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Interview with Phoslock Environmental Technologies (ASX:PET)

December 12, 2022

PET, Phoslock

Interview with Phoslock Environmental Technologies

We spoke with CEO Lachlan McKinnon about the recent recapitalisation and restructure at Phoslock Environmental Technologies (ASX:PET), the world-beating nature of its phosphate removal product and the new opportunities the company is pursuing in North America and Europe.

See transcription below.

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Stuart: Hello, and welcome to “Stocks Down Under.” My name is Stuart Roberts, and I’m one of the founders of our publication. And joining me from Melbourne on Thursday the 8th of December 2022 is Mr. Lachlan McKinnon, who’s the new CEO at Phoslock Environmental Technologies. Lachlan, good afternoon.

Lachlan: Good afternoon, Stuart. Nice to be with you.

Stuart: It’s been an interesting time for Phoslock. The company’s stock spent a bit of time in suspension while various accounting issues work through, and you had to raise a bit of capital to go forward. But effectively, Phoslock 2.0 as a company is now off and running.

Lachlan: Yes. It’s been a very interesting few years as you’ve identified, Stuart. So, I started in 2020, and later that year in April, we did a capital raise. And then in September-ish, we actually suspended the stock, as you alluded to, based on some irregularities we were seeing in the accounts in China, which, unfortunately, led to a full-blown investigation and some fairly disquieting restatement of the accounts and other issues which we’ve talked about a lot.

Thankfully, we relisted back in September of this year, so nearly two years later, which has been a difficult time for shareholders, as you can imagine, with a much different and broader strategy than we had, a much more wider geographic focus than perhaps we had because at the time that I joined the company, nearly 85% of the business was coming out of China. And that’s okay if everything is okay. But as we found out, it wasn’t okay because China wasn’t, so…or our business in China wasn’t. So, we broadened the geographic strategy.

We’ve added another product to the portfolio, to Phoslock itself. So, another product called Phosflow. And we’ve set up what I would call a two-tiered approach to distribution or to the sales strategy. And one is the direct to lakes, which was largely what the company was doing before. But the second part of the strategy is, if you like, more repeatable business through utilities, through sometimes private waterways rather than municipal, and through distributors through various countries around the world.

So, that’s been a very important strategic change for the business. Obviously, taking some time to embed and to grow and to set the platform, but that distribution part of the business will ultimately set a strong foundation that the business can operate, and then can hopefully attract those large lake projects that can be a little bit hit and missed to be quite frank. There’s a lot on the books, but not all of them get done in the timeframes that we expect. So, that’s what the strategy has been focused on.

Stuart: What hasn’t changed is the quality of the product. Talk to anyone involved in the water remediation game. Phoslock is one of the best ways to pull phosphates out of waterways. Describe to us, if you will, what the technology you’ve been working with and why it’s better than anything else that’s out there.

Lachlan: Yeah, it’s a really good question. It was developed some 20 years ago and it’s quite remarkable that there’s really been no direct competitor of any sort of comparison that’s come forward in those 20 years. And it was developed by CSIRO here in Australia as you know or as some of your listeners may know. And perhaps the uniqueness of the product is the ability to bind phosphate forever and permanently or phosphorus forever and permanently in a really environmentally-safe profile.

And that’s probably the difference that we can do that throughout both the water column and the lake sediment base itself if it’s a lake. And we can do that in, as I say, in that environmentally-friendly way. And that’s probably the uniqueness and the real trick to the product. The product itself is bentonite clay with a lanthanum product or compound on top of it or element on top of it. And the lanthanum is the product that actually binds the phosphorus.

Stuart: And you’ve got the intellectual property initially created by the CSIRO is now owned by Phoslock.

Lachlan: That’s correct. Yeah. And where we can, we’ve patented the technology and we have patents granted in certain countries and patents pending in others. And obviously, that’s a nice caveat. Oh, no, you know, a nice backstop to have if you like. But it’s the uniqueness of the product and the way the products come together that’s actually put us in such, you know, a great position. I will just comment, talking products, Stuart, that we added. So, Phoslock works best in still water. So in still lakes, reservoirs, whatever.

We recognized fairly early on that if we could treat the flowing water, the inflow into the lakes, which is often where the nutrient pollution will be coming from, then you’re likely to have a complete phosphorus treatment. And so, the addition of Phosflow, which is a pellet and it goes into, let’s say a medium like a sock or a boom, or a giant teabag if you wanna call it that, it’s put into the inflows, it captures the phosphorus on the way in, and then that pellet with the phosphorus absorbed onto it is removed and actually can be used as a slow-release fertilizer. But the key point is is you’re getting a total water remediation position which is both flowing in still water.

Stuart: Right. And I mean, this is an important global problem. Get phosphorus in waterways whether it’s still or flowing, it becomes useless, for instance, for production of potable water, for example. Not to mention, its agricultural use has become complicated and, you know, don’t get people started on what it does to the wildlife in the waterways.

Lachlan: Correct. I mean, and if you’ve seen the eutrophic lake, or heavily polluted is the layman’s term for eutrophic conditions, you’ll know that they can be basically unusable, undrinkable, unusable for pets, swimming, recreational use, fish issues, you name it. So, you know, and phosphorus is one of the largest contributors to that eutrophication issue that we have and it’s growing. As the world warms up, these problems get worse.

And I guess for us, the addressable market is huge. I mean, we kind of say, flippantly, we don’t how to quantify it because it’s that big. But, you know, you’ve gotta have the money to pay for it, you’ve gotta have various other opportunities, you know, come together to make it a saleable product for us. But it’s a significant and growing issue. And nitrogen is the other big pollutant, of course, in waterways. But you can see it. Yeah.

Stuart: What impresses me is you’ve proved the product works in China. Middle East had difficulties getting paid and properly accounting for what you did there, but you’ve now got a use case that this is a cost-effective product. The trouble with a market this big is choosing where to start. Now, in a previous conversation you and I had, you talked about putting some boots on the ground in key markets, particularly in North America. How’s it been going?

Lachlan: Yeah, good. And that was part of what I alluded to at the very start. You know, we wanted to make sure we were focused because you’re absolutely right. You can actually have a scattergun approach. You can see the market as one big global, you know, opportunity and end up not really focusing in and getting the best sort of bang for your buck. So, we’ve identified North America, Europe…in North America, and Europe, in particular, as the key target areas for us.

We’ve built a team in the U.S. of three at the moment. Now, you know, pending sales and pending opportunities, we might be able to grow that, but that’s three from zero. So, you know, that’s quite a significant growth and quite a significant, you know, resource base now for us. And we’re starting to see real opportunities. We’ve engaged and written a number of contracts with distribution, who will take the product to their customers.

And, of course, we’re engaging with, you know, many lakes and municipalities directly. So, that’s been really good. Similarly, in Europe, we have a team of three looking to expand that. There’s been a lot of work done. You know, I think over the journey, we’ve done over 320 applications all been really successful. So, you know, we’re very proud to say when we do do the work, it works really well, and the customers are unanimously very happy with the results they get.

Stuart: Right. Now, for investors who don’t know you, you’ve been around the agricultural scene for a long time. Tell us about your background and some of the adventures you had before you arrived at this company.

Lachlan: Adventures is a good word. Agriculturally based, I trained in Ag science way back when we didn’t have computers even, I think. And then had a long career with New Farm, who many of your listeners may know as an agricultural company based here in Melbourne. I had best part of 16 years running the business here in Australia and New Zealand. I spent time in the [inaudible 00:09:45].

Stuart: Which was the growth engine for a global opportunity. So, a lot of shareholder value rested on your shoulders, basically.

Lachlan: Yeah. I mean, it was a great time too. We were really in a very, you know, growth-focused mindset. The CEO at the time and the current CEO are very growth-focused. And so it was a good time to…yeah, there was responsibility, but it was a good time to be part of that business for sure. It was agriculture, so that was my space. And, you know, there’s a real connection, obviously, to agriculture and what we do here at PET now, as I’m sure your listeners will understand. But, yeah, so then I spent some time in the UK.

About four years running the European businesses over there and then some time in Canada, working in both Canada and the U.S. So, I had, I guess, quite a bit of international experience over that journey, which is partly why the then board of PET, I think, wanted me to come and have a try and grow this business here for them with some of those skill sets. So, that’s…yeah, that’s me. Still live in the country, still agriculturally focused, but obviously, work pretty full-time now on this job.

Stuart: Perfect. To close things off, I’m interested very much in the U.S. opportunity. Americans had…the Clean Water Act has been on the book since, at the federal level, I’m guessing since the mid-1970s. So, there are some serious mandates at all levels of government to clean up waterways. With these folks on the ground, obviously, there’s plenty of doors they can knock on. Are there particular regions you wanna get focused on, or municipalities, or whatever?

Lachlan: Yeah, you know, a very good question. Yeah. So, again, as I said in the globe, you can focus on too much if you like, or try to focus on too much and you don’t actually get anything achieved. So, similarly, in the U.S., it’s a very, very big market. As you know or most of, you know, your listeners will know, there’s multiple states with multiple different levels of government and management and systems and processes. So, it can be quite complex to get through all of that. There are mandates and there are mandates on phosphorus levels.

Sometimes they’re not actually rigorously adhered to or applied, or penalties aren’t applied. That’s almost a bit of an aside issue, but that’s important to us. There are mandates in Europe too. European directives around phosphate levels in water that lakes must be under. They need to be enforced, of course, to make them work. But back to your question, the U.S. states or regions of most interest, and our focus at this point, Florida. Naturally, Florida is a huge opportunity for water and water remediation, and the sort of what we call the Great Lakes region, which is if you like…

Stuart: Minnesota, Illinois, those places.

Lachlan: Minnesota, Wisconsin, Illinois, those kind of states also are very proactive in the water remediation work. And clearly, that’s where we wanna focus, where those states and regions are most interested in doing something about it. Now, that’s not to say that others won’t, and there aren’t other opportunities. We’ve done work in California, New York, New Jersey, Washington, Oregon. So, there’s lots, you know, Colorado, lots of opportunity, but that’s sort of the key focus for us.

Stuart: All right. And as you’ve been speaking, I’ve been looking at the photograph behind you. It’s got a barge on a waterway that looks a bit green. Now, that says to me, this is a pretty easy product to deploy. It’s not like you sort of have to blanket the lake with Phoslock from one end to the other, you had some sort of barge going back and forth. Are there hassles in terms of deploying it or is it straightforward as I understand it?

Lachlan: Not really. It’s pretty straightforward. I mean, that barge, you’re absolutely right. So, that’s treating a lake, I think from memory, it might have been in Canada some time ago. But Phoslock is a granule or a dry product if you wanna call it that. You mix it into a slurry on the barge and you apply it as a slurry to the waterway. It’s not hard to do. We typically would help any application or any customer with that application, be it directly or through various, you know, contractors that do the work for us. GPS map where you’ve been and make sure you get an even spread across the area you’re meant to with the right amount going on, no problem.

Stuart: Right. Well, Lachlan McKinnon, I’m excited for your progress, and we look forward to hearing the first of the big contracts from the U.S. market. Good luck in terms of the rebuild at Phoslock.

Lachlan: Thank you very much, Stuart. Nice to talk to you.

Stuart: Thank you.