Synthesis Energy Systems Inc (NASDAQ:SYMX) announced an agreement with Xuecheng Energy to restructure the ZZ joint venture to produce syngas as a replacement for natural gas at an industrial park in Zao Zhuang City. The agreement accelerates the monetization of the asset and creates additional opportunities. We reiterate our Buy rating.
Summary of the agreement to restructure the ZZ joint venture:
- The ZZ facility has successfully demonstrated the ability to convert low-quality, low-cost coal to syngas, on a commercial scale, for the production of methanol.
- SES’s interest in the joint venture will be reduced to about 9%.
- Xuecheng Energy (XE) is to assume project debt and operational responsibility.
- Syngas produced at the ZZ facility will be used to form other products.
- SES is evaluating partnering with XE on additional gasification facilities.
In our opinion, it appears that the restructure should be the shortest path to resume operations and potentially monetize its investment in the ZZ project. We suspect that this agreement will increase the net value of the ZZ project to SES, eliminate debt reported on SES’s balance sheet and potentially lead to other opportunities with XE to provide additional gasifiers at XE’s new industrial facility in the Zouwu Industrial Park.
Most importantly, having proved the efficiency of its gasifiers on a commercial scale, the restructure is consistent with SES’s strategy to leverage its technology into additional opportunities without the burden of operational risk, or being dependent on commodity prices or markets for any one particular end-product. We maintain our Buy rating and price target of $2.70 per share.