Phoslock shrugs off COVID-19 impact with strong performance in China

Phoslock Environmental Technologies ASX PET Changxing Facility engineering solutions water treatment China
Phoslock’s balance sheet was strengthened by three capital raisings in April totalling $20 million.

In its quarterly update, Phoslock Environmental Technologies (ASX: PET) announced it had achieved a resilient performance in China while admitting the ongoing COVID-19 pandemic has affected the commencement date of most of its projects in Europe, the UK, Canada and the US.

The water remediation company said its Chinese projects and factory production in Asia were “largely unaffected” and that revenue guidance for the current year was unchanged.

All three of Phoslock’s major projects are based in Yunnan province, in south-western China, an area essentially unaffected by COVID-19.

Three capital raisings in April have also helped Phoslock maintain a “significantly strengthened” balance sheet, bolstered by around $20 million in new funding – including over $3 million invested by the company’s management.

Chinese success

In terms of new business, Phoslock announced that the contract value of its Shilongba restoration project near Kunming, Yunnan province, had increased to $25 million, with $20 million to be completed in the current financial year.

“This project will include significant quantities of Phoslock, as well as installation of a water treatment technology, building of wetlands, and engineering technology,” the company said.

Furthermore, upon project completion, Phoslock will retain a five-year maintenance contract with a value of around $5 million per year.

At its other Chinese project, Xingyun Lake, Phoslock reported that results from the 2019 application of some 3,000 tonnes of Phoslock had “met or exceeded all criteria” with a further 4,000t application of Phoslock to Xingyun Lake now planned over several campaigns later this year.

In January, Phoslock signed a long-term lease for a second manufacturing facility in Changxing. The planned new facility is expected to be triple the size of the existing factory, capable of creating a new production line of 20,000t per year, thereby doubling current production capacity.

“It is expected that the new production line will be completed by Q4 2020. Although a slight delay to initial plans, we anticipate no impact on implementation of any current projects,” the company said.

In addition to its current projects, Phoslock also revealed a significant in-lake trial at Lake Dianchi was currently being “finalised”.

Dianchi is China’s eighth-largest freshwater lake with a total size of over 300 square kilometres, around six times larger than Sydney Harbour.

Meanwhile, the company’s factory in Changxing returned to full capacity in March after re-opening in February following New Year celebrations.

Average production at the factory is 50t of product per day with no shortages of raw materials being reported. A record daily production of 60t was achieved in early April with Phoslock declaring that large volumes of product will be required from May onwards for both the Xingyun and Shilongba projects in Yunnan province.

While projects and revenues have remained resilient in China, projects elsewhere have been left delayed. The water remediation company said it has achieved significant sales in Brazil since 2017 with several projects set to be undertaken this quarter including a large inner-city lake for drinking water in Rio de Janeiro.

However, the COVID-19 pandemic has left its Brazilian operations being re-scheduled to May at the earliest.

In total, Phoslock estimates that its current project pipeline is currently valued at $380 million, comprising of $250 million in China and a total of $130 million of new international projects.

Altogether, the company estimates that until 2023 it will have six Chinese projects and over 40 international projects on its hands.

Financial metrics

In terms of financial metrics, Phoslock reported that receipts from customers and government grants totalled $2.8 million in Q1 this year.

Operating costs were $3.7 million, compared to $2.3 million in Q4 2019. During the current quarter, Phoslock said it had incurred a total of $600,000 in leasing costs for the new Changxing factory plus the annual rent of the existing factory, which were both paid in advance.

Other increases were higher employee costs, one-off administration as well as corporate costs. Manufacturing costs, including raw material procurement, were $5.3 million for the quarter, a significant increase from $3.7 million in Q4 2019.

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