Bioteq Environmental BQE.v
May 11, 2006 - 9:35am EST by
issambres839
2006 2007
Price: 1.85 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 98 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Bioteq Environmental is an undiscovered gem of a company that cleans the wastewater that comes off of a mine while simultaneously extracting the metals which are left in the water. Bioteq operates three plants which process the water and metals. The company has three more under construction and four on tap to be announced for next year. Bioteq is past the technology testing phase and about to enter a period of dramatic growth. With plants with life spans that last 40 to 50 years, and with minimal ongoing capital expenditures, Bioteq is about to become a cash cow. In four years, with 15 plants churning out on average $3-4 million in cash flow, Bioteq could climb close to $9 a share, or more than 400% higher than its current stock price. This company has incredible upside potential.

The current way of disposing wastewater

Currently, mines use lime to treat wastewater. While this cleans the water, the mines are left with a sludge that has to be watched and maintained in perpetuity. Besides the long term environmental liability, the mines lose the opportunity to recover any of the metal in the water. This sounds like a very inadequate situation and a lose-lose for the mining companies.

The Bioteq solution

Bioteq’s technology uses sulphur or sulphate reducing bacteria that cleans the water and allows for the recovery of the metals such as copper, nickel, zinc, cobalt, etc. depending on the mine. The end result is either an elimination of the sludge or a dramatic reduction in the amount of sludge combined with 100% safe drinkable water.

What makes Bioteq’s process so unique is that they can extract a metal like copper for $0.60 a pound or nickel for $2.08 a pound. The combination of an environmentally friendly solution while being very profitable should be very valuable. And after years of struggle, Bioteq is finally past the technology proving phase.

Bioteq offers mining companies a chance to substantially reduce or eliminate an environmental nightmare, and all Bioteq wants is to keep the metal it recovers for sale. Bioteq pays for the plant and runs it, only asking to keep the metals extracted and selling those metals. Some mining companies want to partner 50/50 with Bioteq, but most should be content for BQE to own and operate everything itself. It is not a big deal for a multi-billion mining company to extract an extra $3 to $4 million in cash flow out of a mine, but it is a big deal to BQE.

Three plants up and running

Bioteq has three plants up and running right now: Caribou, Raglan and Bisbee. The Caribou mine is owned by Breakwater Resources. Caribou was the first plant for BQE and has served as a prototype/testing facility since 2002. BQE only earns a slight fee from the plant, but has been able to test and work all of the kinks out of the system with this plant.

The Raglan nickel mine in Quebec is owned by Falconbridge (NYSE: FAL). Bioteq commissioned this second plant to extract nickel from the wastewater in the middle of 2004. Due to its remote and northern location this plant only runs five to six months a year. BQE also receives $300,000 a year as a fee.

The first real plant with substantial volumes and revenue has been the Bisbee, Arizona mine of Phelps Dodge (NYSE: PD). Commissioned in 2004, Bisbee is a 50/50 joint venture between Phelps Dodge and BQE. The plant capacity is around 3 million pounds of copper a year. The operating cost to extract the copper should be about $0.65 per pound. BQE estimates that there are over 400 million pounds of copper in the wastewater, which should mean this plant should be around for some time.

Last year a freak problem occurred when the agitator broke, and there was an 11 week delay until the company could get a replacement. So, the company has not really reported cash flow numbers from this plant that fully encompasses production and recent copper prices. For example, revenue from Bisbee in 2005 was $614K, but it should be at least $2 million in 2006.

Three more plants to be added by next year

Now that there are several plants up and running and a history that goes back four years, momentum is really starting to build. Industrial metal prices surging helps as well. BQE has three plants currently in construction or about to be commissioned that should be fully operational for 2007.

The first new plant which should be commissioned this year is Phelps Dodge’s second mine its Blackwell, Oklahoma mine. However, this is really just a plant sale in which BQE will get a licensing fee. Phelps needed an environmental solution and Bioteq was its best option.

The second plant is also an environmental solution and this is for the former Wellington, Oro mine in Breckenridge, Colorado. This is another plant that is really just to show off the technology. What is very important about this plant is that the EPA is the one who selected Bioteq’s solution, which is a fantastic validation of its technology, safety and efficacy of its technology.

In October of 2005 Bioteq announced an agreement with INCO Limited for its North Mine, which is part of INCO’s Copper Cliff mine operations complex located near Sudbury, Ontario. The plant will extract nickel from the mine and treat under-mine water. Bioteq estimates that it can recover approximately 850,000 pounds per year of nickel from a water flow of 5 million liters per day. With an initial capital cost of C$3.5 million, the plant should be able to extract the nickel out at a cost of around $2.10 a pound. This INCO mine will be the second material producing cash flow plant for Bioteq, besides the Bisbee plant.

China

The opportunity for Bioteq in China is enormous. As has been increasingly well documented, China has destroyed their environment and contaminated their water supply. With all of the mining in the country what better way to clean the water and extract more metals than to use BQE’s technology?

A hint of the opportunity came when China’s largest copper company, Jianxi Copper announced an agreement with BQE last year. This plant should begin construction this year and should be commissioned in 2007. The minimum capacity of the plant will be 1.1 million pounds per year of copper and a maximum capacity of 4.5 million pounds per year if all of the acidic water is treated. The two companies plan to increase the capacity in stages. The cost to extract the copper due to low labor costs will be an absurdly low $0.32 per pound of copper. The cost to build the plant should be less than $2 million.

Cyanide regeneration

Besides extracting metals, Bioteq’s technology can also be used for cyanide regeneration. Bioteq earlier this year signed an agreement with Columbia Metals Corporation Limited for the development of a water treatment plant at Columbia’s La Jojoba Gold Property located in the State of Sonora, Mexico. Besides providing Columbia with regeneration of cyanide, which can then be recycled for gold extraction, Bioteq will also convert copper cyanide complexes to copper sulphide which they will then resell. Bioteq estimates that they can regenerate 3.6 million pounds of copper a year at a cost of $0.90 a pound. That cost estimate is before the benefit of fees for the cyanide regeneration which should lower the cost at least $0.30 a pound.

Pueblo Viejo’s monster potential

Bioteq has been working with Placer Dome on a potential agreement for their Pueblo Viejo mine in the Dominican Republic. The company was very close to an agreement and then Placer was bought out by Barrick Gold. Now Barrick is reviewing the technology and plant. Note that in 2004, Placer Dome and Bioteq had an agreement to check out the applicability of the technology. The test was successful. Bioteq has further worked with Barrick on feasibility and engineering designs, etc. While the timing of an announcement is uncertain, the economics of this plant are fantastic.

This mine would be bigger than anything that Bioteq has worked on before and would pump out 8.5 million pounds of copper per year. The cost would be about $0.66 per pound of copper with a 30-40 year lifespan. At $1.75 copper prices, this plant is worth around C$2 a share in NAV alone.

The capital cost of building this plant would be about $20 million to build. At current copper prices, this plant would churn out $24 million a year in cash flow. Capitalized at ten times, this plant alone could be worth $4 a share. And this is just one mine. This is an example of the opportunity for Bioteq and its model.

Municipal water market and Coal is in the Future

Bioteq is part of a consortium led by EPCOR Water Services that submitted a bid for the design, construction and operation of a treatment plant located at the Britannia Mine in southwestern British Columbia. This shows an opportunity for Bioteq to take its technology into the municipal water market. While EPCOR is Bioteq’s partner in Canada, the company is starting to look for a partner in which they could license their technology to a U.S. partner for the U.S. municipal market. It should be fairly obvious how this could be a big potential source of income for the company.

Another big potential is for Bioteq to work with water that has been contaminated by coal mining. This is another huge market for the company and another thing to look for in the future.

People capacity is constricting growth

But if there is one major problem affecting the company, it is that Bioteq is capacity constrained. The company simply doesn’t have the people and specifically engineers to build more than three or four plants a year. And with all of the opportunity in the municipal water market, coal, cyanide regeneration and international markets, you have to wonder what the potential would be with more people.

The company recognizes this risk and is considering buying out a small engineering firm of 25 to 30 engineers. As you can imagine, engineers especially mining engineers are in hot demand right now, so the company has to be creative and not pay too much. While this is a major risk, it is a nice one to have.

Financial modeling

Before getting into specifics, just consider a back of the envelope model for the company to realize its upside. Bioteq’s plants will last for around 40 years and that the capex is in the operating expense number. These plants are cash machines. I expect that in five years, Bioteq will be an income trust; it has the perfect model.

Assuming that the company builds out 3 to 4 plants a year, in four years Bioteq will have 12 to 16 plants running. Let’s assume that each plant spits out 3 million pounds of copper at a $0.60 a pound cost. At $1.60 copper, this plant throws off $3 million in cash flow.

# of plants 10 15 20 25 30
CF per plant $ 3,000,000 $ 3,000,000 $ 3,000,000 $ 3,000,000 $ 3,000,000
Total cash flow $ 30,000,000 $ 45,000,000 $ 60,000,000 $ 75,000,000 $ 90,000,000

Multiple of 5 $150,000,000 $225,000,000 $300,000,000 $375,000,000 $450,000,000
Multiple of 7 $210,000,000 $315,000,000 $420,000,000 $525,000,000 $630,000,000
Multiple of 10 $300,000,000 $450,000,000 $600,000,000 $750,000,000 $900,000,000


With 15 plants at a multiple of 10, this stock is an $8.50 priced stock. And this is with copper at $1.50! This gives no consideration to the potential of metal prices entering a new price level.

Think about the economics for Bioteq’s plant with Jianxi Copper. At current copper prices and a 2 million pound run rate of copper, this mine will spit out $6 million in cash flow a year for forty years. And this is one mine. And yet, even if copper prices collapsed, this plant could make $2 million a year if copper was $1.32 a pound.

It is worth noting that if every plant that BQE has announced is up and running in 2008 including Pueblo Viejo, that BQE will earn $0.90 a share in EPS. With copper at $2 a pound, BQE would earn $0.35 a share. Considering the long lived nature of the assets, there is no reason why the company could not receive a 10 or higher multiple. And that gives no consideration to future projects or growth.

Excluding Pueblo Viejo and assuming current metal prices, BQE would earn $0.38 in earnings in 2008. Even with copper at $2, with no Pueblo Viejo, the stock will earn $0.15 in earnings. Basically, any way you mess with the numbers, you realize that Bioteq can double and triple and still be considered cheap.

What would the multiple be if this was an American listed company?

This is actually a very important question to ask. Not only is Bioteq a Canadian company, with only one brokerage in Canada following them, but its name is confusing as well. Many people think this is a biotechnology company. It is not well known and the company and management have not been promotional at all. They have not even done a road show in the U.S. According to the CEO, none of the socially responsible investors in the U.S. are investors.

What would happen if the company were to simply change its name to include “water” in its name? I estimate that the stock price could double just on that. What if it had an AMEX listing? Again, the stock would probably double as well. I throw this out there, because chances are this will happen.

Summary

If you can melt a penny and make money from the metal content in the penny, Bioteq should be able to print money extracting metals out of wastewater coming off of a mine. The benefit of cleaning the environment with an EPA recommended technology is an added positive. There is also potential from a licensing deal in the U.S. municipal water market and coal projects that I haven’t even factored into my valuation.

Bioteq is so busy right now; they are capacity constrained and are literally cherry picking which are the best mines to work with. With so much potential and so little coverage and hype, Bioteq is poised to explode in stock price.

I think in three to four years this stock could trade at a double digit stock price. In the interim, I believe in the next twelve months, the stock will trade to C$3 to C$4 per share based upon its backlog and building cash flow streams.

Catalyst

1) New plant announcements
2) Pueblo Viejo progress
3) Municipal Water licensing agreement
4) US listing
5) Improving cash flow
6) New analyst coverage (there is only one right now)
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