiatives.
DeLome and our CFO Roger Ondreko are joining me on today's call from our Houston headquarters. This marks the first time we have webcast our quarterly call so for those who have ended up in listen-mode only I hope you will subsequently visit our website and please view the accompanying presentation.
In addition to reporting fiscal second quarter financial results and operations update on the webcast today, we will review the Company's enhanced global growth strategy. Our shareholder sounded up well when he told us last week that he believes that planets have aligned for SES. There is a confluence of events where the global need for cleaner energy is growing.
Larger-scale global demand is propelled by the world’s emerging economies, new population growth, people being lifted from poverty and the creation of a new middle-class. The resultant demand is for economical energy that is also clean. These are historical events of our lifetime. While today we will be referring to China as the leading example of this I want to be clear that it's not only a China opportunity, but a global large-scale clean energy opportunity for SES.
That said, in China specifically the government is demanding a focus on cleaner energy, higher energy efficiency and the replacement of underperforming industrial operations with a more economically effective integrated industrial base. Because of our past accomplishments of the Company, we are in a very good position now in China and clean energy is becoming an even larger major initiative of Beijing.
At the same time, China’s huge industrial sector which continues to burn coal indiscriminately polluting the skies cannot afford to burn expensive natural gas in its place. Consider these two very different approaches, burning coal releases large quantities of sulfur oxides and particulate matter which cause pollution. Conversely gasifying coal with SGT, our technology removes the sulfur and particulate matter from the syngas product. Because of this, our SGT syngas is much cleaner than burning coal and affords what we call growth with Blue Skies.
In addition to significant challenges with air pollution, we hear a lot in the news today about how China is evolving its economy from a low cost export model to consumer services model. This can seem daunting, but when you stop and think about China and how these challenges affect the Company like SES what you should see is opportunity.
We believe we are in a great position to provide clean energy technology that first doesn't burn coal and second doesn't utilize expensive imported natural gas or LNG. At the same time China is pursuing new forms of higher value international growth by exporting more than just goods made with cheap labor.
China is providing a potent combination of financing along with its higher value technology and manufacturing capabilities into large-scale international infrastructure projects. This is the purpose of the well-publicized One Belt, One Road initiative where China intends to expand trade by $2.5 trillion, which is estimated to touch the lives of 4.4 million people in 65 countries.
The country is moving forward into a new China paradigm of sustainable economic growth. This new paradigm has potential to be even more impressive in the quick ramp up of GDP that is currently over the past 20 years as China built its initial infrastructure and industrial base.
With a convergence of the growing need for clean energy, the expansion of the consumer and services based economy and the One Belt, One Road initiative, we consider SES is very well aligned with China’s current aims and this is the time for us to evolve and enhance our strategy in order to tap into this emerging opportunity. We intend to significantly expand the scale of SES and create much larger value than we would have otherwise based on our technology and equipment sales alone.
In light of our early success with the CHALCO industrial fuel projects, we have carefully reviewed the best options for SES to take steps now for transformative growth. Our aim is to deploy SES’s clean energy technology through project participation and enhancing SES’s profit opportunity to include equity ownership.
In addition to existing – our existing technology and equipment sales model, our industrial growth model now includes providing clean energy through selling syngas as an industrial fuel gas or as a substitute natural gas and power generation with our iGAS platform.
Our gasification technology is at its most compelling advantage when applied in the energy production arena. Although oil prices maybe low at this moment, natural gas and LNG prices in Asia and much of the developing world are not low and these energy markets are large and growing. The use of our clean syngas for industrial fuel is highly attractive in regions, where natural gas is expensive or unavailable.
In some regions like China and Eastern Europe several large-scale SNG projects are now in the early planning stages. In fact, in China the experience from the small number of large SNG projects that have already been built is strongly favoring the next wave of SNG projects to use our SGT technology due to a superior environmental performance and lower cost.
Lastly, the global distributed power market is very large and we anticipate our iGAS platform which can cleanly convert indigenous coals into economical and clean power in settings where power prices are greater than $0.06 per kilowatt hour has the ability to provide multiple orders year-over-year as this market segment matures. So all combined, we believe these energy-based markets represent an opportunity of well over 10,000 SES gasification systems of equivalent Yima scale and which we intend to pursue.
We plan to pursue a model of growth which can provide steady-stable earnings into the Company and affords us options to simultaneously multiply the value created. We have already secured a Chinese partner whose charter is to focused on clean energy projects and with whom we intend to form a development and investment joint venture company and who intends to participate with us and approximately 50% of the equity for these projects.
Together, we are working hard now to secure the first projects in this pipeline. Once projects have been built, we believe we will have the option to sell some or all of them at an attractive multiple on the earnings. Reinvest a portion of the proceeds to build more projects and create much larger value for SES in the process.
We believe this project participation model will allow SES to fully benefit from the value of our technology, levering modest initial equity investments into projects, multiplying into new projects through reinvestment and expanding the scale of our business. We believe this may also allow us to aggregate facilities and vehicle that could eventually be listed. While this example is based on industrial syngas sales, we believe the same concept applies to iGAS power.
So as we enter into this new and important chapter and the growth of SES, we are very excited that DeLome will be serving the Company as our President and CEO. I firmly believe the SES is on the right track and I remain enthuse for the Company's prospects. As Vice Chairman, I look forward to working with both DeLome and her new role and with our Chairman Lorenzo to help the Company achieve its goals.
Now, I am very pleased to turn over the call to our new President and CEO, DeLome Fair.
Thank you Robert. This is an exceptional and well-timed opportunity for SES, which has been made possible through both the great progress achieved during these past eight years with Robert serving as CEO and the global market dynamics of the developing world.
The Company has made significant and impressive accomplishments and its work to commercialize our technology and from my perspective we are in a great position now to take advantage of the new growth markets which Robert has just covered. I am happy and excited to have been chosen to lead the Company at this time of potential growth and promise.
My entire career has been dedicated to gasification and clean energy, our technology holds much promise for global markets for natural gas expensive and were clean energy is needed. Now that we've established the Tianwo-SES joint venture in China built seven additional gasification systems bringing our total installed base to 12. It’s clear to me that SES technology has momentum and we have turned the corner on having our SGT Technology recognized and accepted as being economically and environmentally advantageous as well as delivering exceptional performance.
What most excited me about the opportunity to join SES 14 months ago was the technology in my view the SES Technology is the only commercially demonstrated technology in the world that can economically gasify a wide range of feedstocks including low-quality lignite, brown coal, high-quality bituminous coal, petroleum coke, renewable biomass and municipal solid waste.
More importantly in addition to this wide feedstock flexibility our technology can also achieve better economics in the competing technologies to this entire range of input fees I believe strongly that this is by far the best technology in the industry and the future of gasification. It’s an exciting time for SES and I'm looking forward to continuing and furthering the great progress that has been achieved to date.
Before I continue I would like Roger to provide the summary of the financials for the fiscal second quarter.
My congratulations to both DeLome and Robert, and good afternoon everyone. The company reported $651,000 in revenue from product sales and other for the three months ended December 31, 2015 versus $3.7 million in revenue from product sales and others for the three months ended December 31, 2014. As of December 31, 2015 the majority of the Company's revenues were generated from methanol sales related to the ZZ facility.
During the second quarter of fiscal 2016, the ZZ facility sold 2,468 metric tons of methanol compared to the second quarter of fiscal 2015, where the ZZ facility sold 12,268 metric tons. The decline in methanol sales is due to Xuecheng Energy permanently closing its coke oven operation last quarter. This coke oven operation produced the coke oven gas feedstock to the methanol production by the ZZ joint venture.
We are currently working with the ZZ joint venture to evaluate our options to repurpose the facility or to deploy the capital there. Company also recognized revenue from technology licensing and related services of approximately $167,000 for the three months ended December 31, 2015, which resulted from technical consulting and engineering services related to the Company’s Tianwo-SES Joint Venture with Midrex. This compares the technology licensing and related services revenue for the three months ended December 31, 2014 of $151,000.
Company’s operating loss for the second quarter of fiscal 2016 was $3.9 million compared to an operating loss for the second quarter of fiscal 2015 at $26.1 million. The primary reason for the reduced loss is due to an impairment charge made in the second quarter of fiscal 2015 on the ZZ facility. The net loss attributable to stockholders for the second quarter at fiscal 2016 was $0.05 per share versus a loss of $0.35 per share for the prior years fiscal second quarter.
As of December 31, 2015 the Company had unrestricted cash and cash equivalents of $18.4 million and working capital of $6.6 million. Regarding the Company's working capital I would like to point out that the ZZ joint venture is consolidated into the Company's financial statements. If you look at the Company's financial statements without the ZZ joint venture we have a working capital balance of $17.4 million as of December 31, 2015.
I point this out because the Company has no obligation or intention on contributing more funds into the ZZ joint venture. In addition all of the debt on the Company's balance sheet is within that ZZ joint venture and we have no guarantee obligations related to that debt.
Now I’d like to move on to Tianwo-SES. As we’ve previously stated Tianwo-SES is not consolidated in the balance sheet. Tianwo-SES reported to us that for the 12 months ended December 31, 2015 they had revenue of $17.6 million primarily from the three CHALCO projects and it calculated EBITDA near breakeven at negative $500,000.
In addition as of December 31, 2015 Tianwo-SES reported to us a cash balance of $4.6 million also our partner Suzhou Tianwo Science and Technology is required to inject another $7.1 million into the Tianwo-SES joint venture next quarter.
Now moving on to Yima. I would like to point out that we recently completed a detailed review of the operating and financial performance of the Yima project. Although, the Yima project is reported based on a cost method accounting I wanted to share a couple of important financial insights.
The Yima joint ventures today have a total of $108 million in equity and $186 million in debt on their balance sheet. In addition, it has completed many of the important improvement discussed over the past several quarters. We are encouraged to learn that the most current operating data from the facility indicates that the project has the ability to achieve a breakeven price on methanol less than 1,400 Yuan per ton. And we will intend to further validate those numbers with more operating data over the next several quarters.
That completes our financial review, now back to DeLome.
Thank you Roger. First, I would like to cover our operating assets of Yima and ZZ. We have seen good progress at Yima in the past quarter, the coal supply and pricing issue between the Yima JV and parent, Henan Coal reported during the last quarterly call was resolved as expected and the plant was returned to service in mid-November after a three-month outage.
We are seeing very good progress at the JV now, while low methanol prices create challenge, the plant itself is running very well. In fact, we have been studying the operating data for 2015 and have seen the performance of the plant fundamentally improved since last June with the installation of the required ash control. With this system in place and with other improvements made last spring, which allow the unit to reach and demonstrate full production rates. The conversion efficiency of coal to methanol has more than doubled.
Late in 2015, the JV was able to commission our proprietary fines recycle system, which further improved the coal utilization roughly by 5%. The bottom line is that the plant is operating the best we have ever seen. Because methanol prices are very low at the moment, the JV’s financial resources remain tight and Yima has been stepping in with shareholder loans when funds have run short.
The potential for generating methanol at a cost below 1,400 Yuan per ton, it’s very exciting for us because based on our current model data, this provides the profitability potential of the Yima JV on an EBITDA basis in the order of 300 million the 350 million Yuan per year.
Further proving that the SES gasification technology can provide the lowest cost syngas due to the local cost coal feedstock and efficient gasification operations. This also sets the stage for us to take steps this year to work with Yima to see if we can create a method for flowing cash back to SES and the Yima parent now instead of waiting for dividends, which design a final foreign JV rules might still be quite some time into the future.
We will be pushing hard on this goal because we want to redeploy some or all of the $34.8 million of equity we have there. At ZZ, we also have had several meaningful developments. As Robert reported last quarter, Xeucheng Energy decided to permanently shutdown one of the two existing coke ovens and since our last call they have permanently shutdown the second coke oven unit there. We are working with Xeucheng to resolve resulting open items and unwind the 10-year operating agreement for the methanol unit that the ZZ JV signed with them in 2013.
In December, Rui Feng was not able to complete its next $4 million payment to SES related to their purchasing a share of the facility and refocusing the plant. We have been working closely with Rui Feng, who expressed their continued intention to proceed with the acetic acid, propionic acid project and the purchase of 61% of the ZZ facility, that need to see the government approval completed, which was delayed and processed due to a temporary holds on chemical plant permits resulting from the August 2015 Tianjin explosions and the need to see improvement in commodity prices which has also affected their own business and cash flows.
We believe this is an understandable position by Rui Feng, who are also evaluating, building the propionic acid section of the plant right away purchasing acetic acid as the feedstock and delaying the build of the acetic acid section until pricing improves. We are in support of that alternative as long as certain conditions we have communicated are met.
Coincidentally the ZZ JV was recently approached by a power generation equipment supplier regarding installing a small-scale power turbine system at ZZ for power generation. New power fee subsidies maybe available to ZZ as powers made using ZZ syngas, essentially making ZZ similar to a more sophisticated iGAS power platform.
Based on power fees 0.65 to 0.7 Yuan per kilowatt hour the initial economics on attractive payback, we are still very early on the analysis regarding the project economics and the power pricing that will be available and no decision has been made to move forward with this option. If this project moves forward this can be a big steppingstone in the broader acceptance of the iGAS technology in China by demonstrating the generation of clean power using syngas from an SES gasification system.
Based on these new developments, our approach to ZZ is on delivering three key objectives. Number one, resolve the open items payables and debt owed related to the coke oven gas to methanol operations with Xuecheng Energy, complete the permit and continue to support Rui Feng acetic acid, propionic acid project objective such that they can follow through with remaining purchase of 61% of the ZZ JV for $10 million and continue with the repurposing of the plant.
And number three, complete an FSR for the power option, confirm the availability of the improved power fee and the project economics and secure power purchase agreement that delivers that economics. My plan is to give these options a couple of quarters to prove that and if they don't we will move to sell the ZZ asset and redeploy the funds. There have been parties interested in the past in buying ZZ and relocating it to produce syngas for fuel.
Moving on to Tianwo-SES, the three natural gas replacement projects for Aluminum Corporation of China and licensed by our Tianwo-SES joint venture continue to make positive progress. The initial facility in Zibo City continues to operate extremely well. The plant has just completed a 90-day continuous full-load test run achieving another key milestone for the project.
The second project, Huaxin Plant in Xing County, Shanxi Province is continuing to make progress in it commissioning and startup phase. Initial syngas production from Shanxi single SGT system occurred last month. Testing and final commissioning activities continue.
The third and largest project in Henan Province which has four SGT gasification systems is proceeding on track. In addition, for the year ending December 31, 2015 the Tianwo-SES JV reported revenues of just over 114 million Yuan which is about $17.6 million related to these orders.
So we are now seeing our JV companies show financial momentum and we intend to continue to focus on helping the JV deliver profitably. Also based on our communication with Tianwo-SES, we anticipate a similar order flow in 2016 as the JV achieved in 2015 and the JV is working hard on securing one potentially very near-term order about the size of the CHALCO Henan project.
One area I am most excited about is our iGAS product based on my background with IGCC I can say that iGAS is truly a differentiated and compelling clean power product, where low cost coals or renewable fuel sources are available iGAS economics are compelling when market power prices are $0.06 per kilowatt hour or higher.
In the developing world, we see market power prices in this range all the way up to $0.20 and greater. When you studied the data on energy per capita just looking at China and India alone over 900-gigawatts of new power generation capacity will be required to bring these countries up to the energy per capita utilization similar to that in Europe.
My goal is to move aggressively to get our first project cited in our initial iGAS power opportunity in Dengfeng City and Henan Province is the top focus. This project has now completed a significant portion of the work on the final feasibility study report or FSR. The next step in the process is for the FSR to be reviewed and approved by an official power design institute. Once the FSR is officially approved by the power design institute, Dengfeng power can move forward to secure government approvals and begin construction on this 160-megawatt iGAS plant.
Our new Beijing-based China partner that Robert mentioned earlier with regards to the new syngas project for equity participation also had very strong objectives to pursue clean power project with SES technology. As this relationship develops we intend to focus together with them to secure additional iGAS projects in China. To ensure growth with Blue Skies, new coal power must ultimately be gasification based.
Much of the developing world is still pursuing old and dirty coal-burning technologies and has power transmission and distribution systems that are very limited or simply not available. This is why iGAS draws a lot of market interest but it's a slow process to be adopted.
However, as Robert covered earlier the landscape is rapidly changing, pollution is a big, big problem and it appears that regulations in places like China are now lining up in our favor. This is by far the largest potential market for our coal gasification technology and I expect to see iGAS adopted and accelerate over time.
This is a good lead into our pipeline discussion. We continue to maintain a global pipeline of about 50 projects that are in various stages of project development. Many of these projects have already selected or have indicated a strong preference to use SES Technology.
Geographically, we continue to see the largest number of opportunities in China, but we also see activity in other parts of the world. We are receiving inquiries from the U.S. eager to use SGT with renewable municipal solid waste feedstock and from Africa to South America the capability and attractiveness of SES gasification technology is increasingly becoming more widely known.
In fact, we recently submitted the largest proposal in the history of the Company valued at over $100 million for a project in South America that we have been pursuing and supporting for the past two years. If successful this would go directly to topline revenue for SES. I can't discuss details due to competitive sensitivities and there is no guarantee we will ultimately be the selected bidder, but this is a good example of projects in our pipeline progressing forward.
The projects in our opportunity pipeline include both the licensing and equity projects that SES is actively pursuing. To move as quickly as possible we are currently working these projects with three separate channels. The Tianwo-SES JV in China is focused on technology licensing activities inside China and the surrounding countries that they cover. My BD team in Houston is focused on the technology licensing activities outside of the general SES territory and we have dedicated resources on the ground in China working to aggressively pursue the equity project development opportunities.
While, we don't have a large number of opportunities in India today I believe this will be the next large regional market for clean energy projects with SES coal gasification technology. I'm in the process of engaging a third-party company to provide us with some additional arms and legs on the ground in India with the goal of identifying key partners that we can work with to quickly accelerate the development of projects there.
Those for our technology and equipment sales side of the business as well as the development of equity projects selling clean energy in the form of syngas and power. This active pipeline of project drives our desire to pursue the global partner for a subsidiary technology company. We believe that the right partnership structure can help us convert more pipeline projects into orders and accelerate the growth of our technology and equipment supply business.
Last quarter we began initial discussions with an interested potential partner who just recently completed their technical due diligence activities. We anticipate this will now progress into commercial discussions. Although this partnering option looks promising it is important to note that we are still very early in the process and we cannot predict at this time of these discussions will ultimately be successful.
Our work with the existing key partners continues with GE we recently met with new leadership in an effort to increase our joint focus on securing iGAS projects around the world. We continue to work with CCRI in support of the One Belt, One Road projects being pursued by CCTEG, CCRI’s parent company and this past quarter together with Midrex Technologies we completed the preliminary engineering work to begin the process of completing the fully integrated design combining our coal gasification technology with the Midrex Direct Reduced Iron Technology.
Once completed Midrex will then proceed with the proactive targeted marketing campaign in India with the purpose of securing projects for the new MXCOL-SES total plant offering. SES is positioned well for growth. As we move forward with our enhanced global growth strategy we will continue our push to build industrial fuel projects with our partners in China continue to advance towards our first iGAS power plant.
Expand along the Silk Road and built global vertical markets with our collaborators. We are now focused on value creation to project participation in addition to technology and equipment sales. Our aim is to bring cleaner energy technology to global markets were natural gas is expensive and were clean energy is needed.
Establishing a diverse installed base of earnings generating facilities, selling syngas and providing clean power via SGT is a much larger business model than technology and equipment alone, which we believe may generate 10 to 20 times more value for SES over time. These are large robust markets for the future and a global large-scale clean energy opportunity for SES, our unmatched feedstock flexibility and proven performance give us a strong competitive advantage.
SES gasification technology economic and clean is the future of gasification. As we enter into this new and important chapter in the growth of SES I will integrate this new strategic direction into the day-to-day operations of the Company, and is with great excitement and anticipation that I accept the charge of leading SES as President and Chief Executive Officer at this time of potential growth and promise.
I believe that with SES gasification technology, we can create tremendous value for our shareholders, while helping the world to grow with Blue Skies. I agree with that shareholder's premise that the plan of their lines for SES and I'm eager to work side-by-side with Lorenzo, Robert, Roger and leave the entire SES team to take full advantage of this.
With that I'd like to open up the call for questions.
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mike Niehuser of Scarsdale Equities. Please go ahead.
Hi, this is Mike Niehuser. DeLome first of all congratulations since we’ve followed your career at Synthesis, you must be very excited.
Yes, I am Mike. Thank you very much.
Could you give me an idea of how you see your relationship with General Electric being able to provide maybe increase the opportunity or realizing the opportunities in your pipeline with iGAS?
Sure. I was with GE for 10 years and developed a lot of strong relationships there and have a lot of – a very strong network there at GE. They’ve had some rearrangement of their businesses and we’re re-engaging as they’ve reorganized into their new structure with the Alstom integration.
So we have now made new contracts with the global sales leader for distributed power, gas turbines. Lorenzo and I met with him directly a couple of weeks ago and pushing hard to get them reenergized and reengaged. They’re very excited – he was very excited about iGAS and glad to get an update on what we’re doing, so we’re eagerly moving that forward as quickly as we can.
Well, I know if you do something I didn't think it will involve your latest gasifiers, but you mentioned about regarding ZZ that you're exploring the possibility that if as a secondary option if things don't work out with the current plan of turning those over that will be considered for generation of power.
My question is technically with those older version of gasifiers is there any – are there any issues with the quality of the syngas or the pressure or something I'm not thinking of being able to power turbines?
No, there are no issues at all Mike. The ZZ plant is lower pressure and it will require some syngas compression to get the syngas into the turbines, but basically syngas is syngas and that's why we are really excited about this opportunity and maybe something we pursue in addition to the acetic acid opportunity with our partner Rui Feng and it will give a demonstration plant in China for our syngas being burned in a combustion turbines.
So I'm really excited about this. We’re moving as quickly as we can to study this and make sure the economics are good and then move forward.
So you are not seeing any issues with the earlier versions of the gasifier being competitive for matching with the latest turbines. Can you comment on the quality of the coal that’s been processed successfully or has been processed at Zibo or at the ZZ plant and at Yima and also currently going through the first CHALCO plants that are online?
With those three plants that you mentioned ZZ is above and Yima. We have gasified coals ranging from 1%-ash to 55%-ash, we've gasified coals from single-digits and moisture content up into the 40% moisture content. Basically, we have demonstrated that we can gasify any coal of any quality that is pretty much we've hit them all.
And that’s all pretty much because of your ability to manage the material in a fluidized bed environment?
Exactly, it’s because of the nature of our technology the fluidized bed arrangement, the temperatures we operate and the unique design of our fluidized bed technology allows us to be extremely flexible with our fuel stocks and allows our customers to choose the lowest cost coal over the life of their projects.
It was mentioned in the release that Tianwo-SES received $17.6 million revenue for the last 12 months or at least for calendar 2015. Does that show yet on your financial statements either in the income statement or the balance sheet?
I’ll let Roger answer that question.
No, it does not show yet on the income statement or balance sheet as of yet. Once they start turning to profit we will start picking up that profit in our financial statements.
Do you have an idea if that will be a 2016 event?
That is my number one. One of my number one priorities I have a few of those, but we are excited to see the momentum of the revenues coming in, but now it’s time to make it profitable for SES so we've already been had meetings with Chairman Chen, the Chairman of Tianwo-SES and also the Chairman of our partner in Tianwo-SES. And our goal this year is to move to make this joint venture profitable and to show cash flowing back into SES from the joint venture.
I have one more question before I jump back in the queue is there is a lot of press growing over the – especially in the last week's about China, their growth in all the things that surround exchange rates and leverage and banks and all that kind of stuff, but it seems that your technology would be ideal for – this is a softball I guess, but it's seems that you'd be – if China is going to perform some kind of QE or infrastructure investment doing something that would provide a cleaner environment and eliminate the strain on the foreign exchange requirements by internally processing low rank coal to reduce imports of oil, gas and coal would be kind of a no-brainer, but there's a lot of headwinds on China. Now can I get you to delve into the deep end of the pool on that and then I’ll jump back in the queue. And again congratulations and thank you for taking my questions.
Thanks Mike. Robert you want to take this one.
Sure. Hi Mike.
So that's a great question, we are on the ground a lot in China and it may sound like a softball question for us, it is a good question for everybody understand because we hear so much in the news these days about China's economy and some of the challenge there, but when you really – what you see going on when you're there is that firstly they do have a pollution problem and for years there has been a lot of talk about it, but now there's actually some meaningful actions going into taking care of the pollution problem.
So than second, how China built up over this really quick rapid GDP built up over the last several years, created a lot of fragmented industrial operations around the country and so they are when we talk about integrating and making their industrial base more efficient, a lot of that is consolidating, a lot of those old small plants are going to be shutdown or have been shutdown.
They are more efficient or centralized facilities will be put in place, but yes even with all this going on and if China is trying to ship from just being a low-cost exporter of products made with cheap labor. That's not really exactly what China is anymore, China has started growing middle-class and it needs for cleaner energy are growing.
So what happens for us while this creates a lot of challenge for many businesses for us it's really creating a lot of opportunity. So when I move around China the last – particularly in the last couple of years the level of interest in SES is accelerating extremely fast, the types and the quality of the companies that were getting involved with who are really taking us serious and sincere look at the company have really transformed in the last couple of years.
And these are companies now like the one that was mentioned on the call here that we’re working within Beijing the companies that are connected to the Ministry of Environment and they have a charter to move forward and build cleaner energy projects. So what we do now we’ve got the ability and we demonstrated it – this is a key thing in China you can't do anything. If you haven't shown that is working it's very much like Missouri it's like a show me kind of place.
And so with the CHALCO projects up and running and doing so well particularly with this first project that started up in Zibo. It’s just the catalyst that we needed and it was the right time for us to take advantage of this. So yes, there is uncertainty and when you can see about this in the media going on over here but we have got to get ourselves in position like we’re doing right now and we've got to get out there and secure these first round of projects and take a leading role in this China opportunity that’s coming up.
The next question comes from Robert Smith with Center for Performance Investing. Please go ahead.
Thanks for taking my call. And welcome to the new leadership and I wish you well. I was just wondering Robert what is your role even you will be full-time at the company and I know you’ve been globe trekking around lot of energy even you’ll be devoting similar time and effort?
Well, Robert I’m going to be putting a lot of time and effort into this and you're right I have put an enormous amount of time and energy into this for the last eight years. This is the growth of SES is something that I am deeply care about I have a lot of my personal efforts into this and it's exciting.
The reason that effect what we’re doing right now with our strategy and the recent leadership changes are based on initial recommendations and conversations if I’ve had with our Chairman and it's something that I believe we need to do because it allows me to work together with DeLome and work together with our Chairman Lorenzo to get out and these first projects are the topest and I want to focus my time on getting into - get these first projects where myself and particularly Lorenzo we have very important relationships in China.
We have the - and we need to focus our time and effort onto securing these getting the financing vehicle setup that we've already started and be able to get the first syngas and power projects that we would invest in up and running.
At the same time this but it's difficult for me to do that in a situation where I'm dealing with the day-to-day activities of the company. So with DeLome here I thought this is a perfect opportunity for we have a great leader in DeLome. She pick up the day-to-day opportunities I can work with DeLome and Lorenzo and do what we really know how to do is get out there and get these projects secured and she's going to integrate them into the operations.
Once we get these first projects done and in construction you know it’s the first ones that are the toughest and next ones are going to follow on and the company will grow and more resources will be added to the company and yes in the future I look forward to the time that I can serve on the Board and watch the team B very successful without all this input from me but right now it's going to take a lot of input from me and that's what we’re going to do.
So my next question really is looking at your financial structure and I know in the past you’ve assured me that you would the role that you quit to avoid any further equity financing and I'm wondering how you're looking at DeLome is looking at 2016 are you fully capable of going through the year without an equity dilution?
So Robert yes if you look at our financials and you look at our run rates you can see that we are fully capable of doing that. But also you sort of touched on the point that I’d like to bring some more color to and that is we’re talking about getting into equity projects. So we’re not looking at tapping into the funds that we have on the balance sheet to-date to do that, and I want to make sure that comes across clear.
We have been in the number of – we’ve done a lot of work already with investors from different parts of the world Asia, Eastern Europe, the U.S. who are interested to have funds ready and available that want to go into clean energy projects that can provide valuable returns.
The key is that what's happening, we have a technology that sort of enabling the projects, we have a pipeline of projects and we can bring them forward and that’s the key role that we provide. Part of our initial equity going into this whole thing is likely going to be a big part, it’s going to be carried interest as we put together a funding vehicles that are based on our role managing like an investment fund if you think about it in that way, where we’re bringing projects into the fund.
We’re achieving a ownership interest in that and there is limited partners that have the funds available to move forward into the equity and do the equity part. And the other thing that I’d like to add is particularly when you look at the syngas projects they're not huge, generally they’re not huge projects, there are lot of medium-sized projects like the one to CHALCO.
So when you use sort of normal approach to financing debt and equity on projects let’s say 30% equity to 70% debt, and you look at that our partner in Beijing already wants half of the equity. They will be participating in this whole enterprise and if you look at the park SES is putting up with a modest investment of let’s say if we’re looking at $100 million of syngas projects more modest investment of $15 million in equity generates a valuable projects that ultimately when they're up and running can be monetized for $120 million and that can be re-leveraged and put back into new projects.
And this is all a lot of the mechanics of what I'm talking about here, we have started the financial structuring on already, we got a lot more work to do, these are the kinds of things that I'll be working on with Roger and also with Lorenzo and as we get this initial part kicked off.
So where do you think you'll be a year from now?
Well, I’d tell you where we – and I just jumped in ahead of DeLome, but let me tell you since on this subject where I see the Company headed and what our objectives are. The size what's already been covered regarding delivering profitability out of the Tianwo joint venture. We have an objective of making to – we either going to get ZZ into a new project that’s going to make money or we going to sell that asset and redeploy that money in another better passion.
We are going to take the Yima joint venture, which now is incredibly exciting when you look inside the operating model. And the only thing in the way the Yima joint venture right now that I can see is a methanol price. So as the methanol price goes back up and unfortunately methanol tends to track oil price.
As methanol price goes back up and probably when oil gets back up in the $40 or $50 range, Yima will be flowing significant amount of cash based on what we see the plan is capable of. That changes everything at Yima for us to be able to go down and sit down and have a meaningful conversation with the Chairman of Yima parent company around look how can we really as two shareholders of this joint venture, which is now operating very well can we go ahead and start flowing money back to the shareholder, so we’re going to be working on that.
Then you get into this whole other piece of the equity projects, we want to get projects locked up this year. That's the goal. We’re working hard on it, Dengfeng is an iGAS project is in that queue. There's multiple syngas projects that are in that queue. And they all have different things that we have to do to be able to get them locked up, but that's our goal and so that's how I see things shaping up for the year.
And I would just add one thing to that. We also want to have an order for our technology and equipment sales business outside of China to demonstrate that that we’re not just a China company, we’re a global company
When you say you may have to sell the ZZ interest. On the surface it looks at the moment as it’s a failed project so you did say that you didn't have to put anymore money in, but is it realistic to expect to get money out.
I think so because I’ll tell you why Robert, we've had – may can think of four different parties over the last two years that have approached us for buying ZZ. And you have to realize the ZZ asset have carry permits, we just went through a very detailed because you can imagine with an asset that’s sitting there we are going to be examining it every quarter regarding its as an asset that doesn’t have a going concern is that impaired or is it not. And we have had a third-party come in and evaluate the market value of that asset as it’s today.
So yes, there is interest there, you can either sell the asset in place probably more likely scenario because I just know that the four parties that have talked to us before is just a symbol and move it to another location. So I don't think that's a big barrier for us, but what we are doing with the Saikong team Rui Feng/Saikong and also this power opportunity that DeLome mentioned has enough merit to it that we feel it's very much worthwhile for us to spend our time to make sure we can get this to connect. But we wanted to communicate here is that, but look if we don't and I think DeLome from my conversations starts.
If you don’t give this a couple of quarters and if it doesn't connect then we don't wanted to take up all our time and energy, we got other things to do and then we will go ahead and sell it. And I honestly don't know what sort of price we could get for it, but based on the numbers that have been floating around is probably close to $10 million and that's important cash that we could use in the business.
It seems for me that the future of the company really is dependent upon partnering and structuring, making arrangements so that as much as possible shareholders since the energy would benefit, so that’s how it appears to me and I wish you all the best and with great anticipation I’d love to see something materialize in 2016. I know you will be working hard to do it.
Thank you, Robert.
[Operator Instructions] The next question comes from [Joe Moravec] of Financial Risk Group. Please go ahead.
Can you hear me all right Robert.
Yes. Hi Joe, I can hear you.
Okay. DeLome congratulation lot’s of good luck.
So have a nice life, not much please. I would like to ask you what you’re going to be doing to regain NASDAQ compliance because the stock prices gotten hammered and being on the retail side very, very sensitive to my clients, ownership and their concern that the stock price keeps slipping and they were going lose our NASDAQ compliance?
Okay. And that's a good question. I’m glad you asked that question actually. So Joe here is what we are doing. First and I'm sure you are familiar with the NASDAQ rules, but I want to cover a little bit that just because everybody may not be so familiar with it. But our primary way we are going to do this is we are going to just stick to what we just said.
We have gotten caught up our stock prices you can obviously see is gotten caught up in the recent I believe anyways, it’s caught up in the recent sort of market churn and uncertainty around China and also the uncertainty around oil price impact. So I think those are probably two things and in my view those are not necessarily a fair impact on the stock price, but that I believe is actually what’s happening.
And nevertheless what we have is we are going stay on track where like DeLome said, we believe Tianwo-SES is going to be very close to some additional orders we will be able to bring out and that's going to give people additional comfort for working very, very hard to show that these joint venture assets are going to flow cash back into the company and then we’re going to demonstrate that we can bring in these new equity investment projects with the financing structures that create value for our company.
However, you know if you get to – if we get to a point and I believe that we will because we've been in this situation maybe three times in my eight years here at SES and every time we just keep working hard and we pull ourselves back up and we regain compliance and I believe that's what we’ll do again.
Whenever - but if we need more time, the NASDAQ rules allows us to have more time and we already have a good strategy in plan, in place and we would go to NASDAQ and we would tell them we have a good strategy in plan, in place and we would expect that we would be granted another six months extension.
So and then it goes on and on from there. So I wouldn't that is not an area that I hopefully it helps you with your question I feel and I believe all of us do feel very confident it will pull right back up into NASDAQ compliance.
Let’s hope so. Are there anything that we can talk about in terms of IR releases, in terms of some of the projects that you have, that you are working on it might help the stock price and gives potential shareholders more hope that we are at the tipping point of changing the world and here's why?
Well, so let me try to address that without crossing the line here. First one of the things that DeLome mentioned is that we put in a very large bid for a project outside of China. And this is not done with a partner it's just us and it's a bit that's over $100 million and that’s all topline SES. But we’re in a very good position, this is a not project that just sort of came up last week and we made a proposal.
This is a project that we've been working with the project developers in that part of South America for about two years and it's been studied through U.S. based engineering companies they have built up their project feasibility work based on our technology. And now they're going forward and they are – we’re not the only bidder but we are the preferred bidder based on what we've been told.
What we've got to do now is work hard and win this, but and that’s not something that’s going to be done in the next two weeks either. This win out this is not a very - this is not something that happens in three or four weeks, it’s something that happens probably in two or three months of a valuation, because it’s a big, big, big project, it’s an SNG projects what it is. And that is I think would really, really make our shareholders feel good to see that topline revenue coming in and something that’s actually not associated with China. So that’s one.
The other is what I mentioned a while ago is the Tianwo-SES joint venture I think we’re really happy with when you stand back and look at the fact that we’ve got these plants built there's $17.6 million of revenue there is running roughly about breakeven on its first projects and all the revenues [indiscernible] so we’ll see how it settles out you know when it's all set and done.
They are very close and unless they negotiated the contracts and everything I was hoping they would have something ready before Chinese New Year to say and unless there's some very strange thing that happens we expect that they will have another order similar to the size of the Henan project and CHALCO which was the larger of the three.
So that’s another piece I think they could be coming our way. And then on top of that will be flowing more news out to the market as we get it on ZZ and on the Yima and on our progress with the projects and develop on the syngas and iGAS side such as Dengfeng. I hope that answers your question.
Well it does. But I do have two more questions. Number one, I thought we had partner in India that we were working and DeLome mentioned that we’re looking for a new partner. What happened to the former partner?
We still have a relationship with Simon. Simon Engineering Company they are – we have been marketing arrangement with them and also an arrangement for them to do our engineering work within India and that continues. This is an attempt to accelerate that and be complementary to what Simon is doing, really focused on identifying partners and dragging the business forward there and findings some local partners that will help us like we've been successful in China with local partners giving us some arms and legs on the ground there in India to help us move forward and navigate.
It sounds like you are getting ready to adopt [Edison type] program where you have an outside partnership funding projects and only a piece of that which royalties et cetera coming back to Synthesis, did I not read that right?
I’m not so, I don’t think any of us are probably that familiar with the Edison model that you refer to, but…
Well, they have an MLP model. They have an MLP model.
Yes, similar to that, it’s of course is not an MLP itself, but it would be a funding vehicle through which SES investment partners would provide funds, we provide projects that investment vehicle provides the equity into the actual projects themselves and then the projects provide the returns back to the limited partners through the fund.
I see. And of course you have those investors lined up before you do any bid on major projects like you just done in South America, so you know where the money is coming from?
That’s right. We’ve been in discussions with a number of parties who are interested, definitively interested in investing in these types of projects is more around the lines of the syngas fuel projects and I guess projects – the one in South America remains to be seen, it's a much larger, more complicated project at this stage that project is a technology and equipment supply
So when we talk about a proposal where we made a proposal for $100 million. I want to make sure everyone understands. That’s a license for technology, that's a bunch of engineering services that we will provide and a whole lot of proprietary equipment topline.
Right. I understand, but my intention is from an IR standpoint, probably I’m missing the boat in terms of the iGAS story, because it is phenomenal story. And frankly, Synthesis is a story stock because you are not there yet, you will be there maybe two years out or whatever, but in order to get interest from the investment public that wants to do venture capital deals particularly in this sector of environmental sector.
You have an opportunity here to tell the market what the potential is for iGAS without mentioning any specific projects. And I don't think that the typical retail investor or a broker has any idea of where you are on that iGAS program. DeLome does and I think it was great move. But I think you need to tell the market, the market has to understand where this Company can go.
I think that’s an excellent comment Joe. And I agree with you and we will and intent to put more effort in that because iGAS is the biggest value driver by far in our collective opinion here for the Company in the future.
Robert never knows it, no one knows it.
And that's the problem. We are an unknown quantity and when I try to explain to clients why they have this in their portfolio. They're saying well how do I know that, tell us, send us something on iGAS. So I guess this goes to you and to Susan, David and I think you guys have to work together to get a little more aggressive in telling the market what the potential of the Company will be.
Yes. We agree, duly noted.
You’ve made a quantum change since we first met years ago and I mean this now is a very, very big story versus what we had before was a great story for saving the lives of millions of Chinese has to believe in the coal gas. Now, we’ve got a much, much bigger story so we have great story and I think it’s not understood by the investment public. So you guys can do what you want to do with that information, but I hope you do something with it?
We will. I promise. It’s a very good comment and we got it.
Thank you. By the way Robert just for your information in 1982 I was invited to China to change their packaging industry for their underwear industry and I spent three to four weeks in China still in my guts and explaining how to get it done. And as soon as they came back and [indiscernible] company and setup exactly what I told you do. So unfortunately we didn’t get anything so I know how tough it is over there.
I appreciate you acknowledging that part as well.
But it's a big world my friend, it's a big world and you guys are discussed of changing major you just have to tell the market about it. And thank you very much and appreciate thanks. Good luck DeLome.
The next question is a follow-up from Mike Niehuser of Scarsdale Equities. Please go ahead.
Hi, I got a couple more questions real quick. ZZ facility has that been turned over to CHALCO for them to operate it I can’t recall if I ask that question or not?
No, it hasn’t been officially turned over, we still have our ZZ team on site helping with the operations, there is still a few nuts and bolts they are working on primarily outside of the gasification area. The gasification area is working well and has really been proven out as far as I'm concerned. They're having some issues with water treatment and some of the other utility systems and so there is still certain of those buts and bolts, but so it has not officially been turned over yet.
One thing Mike you can mind it that project is the turnkey contract is not through our joint venture is with the design institute there, so the turnover as a contract relationship that were not involved with, it’s a contract relationship between the design institute and CHALCO, but we're aware like DeLome said basically aware of what's going on with their handover process.
Great. Good answer. That makes sense. Also when you talked about the $100 million opportunity in South America you offered a little more information about that's for licensing equipment, it makes me wonder is that the order that you would hope to get to SES or would that be the cost of the entire project?
No that would be the SES order.
So you are providing the intelligence and the intellectual property and the real smart part of this. I imagine your margins would be a lot better than if you are building out the entire plant?
Absolutely that’s why we focus on our proprietary equipment and our technology know-how that way we can ask for those types of margins, you can’t do that on commodity type equipment.
Well I'm assuming that this one opportunities bigger than any one single thing that you've done to date in China or elsewhere?
Yes. The SES has done, absolutely this would be a very large plant would be three gasifiers, but large-scale 40 bar high-pressure gasifiers.
Any other information you would like offer on that?
No, no, no. Can't get into any more detail, we are really excited about it.
I think you should be if it sits into that box we just described and I won't ask anymore about that, but just going back to China just one last thing you mentioned oil prices in your conversations with potential partners or clients, customers in China, how are they looking at the world as far as like lower oil prices, do they see this is something that is a temporary oversupply or they seeing lower oil price is a real opportunity for them to be able to reduce imports. What’s the review of the permanence of this decline?
Okay. So most everybody we talk to directly are not focused on oil price at all. They are focused on their expensive natural gas and LNG prices or some of them are running some old, old, old forms of coal burning that they need to replace. That said Mike we do have there is some potential project opportunity coming we do know this that because oil prices have dropped China has some of the refineries there particularly some of the ones along the eastern coast are looking to expand and are asking for more hydrogen production.
And so that’s actually creates an opportunity for us because the gasification is an obvious choice to create hydrogen for refinery expansion in China. That’s not really just so everybody and that’s not something that you would normally see from coal just anywhere in the world it's a – that’s kind of a more of a unique China thing because they’ve got a lot of cheap coal and they need hydrogen if they’re going to expand refineries and that’s a resulting of lower oil prices.
But basically you know we’re in the markets where there's - just taking about power generation, syngas sales how can I stop spend all this money on expensive natural gas. That's what we normally run into.
And lastly as far as the prioritizing the pipeline I look at the call it seems that the number one opportunities for orders being one in the next three months you might have something released regarding the South American opportunity or regarding a follow-on to the CHALCO, Henan size for gasifier opportunity it seems like that's the most likely thing we are going to seeing in the next three months. Is that correct and does that do it for 2016 or are there other potential orders you might be announcing through the end of year?
I agree with your assessment on - most likely first orders so we hope that they’re in the next three months, but definitely we’d anticipate more than that this year that won’t be it.
Okay. Well, again congratulations DeLome and I hope Mr. Taber can help [indiscernible] and good luck to you all.
Thank you very much. Mike.
End of Q&A
This concludes our question-and-answer session. I would like to turn the conference back over to DeLome Fair for any closing remarks.
Thank you for participating on the call and for your questions. With there being no further questions. This will conclude the 2016 second quarter financial results call.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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