Valero builds its renewables base, prepares for mandates

By Nicholas Zeman | January 19, 2010
Valero Marketing and Supply Co., a subsidiary of Valero Energy Corp., recently entered into a binding five-year biodiesel supply agreement with Mission New Energy Ltd. Valero is North America's largest petroleum refiner, and in December the company's media liaison Bill Day told Biodiesel Magazine that the developing renewable fuels sector has offered the company a chance to diversify. "It's still a relatively small part of our business, but it's growing rapidly with our biodiesel deal and the acquisition of three new ethanol plants," Day said. "As for our marketing and sales strategy for biodiesel, Valero is preparing for government mandates that will require the blending of biodiesel into diesel fuel."

The new offtake agreement gives Valero the opportunity to buy a 25 percent stake in MNE. Valero obviously has many options as to which companies it can invest in and deal with. Platform and price are what made MNE stand out from the hundreds of potential companies that would value the opportunity to partner with Valero. "Their work with jatropha is really what interested us," Day said. "And we were able to work out a really good arrangement."

With headquarters in Perth, Australia, MNE has a 100,000 ton per year (30 MMgy) biodiesel plant operating in Malaysia, and extensive jatropha production in development in India. The company has a second, 250,000 ton per year plant under construction in Malaysia, with KNM Process System SBhd as the turnkey contractor using Axens' second-generation heterogeneous catalyst technology.

MNE is also developing a cellulosic ethanol technology that can be integrated into its planned Indian jatropha biodiesel production units, and which it anticipates introducing internationally, as well.

Under the terms of the supply agreement, MNE will supply Valero with up to 200,000 tons of biodiesel per year. Valero has the right to double that amount to 400,000 tons per year and to extend the term by an additional five years. The agreement represents gross revenue potential to MNE of more than $3.5 billion based on prevailing market prices, maximum volume and contract life.

The first product shipment under the supply agreement is expected to occur during second quarter 2010. Over the course of the contract, MNE will supply Valero with palm biodiesel initially, and ultimately with jatropha biodiesel as its supply chain in India expands jatropha production. "We are delighted to be supplying Valero and look forward to expanding our commercial relationship," said Nathan Mahalingam, MNE managing director. "The increasing demand for biodiesel driven by the renewable fuels standard, coupled with this long-term supply agreement, solidifies the U.S. as a key market for Mission going forward."

James Garton, head of MNE corporate finance, spearheaded the negotiations with Valero. "The cooperative spirit of this supply agreement has been crafted through a year of discussions and detailed testing of Mission-produced palm- and jatropha-based biodiesel in Valero's U.S. laboratories," he said. "Given the nature of the relationship and the potential to work together on a range of commercial matters, Mission welcomes Valero as a long-term customer and prospective investor."
According to the MNE announcement, the terms of the equity deal would provide the company with $36.6 million in Australian dollars ($33.4 million) if fully exercised before Aug. 31, 2010. Valero has the right to purchase up to 25 percent of MNE at Australian $0.45 per common share, representing a 61 percent premium to the current 30 day volume-weighted average price.

Valero will be able to maintain the 25 percent equity stake through a second round of investments with the price set in the agreement at a 20 percent discount to the 20 day volume-weighted average price of the publicly traded MNE. That portion of the agreement expires Sept. 30, 2012. Both transactions with Valero are subject to MNE shareholder approval.
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