eurocontrol technics group · 2015-01-22 · petroleum industry - market potential gfi’s...
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Prepared by:
Danny Deadlock, MicroCap.com
Eurocontrol Technics Group (EUO.V 5 cents) January 22, 2015 __________________________________________________________________________________________
Energy Security Technologies including Authentication, Verification and Certification
www.eurocontrol.ca http://www.gfi-petromark.com/ http://www.xenemetrix.com/ http://xwinsys.com/
http://learnxrf.com/
Shares Outstanding: 89 Million / Market Cap $4.5 Million
Sept 30th: Cash and A/R $3.2 million / Debt $2.2 million
Nine month Revenue: $4.5 million / Gross Profit $2.3 million / Net Loss $80k
12 Month Capital Gain Target of 100% to 350%
Our target is based upon a multiple of two times annual revenue. If Eurocontrol lands one or two more country
contracts (fuel or crude oil authentication) in the next 12 months, it should move their revenue into the range of $10
million or more. Based upon a fair value of $10 to $20 million (1.5 to 2 times annual revenue), this should equate to a
(fair value) share price range of 11 to 22 cents and capital gains in the range of 100% to 350%
If it takes longer to secure contracts, it will take longer for fair value to materialize. If they land contracts quicker (or
larger) than expected, then the capital gain potential increases. Apparently there is growing interest from private equity
in this type of business and internationally there is very limited competition. Eurocontrol’s main competitor is Authentix
who I have commented on below.
A scenario I would like to see is a merger between Eurocontrol and Authentix that creates a single dominant player
within the industry (on a global scale). Private equity could easily finance such a scenario and it would free up the true
value of Eurocontrol.
The low price of crude oil and fuel will benefit Eurocontrol as low prices
allow governments to consider new or increased fuel taxes. This in turn
increases smuggling and fuel adulteration (leading to lost taxation revenue
and rising crime).
Eurocontrol has more in the pipeline outside of crude oil and fuel marking
(GFI Petromark / Global Fluids International) but until their other divisions
generate revenue I am only assigning value to GFI. Their XwinSys division may have something substantial that is close to
commercialization but until we see an announcement on this, it will remain “potential” value.
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A 3 minute VIDEO on this page of their website provides an excellent overview of GFI and its potential
http://www.eurocontrol.ca/subsidiaries.aspx
Risk: Idle Investment at times because the nature of their industry means their Sales Cycle is lengthy (they are always
dealing with politics and the most senior levels of government).
Reward: Contracts when awarded can be large and long term. For a small company this can have a significant impact on
sales, earnings and the share price. This potential also makes it difficult to buy the stock for a good price on material
news.
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The objective of this report is to identify the growth opportunities for Eurocontrol. It is very difficult to determine fair
value on a small company like this because we have no peer comparisons. In identifying the size of the market and the
potential growth, an investor can assign their own valuation based upon personal risk tolerance.
Over the years I have seen many small biotech or technology companies with little to no revenue taken over for several
hundred million dollars because their products or technology were unique and provided long term recurring revenue
growth. In the case of Eurocontrol and the unique nature of their business, we can only speculate on future growth
potential.
Investment Diversification
As the bear market in junior exploration enters its fourth year, the need for diversification on the TSX and TSXV takes on
greater importance.
In theory Eurocontrol provides countries with one of the only concrete “taxation solutions” on oil production or fuel
consumption. Many developed nations like Canada and the United States feel the problem is not bad enough to warrant
a solution but for dozens of other countries where oil theft, smuggling, and fuel adulteration are a huge problem, the
lost taxation revenue to the government (and the people) is a massive problem. A problem that could be resolved by
Eurocontrol – if given the opportunity.
Operating Divisions Overview
Eurocontrol specializes in the acquisition, development and commercialization of innovative energy security,
authentication, verification and certification technologies. The Company has three wholly-owned subsidiaries – Global
Fluids International S.A. (GFI), Xenemetrix Inc. and XwinSys.
1) Global Fluids International is a world leading provider of fully integrated marking, mixing and detection systems for
the oil distribution industry. GFI’s unique and proprietary liquid authentication system, Petromark™, is the direct result
of a joint venture with a world renowned research laboratory. GFI is the sole manufacturer and supplier of the
Petromark™ integral system, and it has been proven to be superior to all other solutions available in the market today.
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2) Xenemetrix is a leading designer, manufacturer, and marketer of energy-dispersive x-ray fluorescence (EDXRF)
systems and components. Located in Israel with a subsidiary in Austin, Texas. EDXRF spectroscopy is one of the simplest,
most accurate and economic analytical methods for the determination of the chemical composition of many types of
materials.
3) XwinSys is currently developing intellectual property that will combine 2D and 3D image processing technology, from
Brossh Inspection Systems Ltd. of Israel, with Eurocontrol’s subsidiary Xenemetrix Ltd’s Energy-Dispersive X-ray
Fluorescence (“EDXRF”) technology. The 2D and 3D imaging will be used for surface scanning of wafers and electronic
boards used in semiconductors, while the EDXRF technology will be used for elemental analysis of the materials that
comprise the wafers and electronic boards.
Petroleum Industry - Market Potential
GFI’s Petromark works in Gasoline, Diesel, Crude Oil, Heavy Black Fuel Oil, Refined Products & Solvents, Lubricants,
and Bio-Fuels
Annual global loss from the illicit trade of petroleum and related products is estimated at more than $100 billion.
Criminals steal crude oil and fuel from trucks, pipelines and ships to fund illegal activities.
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Eurocontrol’s technology acts as a deterrent for smuggling, tax evasion, adulteration and commingling of fuels.
The Petromark technology is covert, ISO 17205 approved (meaning it will hold up in court), and testing is done in the
field with a portable lab / analyzer. In addition, they are the only company with a solution for crude oil. Existing
methods for refined fuel use colored dyes that appear far less effective when compared to Petromark.
Eurocontrol has commercial contracts with three existing countries (Albania, Tanzania, and Uganda). They are in
advanced discussions with other countries and have strategic marketing efforts with dozens of other countries around
the world – including troubled oil giants Nigeria and the Sudan who are ideal candidates for “fingerprinting oil and
fuels”.
The sales process involves very high levels of government and industry - the typical sales and marketing approach does
not work. Eurocontrol will typically partner with a powerful corporation within the region. Someone who has strong
contacts and understands the complex nature of the political system and how it is affected by the petroleum industry.
Logic would say almost every country needs this technology – but we are dealing with governments, big business, and
organized crime. There are no easy decisions when it comes to a business of this nature. Unfortunately it is the people of
developing countries who suffer from the delay or avoidance in implementation (because of lost taxation revenue that
can be put back into infrastructure, health care and education).
Potential GFI Opportunities in 2015 and 2016
Eurocontrol is in discussions (several advanced) with the following countries and/or has submitted tenders for projects
that have been put out for bid. I don’t know the specifics or timing other than Hungary and Mozambique are apparently
well advanced.
Hungary Mozambique Zambia Ghana Nigeria
Morocco Cameroon Indonesia Senegal Philippines
There are 196 countries so the market is very large BUT developing and third world countries need to recognize the
problem and do something to counter the loss in revenue. For many countries, the
dilution, theft and smuggling of petroleum products (both raw and processed) is a
huge contributor (funding source) for organized crime and terrorism.
“Fuel Fraud Costing Europe More Than $4 Billion in Lost Taxes” [Bloomberg Aug 26,
2013]
“The heist underscored growing fuel theft, smuggling and fraud in Europe, where
governments from Poland to the U.K. are losing between 100 million euros and 1.3
billion euros in tax revenue a year.”
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Eurocontrol provides the solution by “Fingerprinting” oil or fuel at the molecular level and providing governments
with a proven solution. The Eurocontrol solution would mark the crude oil or fuel and that would not only allow them to
track where it is going, but it would help ensure criminals are held accountable. It would also serve as a significant
deterrent because right now there is no way to prove where crude oil originated.
Ex: Nigeria Loses Over U.S.$6 Billion Yearly to Crude Oil Theft, Says TUC Boss
http://allafrica.com/stories/201501141325.html
Zambia (Example of Potential & Demand)
https://www.daily-mail.co.zm/?p=16132
January 5, 2015
The Energy Regulation Board (ERB) intends
to introduce fuel marking to control fuel
contamination and dumping of the product
on the local market. Fuel marking involves
the introduction of a bio-chemical invisible
marker into petroleum products while
monitoring fuel marker concentration levels
using appropriate detection equipment.
The plan, which is contained in an ERB
report, will also help reduce the smuggling
of petroleum products into the country.
“ERB will introduce fuel marking in Zambia this year and onwards.
The regulatory body undertook studies of fuel marking and established that it is the most effective intervention to
control, minimise and eliminate fuel adulteration and dumping. “Adulteration compromises the quality of petroleum
products resulting in damage to vehicle engines, leading ultimately, to increase in the maintenance costs, and negative
environmental and health impacts from adulterated fuel fumes,” the ERB says in the report.
The measures will help ERB to maintain a level playing field in the downstream operations by eliminating perceived
benefits associated with unfair practices in the petroleum industry. The report notes that monitoring of fuel marker
concentration will be conducted at various points in the supply chain at pre-determined frequencies to rule out
malpractices. It notes that the fuel marker will help regulate the contamination of petrol or diesel with lower kerosene by
individuals.
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Other Countries
BRAZIL - 35% of the fuel alcohol market in the country is clandestine. The government estimates losses near $600
million. The “Fuel Mafia” embezzles, corrupts and issues death threats
INDIA - Fuel adulteration mafia has very high connections in government. Detection methods and standards are so weak
that little is being done or can be done until they change the system of tracking
MEXICO - At least one quarter of the gasoline and diesel sold in the country is mixed with chemical solvents resulting in
an estimated decrease of 23.2% in fuel sales (and taxes). The existence of a mafia dedicated to the theft of fuels, where
Pemex employees participated, has been discovered
COLOMBIA – an estimated 300,000 gallons of gasoline are stolen daily.
ISRAEL - Large fuel companies have big problems at gas stations where cheap kerosene is mixed with gasoline and diesel
ECUADOR – Fuel theft is estimated to cost the government almost $1 Billion annually.
PETROMARK TECHNOLOGY
Petromark™ is based on very safe X-ray fluorescence (XRF) analytical technology which uses the interaction of x-rays
with a target compound molecule to identify its exact composition and quantity. This non-destructive/ intrusive method
achieves unparalleled accurate results, quickly, and inexpensively.
The Marker has the following advantages:
It is embedded at the molecular level
and is invisible and impossible to
imitate, remove and/or alter.
It is an all-purpose marker.
Petromark™ marks and traces
gasoline, diesel fuel, crude and heavy
black fuel oil, refining
derivatives/solvents, lubricants and
bio-fuels.
It complies with engine’ emission
and environmental regulations and
was proven as “non-damaging” to
engines, mufflers and catalytic
converter systems.
It does not alter the characteristics
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of the marked fuel or other additives/markers that are present in the fuel and does not affect the performance
of the vehicles.
It is extremely stable in the fuel for extended durations, is resistant to light, heat and extreme weather
conditions.
It is ISO accredited and certified
Data Control
The system is remarkably fraud’ immune and the incriminating information can be directly transmitted in real
time.
Test results are displayed as PASS / FAIL and display the adulteration percentage and current marker
concentration in PPM.
The Mobile Analysis Units (MAUs) continuously transmits data (including GPS location) to a central
monitoring/control system:
Detection and analysis is conducted immediately on-site and transmitted in real-time for inspection and review
at the Control Center.
Authentix
http://www.authentix.com/industries/oil-gas/
Authentix would be Eurocontrol’s main competitor and CEO Bruce Rowland will waste no time explaining Eurocontrol’s
advantages over Authentix. I would expect nothing less from the CEO but when you listen to him he builds a strong case.
Authentix has fuel marking contracts in 15
countries and a lot of that may have to do
with their financial backers. In April 2008
they were taken over ($100 million +) by
The Carlyle Group, J.H. Whitney, and The
Manti Group. The group paid about two
times 2008 revenue. The Carlyle Group is a
very powerful global asset management
firm specializing in private equity with an
estimated $200 Billion under management.
While Carlyle Group gives Authentix extra
“clout”, there may be a growing list of
countries who would prefer not to work
with them for political reasons – the
company is based in Washington with very
close ties to the George Bush family and
the Republican Party.
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I am not yet sure how this will affect Authentix but as you can see from the table above, they have several very
important patents expiring in 2015. This may open some doors for Eurocontrol.
CONCLUSION
Eurocontrol will likely be a difficult stock to buy “on news” because typically the contracts are large, valid for years, and
can change the revenue model or valuation overnight. Our approach will be to give the company a twelve month
window and then re-assess as the business (hopefully) produces decent top line revenue growth.
The Eurocontrol CEO
is doing an excellent
job controlling costs
and budgeting so if
they are awarded any
larger contracts in
2015 and 2016, I feel
very confident he will
do a good job growing
their earnings (EPS)
and cash-flow.
The share price has
languished for the
past several years as it
has taken significant
time to establish markets and prove their technology.
Also what held them back was the involvement of an investment group from Toronto who they finally separated from in
2013 or early 2014. I will not mention any names but they were well known for paying themselves grossly excessive
management fees and they had a terrible street reputation. That “separation” was the best thing that happened to
Eurocontrol and CEO Bruce Rowlands (CEO).
Fuel theft is creating shortages across many developing countries and as
this article shows from January 15th, tanker piracy (crude oil and refined
fuel) is on the rise across Asia – not just Africa.
http://shipandbunker.com/news/world/801124-intertanko-rise-in-asian-
piracy-is-significant-and-worrying
These problems are nothing new but they are getting far worse as
terrorism grows, organized crime expands, and economies struggle –
citizens look for ways to avoid paying taxes and governments look for ways to tax more. Governments have a clear
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solution in Eurocontrol products and services but anything that involves government and politicians takes more time
than anyone ever expects.
It would make sense for Authentix to spend $20 million or more (20 cents per share) to acquire Eurocontrol and
consolidate the industry. This strategy secures new technology and removes competition allowing them to pick up new
revenue and markets. There is such limited competition in this industry but it is potentially a very large market. If they
wanted to sell Authentix, it also would make it easier to sell if Eurocontrol was out of the market.
Maybe if EUO can pick up another two or three countries they would be deemed as a serious threat – but then the
valuation should be more than $20M
As an investment EUO requires a lot of patience and at times tolerance for price volatility. But if they can start getting
more traction in 2015 and 2016, the capital gain potential from this level is very substantial - and we shouldn’t have to
assume a ridiculous amount of risk in the process (or so I am hoping).
Investment in Research & Development
The CEO would like to be in a position where they can invest more $ in research and development. The company has
several very promising new technologies that they would like to advance (plus they have access to new technology that
is complimentary but still provides diversification). In their efforts to control costs, they have deferred this R&D until
they secure new country contracts.
I would also like to see their share price higher so that they had the option to finance in stages (at more respectable
prices) and earmark a good portion of those funds to R&D. If you review the websites of Eurocontrol divisions (shown at
the beginning of this report), you will see where many future opportunities exist for growth and diversification through
new technologies.
I will follow Eurocontrol's corporate developments closely over this next year and report anything relevant within the
industry that could have a (material) impact on their growth.
CONTACT INFORMATION
Bruce Rowlands, CEO
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Report Produced By:
Danny Deadlock: Publisher & Equity Analyst, MicroCap.com
ca.linkedin.com/in/dannydeadlock
Dated: January 22, 2015
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MISC MEDIA on Fuel and Crude Theft
http://www.kvue.com/story/news/world/stratfor/2014/12/09/amid-mexicos-energy-reform-fuel-theft-poses-
risks/20133937/
"As opposed to the smaller actors previously involved, crime groups have the capacity to organize hydrocarbon theft on
a massive scale across multiple regions with a high level of efficiency."
http://www.proactiveinvestors.co.uk/companies/news/73293/eurocontrols-anti-fuel-adulteration-system-directly-
linked-to-big-increases-in-govt-revenue-73293.html
"Eurocontrol's anti-fuel adulteration system directly linked to big increases in govt revenue" [Oct 2014]
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http://www.busiweek.com/index1.php?Ctp=2&pI=2014&pLv=3&srI=53&spI=20&cI=11
East African Business Week (Eurocontrol Success in Tanzania)
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events that are not within the control of Danny Deadlock, MicroCap.com, or Eurocontrol and there is no assurance they will prove to be correct. Several
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