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Sucrogen – CSR’s Renewable Energy spin-off that isn’t just spin.

July 6, 2010

The CSR Board has accepted an offer of $1.75bn from Singapore-based agribusiness group Wilmar International for the ‘Sugar and Renewable Energy’ business component now known as Sucrogen.

That the buyer is a ‘conventional’ agribusiness group rather than a renewable energy project owner or developer is hardly surprising.  It fits with the nature of Sucrogen’s business which is primarily agricultural commodities.

In an article on the demerged entity last year we noted that the contribution of renewable energy to revenue and EBIT of the newly demerged group was very minor, compared to the other components of the business.    This is certainly true if one restricts the definition of ‘renewable energy’ to meaning electricity and heat cogeneration, rather than also incorporating ethanol production.

However, Sucrogen is important among the ASX-listed renewable energy companies.

Sucrogen states that it is the largest generator of renewable energy from biomass.  Stand-alone biomass generation has proven problematic in Australia and the world over, due to the requirement to integrate biomass feedstock production and pricing with the power generation component.  For Sucrogen to be the largest biomass electricity generator does not therefore constitute news, but does show that, within the appropriate structure, biomass-derived renewable energy generation can work both technically and commercially.

Earlier in the year, Sucrogen announced that it was increasing renewable energy generation at one of its sites – at the Victoria plant in northern Queensland – to 17 MW through a refit.  This expansion brings total installed capacity at Sucrogen sites to 171 MW.

The investment decision pre-dates the amendments to the Renewable Energy Target legislation, which were only passed in parliament in June.  As such, it would seem that the investment proposition at Victoria was strong enough to compensate for a range of Renewable Energy Certificate (REC) prices.

This resilience may be down to two factors:  that the marginal investment cost implies a relatively low Levelised Electricity Cost, and that the integrated nature of the refining and generation businesses imply  further cost efficiencies accruing to enhanced bagasse (waste cane) disposal.

What this means is that one should not expect Sucrogen to start making forays into renewable energy power generation assets which are not vertically-integrated with core agricultural business.

While electricity export sales will be useful in generating recurring and stable revenue streams in a way that differs from agricultural commodity price-based revenue fluctuations, the opportunity for significant up-side and rapid growth in EBIT contribution is unlikely to be significant.

However, if one looks at the underperformance and poor capitalisation of pure-play listed renewable energy companies in Australia, it is evident that a well-capitalised, diversified company with substantial generation assets and existing cash-flow such as Sucrogen is well-placed to attract investment interest with an environmental tag.

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