NEWS UPDATE | 11 October 2019
- Synthesis Energy Systems (SES) will acquire 100% of Australian Future Energy (AFE) with pre-commitments from all major AFE shareholders;
- The new entity will be listed on NASDAQ: SES;
- As part of the transaction, SES offers to acquire 100% of Batchfire Resources, owner of the Callide Thermal Coal Mine, with minimum acceptance level set at 25%, and pre-commitments from 33% of Batchfire shareholders;
- This will create a newly invigorated clean energy company with a multi-tier platform and a combination of operating and growth assets;
- A strong Board and Management team, with AFE majority positions; and
- Transaction capital secured and completion is expected in Q1, 2020.
BRISBANE, 11 October, 2019 – Australian Future Energy Pty Ltd (AFE), an Australian incorporated privately-owned energy company, is pleased to announce that it has agreed on the details of a merger with Synthesis Energy Systems, Inc. (SES), a co-founder and 35% shareholder in AFE. As a result of the transaction, AFE will become a wholly-owned subsidiary of SES, with AFE having the majority of Board and Management positions in the new company.
In connection with entry into the Merger Agreement, the Company also announces that SES has offered to acquire 100% of the issued capital of Batchfire Resources Pty Ltd (Batchfire), owner of the Callide Thermal Coal Mine in Queensland, via the issuance and exchange of one share of SES common stock for each ten ordinary shares of Batchfire.
On acceptance, the acquisition offer for Batchfire represents another milestone achievement towards the creation of a vertically integrated energy company. The offer also combines Batchfire’s long-term operating cash flow assets with the high-quality growth assets held by AFE.
On closing of the transaction, Mr. Kerry Parker, current CEO of AFE, will be appointed as President and Chief Executive Officer of SES, and Mr. Ron Higson, current COO of AFE, will be appointed as Chief Operating Officer of SES. The appointment of a new Chief Financial Officer (CFO) will be made at or prior to closing.
Additionally, current AFE directors Mr. Edek Choros, Mr. Stephen Lonie, and Mr. Richard Barker will be appointed to the SES Board of Directors. Mr. Robert W. Rigdon, a long-time SES executive who has served as Deputy Chairman and Director of AFE since its inception and is the current Vice Chairman, President and CEO of SES, will remain on the board of SES. Once convened, the Board of Directors is expected to appoint one or more additional, independent directors. All other current directors of SES will resign their positions at merger closing.
Details of the transaction
The current other major shareholders of AFE, representing approximately 90% of the current issued capital of AFE, have formally pre-committed their shares in support of the merger transaction. The mutually agreed purchase value of AFE is approximately $US36 million ($AUD 55 million), based on $US6 per share of SES share of Common Stock to be issued.
Upon closing and subject to the terms and conditions of the Merger Agreement, SES will issue 3,875,000 new shares of its common stock for the acquisition of AFE. Each holder of AFE ordinary shares will receive one share of SES’s common stock for approximately each 24.44 ordinary shares of AFE.
SES has set a minimum participation level by Batchfire shareholders of 25%, inclusive of the SES 7.37% holding in Batchfire. Each participating Batchfire shareholder will enter into a Share Exchange Agreement with SES and, to date, signed Share Exchange Agreements have been received from 33% of Batchfire shareholders, inclusive of SES’s ownership, meeting the minimum participation level.
The Batchfire share exchange is subject to conditions specified in the Share Exchange Agreements, including the completion of Batchfire’s pre-emptive rights protocol and the consummation of the transactions contemplated by the Merger Agreement.
The valuation basis for the offer to acquire Batchfire is based on $US6 per each share of SES common stock placing the value of 100% of Batchfire at approximately $US80 million (approximately $AUD120 million).
The approximate valuation of Batchfire is at a 60% premium to the capital raising completed by Batchfire in April 2019.
Australian Future Energy CEO, Mr. Kerry Parker, said that the merger offers an unprecedented opportunity for shareholders to be a part of a company with a strong growth pipeline, while ensuring that existing assets will maintain a strong balance sheet.
“We are delighted to be entering into this merger and believe it provides strong value for the shareholders of AFE, SES, and Batchfire. From the outset, our strategy at AFE has been to create a vertically integrated energy development and production company that combines quality, operating cash flow assets with a set of well advanced and well planned growth assets,” Mr Parker said. “We have accomplished this with our position in, and the contribution of AFE’s founding shareholders towards the successful turnaround of Batchfire’s Callide Mine, along with a project pipeline that includes substantial work completed on our advanced Gladstone Energy and Ammonia Project, the acquisition of the Pentland Coal Mine Project (270 million metric tonnes resource), and the work we have completed for later-stage gasification projects in Townsville.”
Mr. Parker also commented that the Australian east-coast gas market is in short supply for the foreseeable future.
“Three large LNG projects built in the past ten years in Gladstone, providing approximately 1,200 PJ per annum, are now exporting gas offshore to Asia, at the same time that New South Wales and Victoria have imposed bans on new gas developments,” he said. Mr Parker also said that it was the right time and the right place for scalable and replicable clean energy gasification projects with compelling economics.
“Production costs of conventional gas are on the rise, and we’re able to secure long-term production of gas at competitive pricing.”
“At Gladstone, we’ve made significant progress, putting all of the building blocks in place in logical order for a successful project, with a disciplined approach to development, and cautious use of funding,” Mr Parker said.
Assets Being Acquired
Gladstone Energy and Ammonia Project – Advanced stage, above-ground coal gasification development project, to supply ammonia, natural gas, and power via SES gasification technology, on a company-owned 120-hectare (approximately 300-acre) site in the Gladstone State Development Area, Queensland.
AFE and SES believe that the key building blocks for the Gladstone Project are in place:
- Long-term offtake arrangements are in place with Tier 1 Australian ASX-listed off-takers for 100% of the production output – approximately 250,000 tpa of ammonia and approximately 14 petajoules (PJ) (approximately 13.4 BCF) per annum of pipeline quality gas;
- Agreements for supply of coal feedstock under long-term arrangement in place;
- Project site acquired in 2018;
- Long-term water supply agreement in place;
- Engagement of SNC Lavalin on a pathway to EPC for the project;
- Permitting and approvals well advanced with a pathway to completion of the Environmental Impact Statement (EIS), expected by late 2020; and
- Final Investment Decision will be made in 2020.
The project has received strong support from all levels of Government in Australia, and from the Gladstone community.
Cape River Resources’ West Pentland Coal Resource – A 270 million metric ton JORC-compliant resource, to be utilised for future planned coal gasification projects on-site at West Pentland, for the production of pipeline quality gas, electrical power, and additional chemical products (ammonia, methanol).
Batchfire Resources – On satisfying all conditions, the merger will bring SES’s ownership of Batchfire, currently 7.37%, to a minimum of 25% of Batchfire shares. SES has made an offer to Batchfire shareholders to acquire up to 100% of Batchfire shares on issue.
Batchfire is wrapping up the three-year mine improvement plan originally put in place in late 2016, when AFE created Batchfire and bought the Callide mine from Anglo American Coal. Through implementing this plan, Batchfire’s Callide Mine increased its production from approximately 6 million tonnes annually in 2016 to today’s approximately 11 million tons annually, with approximately 4 million tonnes of export coal; with lower production costs, and increased profitability.
The Callide Mine is a long-time supplier to CS Energy power stations for Australia’s national grid (approximately 18% of Queensland’s electricity generation), domestic customers in Gladstone, and exports via the Gladstone Port. Callide has approximately 230 million metric tons of reserves, and an approximately 1.0 billion metric tonne resource.
Australian Future Energy (AFE) is a privately owned Australian company founded in 2014 by its primary shareholders being Mr. Edek Choros and Synthesis Energy Systems, Inc. (SES).
AFE was established to secure an ownership position in local resources, such as coal and biomass, for production of fuel gas and synthetic natural gas for use in power generation and the production of agricultural chemicals using SES gasification technology that will reduce carbon dioxide emissions, and support Australian industry and regional growth. As part of the formation of AFE, SES and AFE entered into a Master Technology Agreement whereby AFE will exclusively use SES technology for its gasification projects, while SES will exclusively use AFE as its channel to the Australian market.
SES’s commercialised technology, through its five projects in China, is well-proven as an optimum clean energy technology solution that economically and efficiently converts low-cost, locally sourced resources into high value syngas and energy products.
Foundational shareholder, Mr. Edek Choros, along with SES, created AFE, which in turn spun-out Batchfire Resources, owner of the Callide Coal Mine, one of the lowest production cost, largest thermal coal mines in Australia.
Interim Funding to Support Merger Process
In connection with the execution of the Merger Agreement, SES issued $US 2,000,000 of 11% senior secured debentures to certain accredited investors, along with warrants to purchase $US 4,000,000 of shares of SES common stock. The warrants will be exercisable into shares of SES common stock at any time: at an exercise price of $US 3.00 per share of SES common stock, as to half of the warrants of each warrant-holder; $US 6.00 per share of common stock as to the other half of the warrants of such warrant-holder. The warrants will terminate five years after they become exercisable.
SES shall receive the $US 2,000,000 pursuant to the Merger Debentures schedule, beginning seven business days after the announcement of the transactions and concluding within two business days of stockholder approval of the merger. The merger debentures are intended to assist AFE and SES in financing the business through the closing of the merger. The merger is expected to close in the first quarter of 2020.
Follow-On Financing Activities
Upon completion of the merger, the merged company intends to further implement value accretive financing strategies for the development of its projects, including in relation to the project financing activities AFE has previously undertaken with its strategic and financial partners related to the Gladstone Project.
AFE has completed lodgements with the Australian Federal Government to support the project finance (debt) requirements for the Gladstone Project through participation by the Northern Australia Infrastructure Facility (NAIF).
Transaction Process Overview
SES will require stockholder approval to approve the merger. Additional information related to the merger will be included in SES’s registration statement on Form S-4 which will include a proxy statement for a special meeting of SES shareholders will be convened to, among other things, approve the merger. The merger is subject to customary closing conditions, including stockholder approval.
- R. Winston & Company served as financial advisors to SES, in relation to the AFE and Batchfire transactions. Additionally, the firm served as placement agent for the issuance of the $2 million senior secured debentures.
Jones Day, based in Brisbane and Houston, served as legal counsel to AFE and Porter Hedges LLP, based in Houston, Texas, and King and Wood Mallesons, based in Brisbane, Queensland, Australia served as legal counsel to SES.
About Australian Future Energy
Australian Future Energy Pty Ltd (AFE) is a privately-owned Australian company founded in 2014 by its primary shareholders being Mr Edek Choros and Synthesis Energy Systems, Inc (SES).
AFE was established to secure an ownership position in local resources, such as coal and biomass for production of fuel gas and synthetic natural gas for use in power generation and the production of agricultural chemicals and explosives using SES gasification technology that will reduce carbon dioxide emissions, and support Australian industry and regional growth. As part of the formation of AFE, SES and AFE entered into a Master Technology Agreement whereby AFE will exclusively use SES technology for its gasification projects, while SES will exclusively use AFE as its channel to the Australian market.
AFE is currently seeking to develop energy projects that will produce synthesis gas “syngas” – an alternative to natural gas – for use in east-coast Australia as pipeline quality gas and for use as a feedstock for the production of agricultural chemicals such as ammonia, urea, and methanol.
AFE’s first project is the Gladstone Energy and Ammonia Project that is aimed at supplying approximately 250,000 tpa of ammonia and approximately 14 PJ (approximately 13.4 BCF) of pipeline quality gas per annum to industrial customers and users in Gladstone, Queensland, Australia.
About Synthesis Energy Systems, Inc.
Synthesis Energy Systems (SES) is a Houston-based technology company focused on generating clean, high-value energy from low-cost and low-grade coal, biomass and municipal solid waste through its proprietary technology for conversion of these resources into a clean synthesis gas (syngas) and methane. SES’s proprietary technology enables the production of clean, low-cost power, industrial fuel gas, chemicals, fertilizers, transportation fuels, and substitute natural gas, replacing expensive natural gas-based energy. SES’s technology can also produce high-purity hydrogen for cleaner transportation fuels. SES enables greater fuel flexibility for both large-scale and efficient small- to medium-scale operations close to fuel sources. Fuel sources include low-rank, low-cost high ash, high moisture coals, which are significantly cheaper than higher grade coals, waste coals, biomass, and municipal solid waste feedstocks. SES: Growth With Blue Skies. For more information, please visit: www.synthesisenergy.com.