Shareholders right to have misgivings over Magnus Energy's headlong rush into microalgae farming

AT a recent annual general meeting (AGM), Magnus Energy shareholders grilled the board for repeatedly sinking cash into deals with partners that have failed to deliver on what they had promised to do, yet did not have the wherewithal to pay back monies they had taken from Magnus.

One Indonesian contractor owes Magnus S$7.4 million as a result of the cancellation of four projects. Another company owes Magnus US$1.2 million in advance payment for a pre-IPO deal that did not materialise - and it wants to refund Magnus in the form of solar panels instead of cash.

Shareholders also homed in on a US$9.4 million investment in an algae-to-oil project that has remained unviable after more than two years. They were unhappy that Magnus has no recourse from the contractor if the project fails and blamed the management for not structuring the deal with greater care.

In response, non-independent non-executive director Nick Ong Sing Huat said: "Hindsight is always 20/20" - a mantra he repeated a few times during the AGM.

Magnus Energy's foray into the algae-to-oil project, or microalgae farming, was done in partnership with Peter Kim Jae Hoon, said to be an expert in the field.

Mr Kim, a South Korean, has also fronted microalgae and biofuel projects with two other Singapore-listed firms, Innopac and Sino Construction (now known as MMP Resources).

Given that Innopac has had a headstart in the microalgae project, it might be instructive to look at how it has fared.

Follow the algae

In September 2015, Innopac formed a joint venture with Primeforth Renewable Energy, a company incorporated in the Cayman Islands, to commercially cultivate and harvest microalgae for biofuel.

Mr Kim spearheaded the design and plans for the microalgae farm and plant in which the algae oil would be processed.

Primeforth said it owned patents for microalgae technology that were commercially successful. Innopac agreed to spend US$12.5 million to fund the venture.

There were delays in finding a suitable production site, but finally, one was secured in Kundang, in the Malaysian state of Selangor, in 2016. The promise then was that revenue would be generated by January 2017.

But in an unexpected twist, Innopac said at the end of 2016 that it had run out of cash to continue with the plan. This was after it had advanced S$6 million to the joint venture, including S$1.3 million for purchase of algae seeds.

This resulted in a "downsized facility" that failed to achieve optimal results, it said.

Today, sources say the facility was never even built.

Innopac took a full impairment on the algae investment this year, after a change of auditor.

Incidentally, the Magnus algae plant is located in Kundang, which is also the reported site for Innopac's plant. When contacted, Magnus chief executive Luke Ho said he has never visited Innopac's plant, and therefore could not verify if it exists before he entered into business with Mr Kim.

Innopac chief executive Wong Chin Yong rejected phone calls from BT.

No recourse

As for Magnus Energy, it awarded Mr Kim a contract to build an algae-to-oil facility in June 2016.

Magnus Energy drew up a budget of US$12.75 million for the entire project and has disbursed US$9.4 million so far.

If the technology is faulty or if the project fails, there is no clear recourse for Magnus under the contract terms, Mr Ho has confirmed.

The new contract is undertaken by Algae Farm Engineering, in which Mr Kim is the majority shareholder. This is a separate entity from Primeforth, with which Mr Kim has terminated his relationship, said Mr Ho.

But the new algae-to-oil plant has clearly run into execution problems.

Mr Ho told shareholders at the AGM: "We have not been able to bring it up for production. The equipment was not working under optimal conditions (and), as we put the algae into the bigger tanks in the field out in the open, contamination did occur, inefficiency did occur, so we will have to rectify that."

Microalgae is a "biological thing", he said, so the workers have not been able to control the rate of growth of the oil content.

The plant is still running tests and until it gets stable results, it is hard to say when commercial oil production will commence.

In other words, Mr Kim is still struggling with technological hurdles.

According to Innopac, however, the reason for discontinuing its microalgae project was a lackof funds to build a plant large enough to be optimal.

These are very different issues altogether.

We shouldn't sniff at the prospects of algae as a biofuel. But even the most well-resourced companies have been cautious about their ambition.

ExxonMobil, which has been studying algae biofuel since 2009, said in May that its target is to produce 10,000 barrels of algae biofuel per day by 2025 - seven years down the road.

Algal bloom

Strikingly, funding shortfalls were the main reason Primeforth's past projects with both Innopac and Sino Construction failed, Mr Kim has told the Singapore Exchange (SGX).

In January 2015, Sino Construction entered a joint venture with Primeforth to build "micro power plants" in South Korea that run on biofuels such as algae. Mr Kim reportedly spearheaded the execution.

Unexpectedly, shares of Sino Construction crashed later that year, scuppering a planned share placement exercise. Unable to fund further construction, the firm sold its stake back to Primeforth in November 2015.

Under the circumstances, Magnus may want to beef up its balance sheet in case of similar cost overruns, given that it is not exactly flush with cash.

It intends to raise funds by way of a placement to address working capital needs. But it remains to be seen if the SGX will give the go-ahead for the fundraiser.

The group made a net loss of S$100,000 in the three months to Sept 30, and has been taking loans from shareholders and directors. It had a cash balance of S$4 million as at end September, down from S$6 million as at end June.

Shareholders have voiced worry that Magnus is headed for more losses. The board needs to work harder to convince them otherwise.