Two ASX Stocks to Benefit from Water as the New Oil

In the not too distant past oil was acknowledged to be the threat with the potential for having the greatest negative impact on global economies and populations, but no more. Water scarcity has vaulted to the top of the list, according to the latest Global Risk Report from the World Economic Forum.
New technologies have uncovered new sources of oil and renewable sources of energy as alternatives to fossil fuels are expanding their reach. Water, however, has no replacement on the horizon.
According to the report we already have between four and five billion people with problematic access to clean water. Approximately 70% of the earth’s surface is water, with the vast majority of that salt water or fresh water imprisoned in glaciers. Estimates are that only 1% of the water on the earth is fit for human consumption. Population growth has exploded over the last century while water supply remains constant. The following graph shows the increase in water usage by category during the 20th century.

Global population is projected to increase by 38% by the year 2050, with population doubling in underdeveloped countries. Informed investors are well aware that the long term future for a variety of agriculture stocks is bright indeed. However, the growing need for foods will have to be matched by increases in the available water supply desperately needed for irrigation. The world’s agricultural needs already consume 70% of the world’s water supply, a figure that has doubled in the last 50 years with an expected increase of another 19% to 2050. The following graph paints the picture.

In the mid-1970’s a host of doomsday proponents solemnly announced drastic depletions of the world’s available oil supplies by the turn of the century, and some even sooner. Technology stepped in and dramatically altered that picture. In the 70’s the possibility of drilling for oil a mile beneath the surface of the ocean seemed the stuff of science fiction. Blasting oil out of shale deposits is the latest technological advance to extend the lifeline of the world’s oil reserves.
Technology is poised to tackle the impending water crisis as well through advancements in desalination and wastewater treatment. Transforming the abundant sources of salt water into usable fresh water seems the obvious solution, but the costs of the desalination process can be staggering. There are environmental concerns as well with threats to marine life sucked into desalination plants and disposal issues with the extracted salt residue.
Over the course of the last decade or so the idea of recycling wastewater into usable water has emerged as an additional solution to the water crisis, with fewer negative consequences. A 2009 report from Global Water Intelligence (GWI) – an international water research and publishing firm – suggested investments in water recycling efforts will increase at an annual rate of 19.5% through 2016. The following table tells us the forecasts may have been on the low side and that capex increases may continue.

According to GWI new technologies in wastewater treatment are a key factor driving capex growth. Aussie investors with access to trading foreign markets may want to look at global blue chip companies involved in a variety of water management technologies. At the forefront is France’s Veolia Envirronment SA. Also in the Top Ten water companies around the world are four prominent US companies – General Electric, American Waterworks, and Nalco Company. The newest of the US companies is also the closest thing to a “pure-play” water company – American Waterworks (NYSE:AWK). The company went public in 2008 with a first day closing price of US$20.60. Here is how the stock price has performed since.

The ASX now has three wastewater treatment companies listed, with the latest arriving in December of 2015. Two of the three have existing, proven technologies in place with the third still searching. Here are the three, listed by market cap.

Phoslock Water Systems (PHK) turned in the best year over year share price performance and is the oldest of the three companies, originating in 2005. Algae are a significant problem in lakes and water reservoirs and PHK owns the global rights for Phoslock, a treatment developed by the government agency CSIRO (Commonwealth Scientific and Industrial Research Organization). Phoslock is a clay-like material that binds with phosphates that promote algae growth leaving behind a stable mineral that integrates with natural sediments in the body of water treated.
The company has yet to show a profit but the technology is in use around the world. The share price sat at $0.02 in early September of 2015 and began to rise with the first of several new contract announcements. Here is a one year price movement chart for PHK.

In June of this year the company signed a three year contract with a Chinese water management company NZW (Nanjing Zhongke Water Environment Co) to use Phoslock technology in its water projects. Revenue estimates for the contract range from $15 to $20 million. The contract was a result of a successful pilot project in China.
Phoslock has had two successful capital raises this year to fund expansion in China. The company moved into the US market in 2010. The latest bit of good news for investors is the announcement the Chinese Research Academy of Environmental Sciences (CRAES) has certified Phoslock technology as neither hazardous nor harmful to the environment, alleviating concerns about the potential impact of the mineral sediment remaining after treatment. Phoslock Water Solutions was certified in the US in 2011 as NSF/ANSI (National Science Foundation/ American National Standards Institute) Standard 60 certified for use in drinking water.
Investors were thrilled with the news as the trading volume following the announcement tripled from a three month daily average of 228 thousand shares to 1.36 million. The company’s Full Year 2016 financials showed an 85% increase in revenue and a 2.1 million profit loss which was a 19% improvement over last year’s loss. Phoslock appears to have an arrangement with a privately held US based life-sciences and environmental services company, SePRO. The phosphorus technology is listed as one of SePRO’s product offerings.
The newest addition to the ASX water sector is Israeli based Emefcy Group (EMC). Israel has spawned more than a few “hot” technology stocks and Emefcy may join that group. Its wastewater treatment technology purportedly reduces treatment energy costs by as much as 90%. If realized, that qualifies EMC as a major disruptor of current wastewater treatments. The company founders previously created another water management company, AqWise, a privately held company still operating with headquarters in Israel.
Along with its high profile founders, Emefcy arrived with some big name backers, among them the venture capital operation at General Electric. The company’s initial efforts at wastewater treatment, called SABRE (Spiral Aerobic Biofilm Reactor) has proven its commercial value and Emefcy is already hard at work on a new technology, called EBR (Electrogenic Bio Reactor), expected to be ready by 2018. In the interim the company is ready to release yet another new technology, Membrane Aerated Biofilm Reactor (MABR).
EMC generated its first revenue early in 2016 from a project in Israel. The business model is adoptive of Software as a Service (SAAS) where clients pay a fee for software use rather than purchasing it outright. EMC’s plan has its clients paying usage fees for the water while Emefcy bares the cost of plant construction. The company will also utilize partnership arrangements for funding, with revenues shared with the partner.
In January the company laid out an ambitious set of goals, including near-term projects in North America, the Caribbean, Latin America, Australia, Europe, and Africa; with between $14 and $18 million dollars in contracts already in the product pipeline; as well as long-term expansion into the lucrative Chines market, purportedly valued at $20 billion. By August the company announced its first deal in China, a sales distribution partnership for Emefcy’s MABR based wastewater treatment solutions with Wuxi Municipal Design Institute. Wuxi will absorb the cost of the system.
The China opportunity has investors frothing at the mouth. The latest Chinese Government Five Year Plan calls for the twenty-two million people in the Jiangsu Province to be supported by new rural wastewater treatment plants. Wuxi operates in that province and the revenue to Emefcy from that single province could come to more than $1 billion dollars.
The EMC share price has shot up from an opening day closing price of $0.20 to the current $0.78. Emefcy has an impressive pedigree, not the least of which is its technology has proven successful in demonstration projects in Israel. But as yet there is no evidence the business model nor the developing technologies, nor larger scale projects will become and remain profitable. Some solar providers operating under a similar model where the provider absorbs the cost of the installation are beginning to experience difficulties finding funding partners.
The buzz on Emefcy is uniformly positive. As a reminder of the risks of start-ups, let’s look at a five year price movement chart for the last stock in the table, Water Resources Group (WRG). The company closed its first trading day on the ASX, 10 December of 2010, with a share price of $0.18. Here is what has happened since.

The story of this company is challenging to reconstruct (the current website is under construction) but it appears to be one of a business in search of something to sell. The fall in share price suggests even the punters have abandoned ship. The company’s first technology partner was Blue Aquifer, and its first venture was a water supply contract in the Cape Verde Islands where the contract was simply a letter of intent. That was in August of 2011 and by September the company was announcing a new technology development partner, Campbell Applied Physics Inc., pursuing a technology called Advanced Seawater Reverse Osmosis (ASWRO). The company also announced another letter of intent for work with Blue Aquifer, this time in Brazil.
By the end of the year WRG had secured $2 million in funding from existing shareholder Dilato Holdings Pty Ltd, for the development of ASWRO. 2012 produced a flurry of tantalizing announcements, including another possible project for Cambell Applied Physics to use its technology to assist a rare earth minerals company; a teaser announcement of a possible $25 million dollar purchase of its technology rights from a “major US water management company” which of course remained unnamed due to ongoing negotiations. The year ended with a MOU (memorandum of understanding) with a Saudi Arabian company to use ASWRO in a desalination plant.
The company publicly admitted it had failed to reach its objectives and began reorganizing in 2013. Flash forward to the present and yet another promising technology with a promising technology partner, US based Somnio Global, has been cast adrift in search of something else. As of 16 April of 2016 a new technology to excite investors was revealed – Free Radical Generator (FRG). The Full Year 2016 results included a “Going Concern” statement highlighting three essentials needed to keep the company afloat:
1. Additional funding from Dilato Holdings
2. Additional funding from debt or capital raises (excluding Dilato)
3. The ability of the company to commercialise water treatments and other ozone consuming products to generate sufficient future cash flows to enable its future obligations are met.