Abaxx Technologies DD

Volume 1: LNG and the Abaxx Exchange

Buenos Dias,

This piece here is one I have been mulling over writing. In my mind I didn’t want to look like a fool failing to properly articulate Abaxx’s vision and product offering. Abaxx is a company I have had to study up on many times over and its been a rewarding undertaking. If I get nothing else from Abaxx, it will have taught me about real world market structures, the mining and energy industry, the challenges that lie before us to transition to clean energy, block-chain technology, and more.

This piece should not be read or interpreted as a comprehensive and or exhaustive examination of Abaxx Technologies $ABXX / $ABXXF . I have decided that in presenting my DD for Abaxx, I am going to structure it in volumes. There is a lot going on here with Abaxx to get to it all in one stack and have it flow neatly, at least with me behind the keyboard. My target audience here is someone who has never heard of Abaxx before-pretty much me- back in January. I had no clue about LNG or its markets, no strong understanding of blockchain, and my depth of knowledge on carbon credits was that it was something conservatives ripped on Justin Trudeau for.

I of course welcome my fellow Abaxx shareholders/followers here from twitter who I’ve had the pleasure of engaging with, and learnt from, these past couple months. I’m looking forward to your feedback and talking more about our great company. My aim of this piece is to provide an overview of LNG as a transition fuel to a greener economy, the market for LNG, and the Abaxx Exchange and what it will offer to start.

Before we get going I want to recognize the excellent work on Seeking Alpha from both James Duade and Edward Vranic. I have read their pieces many times over. Should you come out of this stack wanting to read more on the company, both of those gentlemen’s pieces are great places to start. I aim to a make a series of volumes that can help complement the work that is out there on Abaxx and share the story of our great company.

Abaxx is such an interesting company to me because I see it having affect in many different ways. It is a beautiful duo of seasoned vets from their respective industries operating the different dimensions of Abaxx in tandem with powerful disruptive technology. To say Abaxx exists to solve a single problem would be quite an undersell of the company and its people. I think its safe to say that an overarching goal of the company is to be a big part of the world’s transition to using greener energy and helping us meeting our carbon reduction goals through price discovery in open-market platforms. The switch to green energy is not gonna be done in a few short years or even decades, and we aren’t going to go from using all the oil and gas to absolutely no oil and gas like flipping a switch. Tts going to be a massive transition that takes time. One of the 478 reasons why I love Abaxx is that the leadership group recognizes this and has strategically placed itself in a position to capitalize on the transition. That is what Vol 1 of my DD on Abaxx will focus on, our starting place in the transition.

Abaxx is still in its pre-revenue stage of development. As with any pre-revenue company, comes a lot of risk. Probably the biggest one being will the market accept and use your product. That offering for Abaxx to start as mentioned is the Abaxx Exchange (ACX), and its Seaborne LNG contract. Here is a clip from the Final SFP filed to Sedar on May 11 that provides a brief summary of the business model:

The ACX is strategically domiciled in Singapore. There a couple reasons for this. From a geographically perspective, Singapore is located in South East Asia and is an Island country that has one of the largest ports in the world. It is the busiest container transhipment hub in the world. Source: https://www.ship-technology.com/projects/portofsingapore/

This allows Abaxx to offer physical settlement of their contracts they will be offering on the exchange. That contract will be for seaborne Liquified Natural Gas (LNG). There currently is no contract for LNG that is at Sea. LNG is primarily transported by shipping it to its destination. Coming back to physical settlement, Its a key distinction that bears spending some time on.

A financially settled contract for LNG brings speculators and traders to the market, along with suppliers and users of LNG as well. Financially settled contracts offer parties ways to hedge their risk, raise capital at the beginning of projects, alongside other uses. But there is a limitation inherent in the financial contract in that a buyer who is long LNG can not take physical ownership of that LNG. Both upstream producers and downstream users need to move/receive the product at the end of the day; this requires physical settlement (i.e., delivery). When you can offer a marketplace for the trading of the commodity as well as the infrastructure to allow the bearer of a contract to take ownership of said commodity, you can bring in the buyers and sellers and allow them to see their trade through to delivery.

To underlie the significance of offering a physically settled contract, lets look at some of the biggest energy contracts in the world; Oil and Gas contracts:

Brent Crude contract - Seaborne Oil - physically delivered around the world, traded on the Intercontinental exchange(ICE), and owned by ICE, which has a market cap of just over 63 Billion as of May 13th.

WTI- land based oil - physically delivered in Cushing Oklahoma - contract is traded on the NYMEX which is owned by CME Group - which has a market cap of just over 77 Billion as of May 13th.

These contracts allow the bearer of a receipt to take physical control of the commodity at contract expiration. These are the contracts that act as benchmarks for all grades of oil to be traded against. I’m paraphrasing here, but James Duade put in quite well in a conversation online that Commodity exchanges and their contracts end up being a winner take all and all the winners have at least one thing in common: They offer physically settled contracts.

So this positions Abaxx to be the first to the market with a benchmark contract for Seaborne LNG, attaining a first mover advantage + offering physical settlement which has proven to be a defining characteristic of lasting exchanges and their contracts. Josh Crumb stated in the April 6th Investor Presentation that the company values the current LNG trading market they aim to operate in at $500 Million Dollars.

Let’s now look at the question, Why LNG?

LNG is one of if not the cleanest Fossil Fuel, the following are some comparative metrics taken from https://www.elengy.com/en/lng/lng-an-energy-of-the-future.html#:~:text=LNG%20is%20the%20cleanest%20fossil,and%20help%20combat%20global%20warming.

The combustion of natural gas does not emit soot, dust or fumes. It generates 30% less carbon dioxide (CO2) than fuel oil and 45% less than coal, with a twofold reduction in nitrogen oxide (N0x) emissions and almost no environmentally-damaging sulphur dioxide (SO2) emissions.

Natural gas makes it possible to comply with the new environmental standards. Compared with diesel, natural gas fuel represents the following reductions:

• a 25% reduction in carbon dioxide (CO2),

• an 80% reduction in nitrogen oxide (NOx),

• a 97% reduction in carbon monoxide (CO) emissions.

Compared to traditional heavy fuel oils, LNG represents:

• a 25% reduction in carbon dioxide (CO2) emissions.

• a 90% reduction in nitrogen oxide (NOx) emissions,

• a 100% reduction in sulphur (SO2) and fine particle emissions.

By way of comparison, a thermal power plant fuelled by natural gas rather than coal is associated with:

• an 81% reduction in carbon dioxide (CO2),

• an 8% reduction in nitrogen oxide (NOx),

• a 100% reduction in sulphur (SO2) and fine particle emissions.

The lower impact of natural gas on the environment is such that if coal-fired power plants were replaced by thermal power plants fuelled by natural gas, the CO2 emissions of the European energy sector would be cut by 60%, and 20% on a global scale.

In addition to a lower environmental impact, LNG is the primary energy offering the best thermodynamic yields and hence the best energy efficiency. 

LNG as an alternative fuel has robust grid flexibility. This is something Josh Crumb, Founder and CEO of Abaxx Technologies discusses on a MacroVoices Interview with Erik Townsend. What I take grid flexibility to mean is that the foundation and structures needed for LNG use in your city/area are much easier to build and incorporate than say a massive solar panel farm or wind turbines. LNG essentially offers a much lower hurdle to use for countries and businesses alike.

As more and more participants enter the LNG market, there has also been a change in the structure of LNG deals. LNG contracts were heavily weighted to long-term deals that didn’t have a lot of flexibility in their trading. Over the past couple years as many more buyers and sellers have entered the market, spot price transactions have increased. source: https://www.naturalgasintel.com/market-slow-to-embrace-cmes-u-s-lng-futures-contract-one-year-after-launch/

Another advantage of being domiciled in Singapore is that the exchange will be open during Asian trading hours. The world has offloaded a lot of its carbon emissions (heavy industrial production) to China and other countries in southeast Asia. But as these countries transition to cleaner fuel, like LNG, they will want to participate in speculation and hedging of their energy during their trading hours. The ACX being in Singapore allows them to do that. Here’s some data and illustrations to provide some context to my points:

There is an obvious trend here in that Countries in the Asian region are the largest users of LNG. Here are some more snippets from the 2020 World LNG Report, the 2021 World LNG report doesn’t come out until June 3rd. I have pre-registered to have a copy sent to me, naturally.

“Global LNG trade increased further in 2019, reaching 354.73 MT, an increase of 40.93 MT since the end of 2018. This constitutes an increase of 13%, a sixth year of consecutive growth.”

“The largest increases in imports were seen in Europe, with the UK, France, Spain, the Netherlands, Italy and Belgium accounting for most of the additional imports (+32 MT). Asian and Asian Pacific markets that contributed to global trade were China, India and Malaysia. The largest importing regions, consistent with 2018, were Asia Pacific (131.7 MT) and Asia (114.5 MT).”

Website link that can provide the PDF is here: https://www.igu.org/resources/2020-world-lng-report/

Their is data out there that shows a 4% drop in LNG use for 2020 due to Covid-19 from the following piece: https://www.iea.org/reports/gas-2020/2021-2025-rebound-and-beyond

The point of this though is to show that where LNG is being consumed is primarily in Asian countries, some of which (like China) are still using a lot of coal for powering their energy grids, so there is further room for strong growth from these markets. It follows that as Europe leads most of the western world in shifting towards greener energy that some countries are increasing their use as well.

There has been a growing demand in Asian countries to have more energy trading occur in their time zones. On the same MacroVoices interview (link will be at bottom of stack) from this past March, Joe Raia, Chief Commercial Officer for the Abaxx Exchange, states that over the past 3-5 years more and more firms are moving into Singapore from around the world to set up origination trading shops. These firms are putting on trades to hedge their risk during Asian hours rather than waiting for the London and US markets to open. To me there is a clear pattern underway here: growing demand for LNG, growing demand to trade in and manage risk on that energy. An LNG market Domiciled in Singapore is a great place to be to capitalize on these trends.

Key Takeaways:

• Singapore has one of the largest ports in the world.

• In an effort to reduce carbon emissions, LNG is increasingly being utilized by countries and businesses as its a cleaner fuel, and is being adopted as the transition fuel towards the electrification of global economies.

• Asian Countries in an effort to reduce their carbon emissions are increasing their use of LNG to reduce said emissions.

• Strong shift from long-term rigid LNG contracts to spot pricing cash settlement.

• There is no physically settled benchmark contract yet for seaborne LNG

• Trading during Asian hours for energy is increasing, with firms from all over the world setting up shops in Singapore to speculate and hedge their risk.

• Abaxx has domiciled their Exchange in Singapore, a strategic country that offers the ability to capitalize on the above points.

The Abaxx Exchange

Ok, The Exchange here is why I am choosing to do my Abaxx DD in volumes. Because really, the exchange is the launchpad for so much of what Abaxx is going to bring forth after the LNG contract. But we do know that the Exchange will start out using traditional financial instruments (blockchain to come) and we do have a timeline to launch. So again with my target audience being someone who is just learning about Abaxx I am going to provide information in this piece as it relates to the structure of Abaxx and the Exchange’s place in there of. Drawing from the Final Short Form Prospectus, here are some illustrations to understand Abaxx’s breakdown as a business entity:

Abaxx has an 81% controlling interest in the Exchange. Below is a further cut that provides some context to the above entities:

I draw your attention to the bottom two bullet points here. These are the two parts of the exchange that Abaxx is still awaiting full regulatory approval for. The company has submitted dual applications to be a recognized market operator (RMO) Abaxx Exchange Pte. Ltd above, and an approved clearing house (ACH) last bullet point above. Abaxx Singapore also must be approved by the Monetary Authority of Singapore (MAS) to be a holding company, which is a requirement for any holding company of an ACH.

The Abaxx exchange cannot conduct business unless it is an RMO, and the RMO requires an ACH to settle trades. Abaxx has an Approval in Principle for the RMO application, (awarded in Sept 2020).

With respect to the ACH application, there is a variety of capitalization requirements, I’ll focus on the most relevant and material one as I see it. The collateral required to guarantee transaction completions. The amount required is $10 mil in SGD (Singapore currency). At this time of writing, 1 SGD is equivalent to .91CDN. Abaxx recently satisfied this requirement by way of a bought deal public offering that saw the company net just over $20 mil CDN. This bought deal de-risked the clearing house and paves the way for final regulatory approval upon satisfaction of other smaller items the company is near completed.

Once final approval is given for the RMO and ACH licenses, Abaxx Exchange is able to start trading. As mentioned earlier, the company will start by trading its Seaborne LNG futures contract. The company is targeting institutional energy market participants at the onset of the exchange launch. The company sees the market maturing to include commercial energy market participants like producers, consumers, transporters and traders through registered dealers, adding liquidity to the exchange. Below is the timeline to completion for Exchange.

As mentioned we have raised the necessary funds to operate the clearing house. June looks to be a month of significant technical milestones being accomplished,

The back half of the summer brings with it final regulatory approval and the Exchange launch.

It should be noted as well that no blockchain technology will be used at the onset of trading. This is another dimension of Abaxx that will come and is where I believe a lot of investors in Abaxx get really excited about. My goal is to use following volumes to take as deep I dive as I can manage in explaining the proposition for blockchain use in commodity trading and what it is the company is aiming to achieve.

As I wrap things up here I want to provide some off the cuff points and recognize some risks.

Regulatory + Political Risk: Failure to achieve aforementioned milestones and not obtain requisite licenses for exchange. In my studying of Abaxx a point that has been made in different instances is that the Singapore Government is Pro-trade, pro-next generation tech and welcomes the exchange operating in the country. They are forward looking on many items besides energy and technology and many businesses from around the world are setting up their APAC headquarters in the country. This is becoming more salient as Hong Kong loses its independence from China. An article to consider is the following for further reading on the innovation led economy Singapore works to achieve: https://www.businesstimes.com.sg/government-economy/singapore-can-be-asia-hub-for-mncs-as-hk-turns-to-china

Market + Geographical Risk: As it relates to China, this is a risk worth acknowledging and its one I’m cognizant of. I am not a professional and will not opine on the matter cause I don’t believe its responsible for me to do so. One must consider their knowledge on the matter as it relates to energy trading and Singapore’s place in the Global energy market. China has stated a goal for their country is to be carbon neutral by 2060. If one takes them at their word for this they will have to move off a lot of coal use and LNG could become a net benefactor for this alongside other alternative energy sources. How does China behave in those markets? How do countries near China manage that risk? To me it’s a thought worth considering and being aware of. There is also many different forms of alternative energy that may pull market share away from the LNG market at large.

PRE-REV Risk: Abaxx is still in its pre-revenue stages, and it looks like the first quarter of material revenue will be in Q4 of this year when the Exchange is Live. The following Clip from the Final SFP shows how the company makes money from the exchange operating:

James Duade has some amazing breakdowns in his work on SA and Twitter breaking this down further and has forecasted what revenue could look like if Abaxx is able to capture different %s of the $500 million LNG market, as Josh sees it so far, the ACX will operate in. His handle on twitter is @James_Duade and he is definitely worth a follow.

There is still some months to pass before we are generating revenue. Pre-rev’s are subject to pretty intense bouts of volatility So I would suggest if you were to take a position in Abaxx it should be one you build out over the summer as the company starts to accomplish its milestones. Let’s get a chart up here and take a look at what we are working with. I am focusing on the CDN ticker $ABXX

Vwaps anchored from the low closes have been my guide for building my position in Abaxx. I personally have just under 40% of my book invested in Abaxx. I have built my position over the past 4 months with the biggest buys coming in these areas above. I have had the conversation with myself a 100 times over that I’m done and this is it. I didn’t expect to add anymore Abaxx after the buying in Mid-May. But I couldn’t help myself with that slip up last week.

I should note as well that CEO Josh Crumb has been adding in the open market as well, to the tune of over 42,000 shares, and his buys occurred in those last two rectangles as well. From the different interviews I have been able to listen to with Josh, I know him to really value price signals, I personally think he’s sending a big message to the market here, and I am glad to have been buying shares alongside my CEO.

Is Abaxx a screaming buy right now? Its a pre-rev company that makes it hard to justify a share price for on fundamentals. I am buying the vision Josh Crumb and the Abaxx team is selling. And that’s a vision that we will continue to breakdown and consider in the following volumes of Abaxx DD. The Abaxx team is stacked with leaders from the commodity and energy industries that have literally built markets like the NYMEX and Henry Hub Contract. Irrespective of everything else that Abaxx will be bringing to market (which will be a hell of a lot), The Contract for Seaborne LNG that the company aims to serve as a benchmark in the industry is a business endeavor worth undertaking in and of itself.

Link for MacroVoices interview:

I hope you enjoyed this piece. The following are formal disclosures that are important to consider:

I own shares in Abaxx Technologies through the CDN ticker. I am not getting paid for this write up, I am not a professional trader in commodities or of anything in that regard. I also do not have a background in extractive/energy industries and I am building my knowledge of financial markets through different certifications available in Canada but none the less I am not a professional in the Investment and or Financial world. As noted at the beginning of this piece, this is not an exhaustive examination of Abaxx, and thus material company product offerings were not covered, as was my intent in building Volumes of DD on Abaxx. I sourced material and information from the web and provided links where I used said information. This material may not cover all relevant points of the LNG marketspace. The Final Short Form prospectus was also used and I encourage anyone interested in Abaxx to read it before buying.

Thank You for reading Volume 1 of my Abaxx DD. I look forward to further discussion on fintwit.

Cheers,

Luke