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Project - organization of complex for wood pellets production in Ukraine
Citation preview
1
Investment opportunity:
Green Energy from Ukraine
Project GEU - wood pellets production
http://www.geutrade.com/
Content:
Executive Summary 2
Value Proposition and Business Model 3
Management & Manpower Structure . 5
Technology ... 5
Market Analysis ... 7
Proposed Investment / Financing Structure . 10
Financial Analysis 11
Risk Analysis . 12
Non-financial Impacts . 13
Ukraine - July 2015
http://www.geutrade.com/2
Executive Summary
This project was developed with the participation of experts of public association "International
investment platform" Energy and energy efficiency of Ukraine 2020, which was created on the
initiative of Minister of power industry and coal industry Mr. Demchishin V.V. and Board of the Public
Council under Ministry of power industry and coal industry of Ukraine.
Project location - Lviv region, Western part of Ukraine:
- Organization of complex for wood pellets production with a total capacity of 14 tsd tons
per year;
- The target market for the realization of the final products (pellets) European countries. As of 27July 2015 we have signed contracts of the total volume of 1530 tons per month starting from September 2015;
- Greenfield project;
- The total cost of the project is estimated at EUR 2.85 mln, including EUR 2.28 mln of pellet lines (3 units) and respective cars (1 loader and 3 trucks);
- Construction period: December 2015 January 2016;
- Activity of the pellets production in Ukraine is not licensed;
- The production complex will be located in rent premises in Lviv region. All infrastructure including gas, high voltage electricity and water are available. In case of investor requirements to construct pellets plant on the private land plot, we are ready to look for acceptable land plot in Lviv region and to build plant with investor (such expenses for construction and purchase of land plot are not included in our business plan).
- Investors contribution is expected at EUR 2.28 mln in cash for a stake of 80% (20% will belong to PE Sivoplyas Ruslan);
- PE Sivoplyas Ruslan will buy out investors 80% stake in several transactions during a 8-year period upon the project completion;
- The expected IRR for the investor is 20,5%.
http://mfa.gov.ua/en/about-ukraine/info/regions/6-lviv3
Value Proposition and Business Model
Growth Strategy
First stage: wholesale trade of the pellets of Ukrainian production to EU market (2014 - 2015). Sales - 1500 t/y (has realized)
Second stage: the construction (purchase) of a plant for the pellets production in Ukraine,
wholesale and retail trade of the pellets of Ukrainian production to EU and Ukraine market
(2016 - 2017). Sales 14 000 t/y
Third stage: Retail trade of the pellets of Ukrainian production to final consumers of EU and
Ukrainian market (2018 - 2023). Sales 30 000 t/y
On the first stage (2014 - 2015) our team has organized export of the wood fuel pellets of Ukrainian
production to European countries. We has contacted with 29 pellets producers, has received from
them samples, made analyses of quality and got respective certificate from SGS company
(our products also certified in Poland and Italy). We also made analysis of EU market and identified
Italy as the most dynamic market pellets (market capacity is 3 mln tones per year, the growth of the
market is 200-300 tsd tons per year). After that, we start promotion of our pellets in Italian market by
searching potential buyers through Internet. Mentioned activity is provided by sales department,
which consist of 3 managers and located at Odessa. Nowadays the core customers are
intermediaries and small retail networks specializing on the retail sale pellets. Buyers upon delivery
of the pellets make payment. Then we hired representative in Italy Babina Svetlana, who
communicate with the buyers, sign contracts, and control the delivery of the pellets on Italian territory,
timeliness of the payments. Trucks belonging to the logistic companies make the delivery of the
pellets. During last marketing year (September 2014 May 2015) we were delivering to Italy 140
tons per month in average. As of 27July 2015 we have signed contracts of the total volume of 1530
tons per month starting from September 2015.
The main problem of the existing business model is its low marginality. The price of the pellets from
producer and significant transport expenses connected with the remoteness of the market, account
for most of the final price of the pellets. The margin is 5 to 20 EUR to depending from the buyer
location. The large buyers (industrial companies, utility companies and large retail networks, which
specializes on pellets trading) refuse to sign contracts with us due to inability to guarantee by us big
volume and stable price because we depend from producers. Due to the reason we made decision
to find investor for construction of the own pellets plant. Now our team is in negotiations with
representative of Indian company KGN BIOFUELS concerning investment receiving in the kind of
the equipment for the pellets production and we have already directed the request to Canadian
government about grant receiving for the financing of the pellets plant construction.
The second stage supposes investments in construction of pellets production from waste wood and
retail trade of the pellets of Ukrainian production to EU and Ukraine market. Raw materials - sawdust,
shavings, chips and other byproducts of wood transformation process. Ukraine has a significant
supply of byproducts of wood transformation (estimate of 4 mln tons annually). As a location for
production placement, we chose Lviv region as the most close to the sales market (EU), and where
there are the most number of companies of wood processing industry. In addition, Lviv region is
most remote from Eastern regions of Ukraine where military actions take place. Long-lasting
preliminary negotiations were took place with potential lessors of the premises for production
placement (price per 1 sq. m is EUR 5), and with companies of wood processing industry which will
delivered raw materials for our production (price per 1 ton is EUR 19.67). The equipment we plan
to buy from Ukrainian company - ICK Group. The managers of ICK Group will provide us also
engineering services services concerning preparation, implementation and technical support of the
pellets plant construction including pre-project and project works, putting into operation of the plant
and service support of the production process. Supposed to produce pellets with diameter of 6 mm
http://www.geutrade.com/pellets.htmlhttp://www.kgnbiofuels.com/http://www.international.gc.ca/development-developpement/partners-partenaires/calls-appels/ukraine-sme-pme.aspx?lang=enghttp://www.international.gc.ca/development-developpement/partners-partenaires/calls-appels/ukraine-sme-pme.aspx?lang=enghttp://www.ick.ua/en/menu/about/Mashinostroitelniy-zavod/4
and 8 mm of 4 qualitative formats, namely - DINplus, ENplus-A1, ENplus-2 and EN-B. Package
will be the following: plastic bags of 15 kg and BB (for industrial companies and utility companies).
Trade of the pellets will provided by our sales department, which located at Odessa and through
representatives in Italy, France and Poland. Some part of produced pellets (about 20% from total
volume) we plan to sell in Ukraine mostly to utility companies, which now replace existing boilers
and move on heating by alternative resources of energy. Delivery of pellets to buyers will provided
by own trucks partly this is reduce transport costs and increase margin. In addition, we will attract
logistic companies. In case of necessity of volume pellets more than our production capacities that
can produce, we will buy the missing part from other producers in Ukraine.
Road map
2014 2015 2016
Action 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
First stage
Negotiations with producers
Searching for buyers
Delivery of pellets
Second stage
Negotiations with investor
Deal structuring, attraction of investments
Projection and equipment production
Sign agreement of the rent premises
Purchase trucks and loaders
Equipment installation and start production
Sign agreements with buyers
Selling of the produced pellets
The third stage supposes entry on retail EU market (it is necessary to prepare separate business
plan). We plan to locate intermediate warehouses in Poland and Italy for the formation of large
consignments of the pellets and for further selling to industrial companies, utility companies, trade
networks, which specializes on pellets trade and retail customers with home delivery. We suppose
that internal Ukrainian market will be more than nowadays and we can increase the volumes of
pellets production and we can increase the weight of trade in the internal Ukrainian market from 20
to 50%. Such approach will allow to reduce the transport costs and diversification of target markets.
5
Management & Manpower Structure
Private entrepreneur Sivoplyas Ruslan is working under trade mark GEU Trade (GEU - Green
Energy from Ukraine). His core business is export trade of the fuel wood pellets of Ukrainian
production to European countries. The location of the office is Odessa city, Ukraine. The office is
equipped with respective computers, connection, Internet and auto transport. The total number of
staff is 12 managers including 7 women (and 3 among them will be decision-makers).
Implementation of the project in Ukraine will provided by team with long-term experience in banking
and leasing in sales area.
Team leader - Ruslan Sivoplyas has 17 years of managerial experience in the banking and
leasing business (Getin Holding, leasing company Lend Lease (leasing of agricultural
machinery), Investment Bank SP Advisors, Credit Agricole, OTP Bank). PE Ruslan Sivoplyas
also takes an active part in the work of the Agrarian cluster at Odessa Regional State
Administration, which unites together civil society activists of the region concerning increasing of
efficiency of the agricultural sector of Odessa region.
Head of sales - Alla Dzhoy has 14 years of experience in the banking business sales (UniCredit
Bank, OTP Bank), as well as experience as commercial director in agricultural holding
CFO - Margarita Kovalchuk has 12 years of experience in the banking finances (UniCredit Bank,
Prominvestbank)
Head of production Anatoly Dzhoy has 30 years in engineering and development of devices,
machines and other equipment. He has more than 45 patented inventions, including 23
inventions in the co-authorship.
Trading of the final products (pellets) in EU market will provided through:
- representative in Italy - Svetlana Babyna - representative in France - Alexandre Kudriavtsev - representative in Poland - Tomasz Bczkiewicz.
In process of project implementation, we will be guide with international standards of environmental
management systems ISO 14000.
Technology
The benefits of recycling wood are numerous, including preserving trees, protecting habitat,
prolonging the lifespan of landfills, reducing the need for new landfills, maintaining air quality,
providing cleaner energy and fuel, and reducing soil erosion. Pellets are produced by compressing
the wood material which has first passed through a hammer mill to provide a uniform dough-like
mass. This mass is fed to a press, where it is squeezed through a die having holes of the size
required (normally 6 mm diameter, sometimes 8 mm). The high pressure of the press causes the
temperature of the wood to increase greatly, and the lignin plasticizes slightly, forming a natural
"glue" that holds the pellet together as it cools.
A report by CORRIM (Consortium On Research on Renewable Industrial Material) for the Life-Cycle
Inventory of Wood Pellet Manufacturing and Utilization estimates the energy required to dry, pelletize
and transport pellets is less than 11% of the energy content of the pellets if using pre-dried industrial
wood waste. If the pellets are made directly from forest material, it takes up to 18% of the energy to
dry the wood and additional 8% for transportation and manufacturing energy. An environmental
impact assessment of exported wood pellets, by the Department of Chemical and Mineral
Engineering, University of Bologna, Italy and the Clean Energy Research Centre, at the University
https://en.wikipedia.org/wiki/ISO_14000https://en.wikipedia.org/wiki/Hammer_millhttps://en.wikipedia.org/w/index.php?title=Wood_pellet_press&action=edit&redlink=1https://en.wikipedia.org/wiki/Ligninhttps://en.wikipedia.org/wiki/CORRIM6
of British Columbia, published in 2009, concluded that the energy consumed to ship Canadian wood
pellets from Vancouver to Stockholm (15,500 km via the Panama Canal), is about 14% of the total
energy content of the wood pellets.
Pellets conforming to the norms commonly used in Europe (DIN 51731 or -Norm M-7135) have less than 10% water content, are uniform in density (higher than 1 ton per cubic meter, thus it sinks in water) (bulk density about 0.6-0.7 ton per cubic meter), have good structural strength, and low dust and ash content. Because the wood fibres are broken down by the hammer mill, there is virtually no difference in the finished pellets between different wood types. Pellets can be made from nearly any wood variety, provided the pellet press is equipped with good instrumentation, the differences in feed material can be compensated for in the press regulation. In Europe, the main production areas are located in south Scandinavia, Finland, Central Europe, Austria and the Baltic countries.
Pellets conforming to the European standards norms which contain recycled wood or outside contaminants are considered Class B pellets. Recycled materials such as particle board, treated or painted wood, melamine resin-coated panels and the like are particularly unsuitable for use in pellets, since they may produce noxious emissions and uncontrolled variations in the burning characteristics of the pellets. Standards used in the United States are different, developed by the Pellet Fuels Institute and, as in Europe, are not mandatory. Still, many manufacturers comply, as warranties of US-manufactured or imported combustion equipment may not cover damage by pellets non-conformant with regulations. Prices for US pellets surged during the fossil fuel price inflation of 20072008, but later dropped markedly and are generally lower on a per-BTU basis than most fossil fuels, excluding coal.
Regulatory agencies in Europe and North America are in the process of tightening the emissions standards for all forms of wood heat, including wood pellets and pellet stoves. These standards will become mandatory, with independently certified testing to ensure compliance. In the United States, the new rules initiated in 2009 have completed the EPA regulatory review process, with final new Standards of Performance for New Residential Wood Heaters rules due in Spring of 2015. The American Lumber Standard Committee will be the independent certification agency for the new pellet standards.
https://en.wikipedia.org/wiki/Vancouverhttps://en.wikipedia.org/wiki/Stockholmhttps://en.wikipedia.org/wiki/Melamine_resinhttps://en.wikipedia.org/wiki/United_Stateshttps://en.wikipedia.org/wiki/Pellet_Fuels_Institutehttps://en.wikipedia.org/wiki/Pellet_Fuels_Institutehttps://en.wikipedia.org/wiki/Coal7
Market Analysis
27 members of EU resolved that by 2020 renewable sources of energy should be used for at
least 21% of electricity generation and 20% of heat generation;
Long term obligations of EU to reduce greenhouse gas emissions and reduction of
dependence from fossil fuels (namely Russian natural gas supply), suggest that European
market of pellets shall grow at least 20% per annum;
The possible threat to the industry may arise from some serious structural change to energy
market, like invention of a new source of renewable energy, and radical change of energy
policy in EU, which is unlikely to happen in near future.
The European Union recently published its annual biofuels report for 2013 with the USDA Foreign Agricultural Services Global Agricultural Information Network. The report identifies the UK, Denmark, the Netherlands, Sweden, Germany and Belgium as the major users of wood pellets in the EU.
Differences in consumption characterize the European pellet market, says the report. The market can be divided in three regions. Markets such as the Netherlands, Belgium and the UK are dominated by large - scale power plants. In Denmark and Sweden, pellets are used by power plants but also by households and by medium scale consumers using wood pellets for district heating.
In Germany, Austria, Italy and France pellets are mainly used in small - scale private residential and industrial boilers for heating. The demand for industrial pellets depends primarily on EU Member State mandates and incentives, while the residential pellet market is driven by prices of alternative fuels.
The UK, the Netherlands and Belgium are expected to be the main growth market for pellets, and also the most dependent on imports. The large scale use of wood pellets by the power plants in the UK and the Benelux countries is driven by the EU mandates for renewable energy use in 2020.
The governments of these countries opted to fulfill their obligations mainly by the use of biomass for the generation of electricity. Recently, the UK Government enforced the Industrial Emissions Directive, which is expected to boost consumption further in 2013 and 2014. The Dutch Government will decide upon the national renewable energy policy in the second half of August. According the draft proposal, old power plants build in the eighties will have to be closed and biomass use will be capped at 25 PJ per year.
8
Besides, 22th of July 2015 French Government has signed a Law concerning reducing the share of atomic energy in the country from 75% (as for today) up to 50% till 2025 in favor of alternative energy resources.
The market development in Austria
German pellet production capacity (grey) actual production (orange) and domestic demand (green)
Growth of the pellet market for heating in the UK
Development of pellet demand in Italy: demand from stoves (dark blue) and boilers (light blue)
Pellet market size in Spain presented
9
The market of Sweden The market of Denmark
Wood pellets production and consumption in Poland
9 3368 505
5 361
9 14810 173
15 072
13 049
16 097 16 526
11 457
8 576
The volume of export of Ukrainian wood pellets in 2014, t
10
Proposed Investment / Financing Structure
Notes:
- Total CAPEX estimated at EUR 2.28 mln.
- Production equipment (pellet lines) will start producing in 2 months after the time of delivery
(after adjusting equipment)
- Exchange rate assumed at UAH 23,9/EUR for the forecast period
- Effective income tax rate assumed at 4%
- Production equipment generates revenues by producing and implementing finished products
pellets
- PE Sivoplyas Ruslan contributes distribution network (an equivalent of EUR 520 tsd of the total EUR 2.85 mln project costs) and receives 20% stake in the JV GEU Trade.
- The investor contributes EUR 2.28 mln in cash into the project for 80% stake. PE Sivoplyas Ruslan will buy out the 80% stake from the investor during eight years in following installments (1 year EUR 249 373, 2-8 years by EUR 639 417).
- JV GEU Trade will not be paying dividends and all accumulated cash flow will be used to finance working capital.
Our suggested cash flow realistic scenario for the investor is provided below (EUR):
1 2 3 4 5 6 7
12.1.15 7.1.16 8.1.16 9.1.16 10.1.16 11.1.16 11.2.16 1.1.17 1.1.18 1.1.19 1.1.20 1.1.21 1.1.22 1.1.23
-2 280 000
19 183 19 183 31 971 51 153 63 942 63 942 639 417 639 417 639 417 639 417 639 417 639 417 639 417
-2 280 000 19 183 19 183 31 971 51 153 63 942 63 942 639 417 639 417 639 417 639 417 639 417 639 417 639 417
The expected IRR for the investor is 20,5%.
In addition, there are the following variants of the market behavior and the respective changes of the main financial indicators (IRR and cash flow):
Scenario Price, EUR Cash-flow, EUR IRR, %
Pessimistic 160 504 777 11,3
Realistic 170 639 417 20,5
Optimistic 190 908 697 37,5
Scalability of the business model
CAPEX, EUR Cash-flow, EUR IRR, %
3 pellet lines 2 280 000 639 417 20,5
4 pellet lines 2 800 000 895 005 22,0
5 pellet lines 3 600 000 1 150 593 22,9
11
Financial Analysis
Project assumptions:
UAH EUR
Total CAPEX 54 492 000 2 280 000
pellet lines (3 units) 47 800 000 2 000 000
cars (1 loader, 3 trucks) 6 692 000 280 000
The structure of the cost price per 1t, EUR: 107
Sawdust per 1 ton 19,67
Transportation of pellets per 1 ton 79,00
Salary per 1 ton 3,80
Premises rent payments per 1 ton 1,30 customs clearance 3,00
bank commissions 1,50 others (utility + transportation of sawdust payments + equipment repair)
17,50
Production cost of the pellets, EUR:
Production cost per 1 day 6 406
Production cost per 1 month (25 days) 136 126
Production cost per 1 year 1 497 383
Export price per 1 ton, EUR 170
Revenue, EUR
Revenue per 1 day 10 200
Revenue per 1 month 216 750
Revenue per 1 year 2 384 250
P&L projection for a typical year
UAH/year EUR/year
Revenues 56 983 575 2 384 250
Operating expenses -35 787 452 -1 497 383
Administrative expenses -5 368 118 -224 607
D&A -267 680 -91 200
EBIT/PBT 13 648 325 571 060
Income tax -545 933 -22 842
Net income 13 102 392 548 217
Operating cash flow 13 370 072 639 417
Output data:
Annual cash flow, EUR 639 417
IRR 20,5%
12
Risk Analysis
Strengths Weaknesses
Opportunities Threats
Risk Risk Response
Development risk Increase of the volume of the shale gas mining in Europe and selling it to population
To use our pellets for energy generation
Development risk Significant decrease of the agricultural waste in Ukraine
To import of the raw materials from European countries
Financial risk Lack of the own working capital funds for the current activity.
To receive respective financial funds from the bank.
Currency risk Changes in hryvnia exchange rate to euro The use of stock options, futures contracts on the euro / dollar to hedge future revenues in euro
According to the available risks the overall risk level is non-significant.
1. Professional team with experience of interaction with European financial institutions
2. Constant raw materials basis 3. The growing market for EU
diversified
1. Low investment attractiveness of Ukraine
2. The cost of logistics significantly exceeds the cost of goods
1. Internal market Ukraine 2. Creating intermediate hub in
Europe for the sale of goods to final consumers
3. Alternative energy projects are a strategic priority of Ukraine State, in connection with the possible benefits for the business
1. The massive introduction in Europe sun batteries and / or other alternative energy sources
2. Changes in tax and / or customs legislation
13
Non-financial Impacts
One of the inviolable rights of the person is the law provides for free access of persons to natural
resources, namely, the opportunity to live in a healthy environment characterized by acceptable
level of quality of life. From this perspective, the impact of our project to build a plant for the
production of pellets on human rights is primarily due to a reduction in demand for other traditional
fossil energy sources (gas, coal), helping to reduce air pollution. Emissions of carbon dioxide, one
of the main pollutants, is associated with energy production from fossil fuels is reduced by the use
of pellets to generate power. As a result of the simulation conducted by the US Department of Energy
(2010b) c using the model COBRA (US-EPA), changes in the concentration of particulate matter and
greenhouse gas emissions associated with fluctuations in the risk of mortality and health risks,
resulting in increased health care costs and loss of working hours. Hence, in addressing these
challenges is greatly improved quality of life and laid the foundation for a society in which social
welfare is a fundamental element.
The benefits of recycling wood are numerous, including preserving trees, protecting habitat,
prolonging the lifespan of landfills, reducing the need for new landfills, maintaining air quality,
providing cleaner energy and fuel, and reducing soil erosion.