Ethanol Mega Project Peru July2008 | Sugarcane | Reservoir

General Memorandum of Information

ETHANOL MEGA-PROJECT IN PERU July 2008
(Adjusted will the latest cost increases)

General Memorandum of Information
ETHANOL MEGA-PROJECT IN PERU

PRM Group Peru, submits the present Memorandum to orientate possible sustainable actions of Investors in our country, regarding its Ethanol potentiality Framework and Scenario: Peru conforms with Brazil –Ecuador, Colombia and Venezuela- the Lung of the Planet hosting one of the biggest biodiversity in the world.

As of now and for long period, the Peru-Brazil Axe is one of the most prospective economic development axe in the world that has to be developed based on private efforts conveniently associated to complete the axe in the Pacific Ocean toward Asia. Regarding Peru, it is a high agricultural and forestry potential development country due to three natural factors: Climate, Soil and Water. In the world there are 103 microclimates which host all the forms of life on the planet; 60 of them have aptitude for agriculture. Peru has 55 out of these 60 microclimates (91.7%), which mean that Peru not only can satisfy the local demand, but also is able to compete in the international markets throughout the year.
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Localization of Microclimates Worldwide Peru % of World Microclimates

Number of microclimates as per aptitude Agriculture 60 55 91.7% Cattle 20 16 80.0% Forestry 16 10 62.5% Non productive 07 03 42.9% Total 103 84 81.6%

Are there enough land and water? Peru has a total land area of 12,852.16 million of hectares: of which 5.92% (7.61 million) have agriculture, 13.96% cattle and 37.89% forestry aptitude. Regarding water: 37% of the water running to the Pacific Ocean, 0.11% of the water running to Atlantic Ocean, and 0.92% of the water running to the Titicaca Lake is utilized in Agriculture, totaling 0.72% of 2,043.6 million m3 of water flow at national level. In the other hand, Peru is entering a new stage in its economy, favored by its stable economy, a satisfactory perception of country risk and the governments’ clearly defined economic policies. The following map shows the areas of Agrarian production in Peru:

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PRODUCTIVE USE OF PERUVIAN COAST DESERTIC AREAS

I - INTRODUCTION Making a journey for the Pan-American Highway from Lima to the frontiers with Ecuador and Chile, we can appreciate a diversity of valleys along the coast, with their respective rivers. Many of these rivers only load water in abundance during the avenues period from the sources coming from the Andes. Most of these rivers only drain abundant water in the avenue period along 2 to 3 months yearly and some present risk of disasters in the valleys and in the cities; although the river levels are lower that the one of valley fence. This way a huge quantity of hydrological resource gets lost in the Ocean Pacific, favored by the topographical slope. It is not possible to take advantage of the water in the higher part of the basins, due to the lack of an irrigation substructure that may allows to irrigate the plains located in one level up of the valleys, in which big extensions exist, being areas with rich soil and excellent climates that, for lack of water they plows arid propitiating big desert extensions. A minority of the 53 rivers of the Peruvian coast count with dam built at very high costs, with marked limitations and executed through the development of very long maturation projects. It is important to remark that the hydrologic resource is wasted from most of the rivers that drain its waters in the avenues period, for not having the mentioned substructure, due to the high cost that represents the investment in building through the traditional dam model.

II - OBJETIVE OF THE INITIATIVE The objective of this initiative is to design and build “channels for water reception” in the higher part of the river basins in order to take advantage of the avenues period and to drive water trough the mentioned channels toward diverse reservoirs -type artificial lagoons- to be built in the heads of the high terraces. This way the water reserve could be used throughout the whole year. These reservoirs will allow the humidification of the terraces sub floor, by means of natural filtration and according to the slope of the floor topography. For this reason, the terraces will be permanently humidified and in consequence, the phreatic napa of the sub floor will be able to stay at to higher level, favoring the cultivations. The construction system to be projected in this initiative will have to be designed based on the land topography, according to the inclination of the terraces.

III - METHOD OF CONSTRUCTION This type of work to be economic and of quick execution, requires the use of Big Construction Equipment (hydraulic diggers of great capacity: 300 to 500 TM), to carry out big earth movements in the stage of the excavation, for the construction of the reception channels, dikes and the respective reservoirs (type artificial lagoon) allowing lower construction costs and to carry on the works in relatively short periods of time.

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Civil works will include the construction of the Contention Barriers that should be castled and built in the higher part of the river bed at water reception point in order to allows to dam the water so that it enters for the intake and to maintain a permanent spillway in the shortage of water periods, staying the river normal bed. Because the avenues period is relatively short, the system will take advantage of the maximum reception of water to fully fill reservoirs of great capacity. Watering channels of smaller section will be built from reservoirs, to distribute water down to the terraces, where the cultivations projects will be executed. To make a better use of the water, technical irrigation –dripping or spilling- systems will be used.

Reservoires
River Current Crops Fields Pacific Ocean

Desertic Terraces for new Crops

City

Comparative advantage of the Peruvian northern coast: The climate of Peru is very stable, since Peru is a tropical country. The unique characteristic of the Peruvian whether is due to the influence of the Peruvian or Humboldt current that runs all along the coast of Peru up to Tumbes were this stream turns to the west. In the Piura parallel the Andean chain has its lowest altitude which originates a unique climate condition in the whole World. This cold stream, creates a natural greenhouse effect on the Peruvian coast. There is no rain, the temperature is steady throughout the year, and it has 53 rivers that run from the highlands to the Pacific Ocean, irrigating the coast. These conditions will allow us to sow all the 365 days of the year and will enable us to irrigate whenever we want. We will be in control of the crop production, not like other countries that the nature is in control of the crop production.

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IV – AGRONOMIC PROJECTS A study should be developed to classify the levels of the floor tabard coats and the soil quality to carry out traditional cultivations, as well as the cultivation of Biomass for the production of Ethanol. The lands for traditional agriculture should be reserved to Peruvian Farmers and the Biomass for Ethanol production oriented to export mainly to Asian countries through appropriated distribution channels, both under the same management system in a way to integrate the operation and mitigate any social risk. There will also be considered areas to develop forestry projects with precocious species, also integrated to the same system. Depending on the Project span, the areas of cultivation in the coast valleys will notably be increased, since the extensions of the terraces plows bigger than those of current operations in the valleys. In consequence with the extension of this initiative, the areas that are crossed by the Pan-American Highway will become a great extension of permanent green areas (that may apply to “Certificate of Emission Reduction CO2” to complement financing scheme), improving totally this way the national and regional ecology and becoming a very important productive employment source. In this way the proposed initiative will be of great social impact, when improving the farmers’ quality of life as well as of the neighboring, along with the ecological impact due to the notably and magnificent increase of green areas with sustainable, renewable and permanent cultivations. As a consequence the initiative will bring a great economic benefit to our country, since the cultivation of the biomass will allow the development of the agro-industry for the production and export of ethanol and other products, to the US and other countries worldwide markets, besides the excellent facilities of roads and shipment ports.

V - QUANTIFICATION OF THE INITIATIVE The water main substructure depends of the valley characteristics and would need an investment of some $80 to $100 million including machinery for some $40 to $60 million; machinery will be reused in other similar projects. Let take as standard a 40,000 hectares module with an estimation of $240 to $280 million investment in development of the agrarian substructure -with dripping systems- and cultivations. Additionally is the investment for acquisition and installation of the Ethanol Plant with top technology. The value of an installed hectare with irrigation substructure with the whole year water inflow will worth (capitalization) average $15,000; then the land value will rise to $600 million in the second year after the installation. So only the Fixed Assets added value will justify the investment. Besides there will be the revenues from the fuel operation and from the agricultural and forestry operations, that will guarantee the cash flow of each project. It is important to mention that along with the Ethanol production -with the residual of the processed biomass of 40,000 Ha- energy in the level of 130 to 150 Mw may be generated.

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The Ethanol Impact in the Peruvian Economy:

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ETHANOL COMPETITIVINESS IN THE PERUVIAN COAST Due to the comparatives advantages of the Peruvian Northern Coast a low cost to produce Ethanol is prospected. Any Peruvian Project will be able to enter the world market with the highest level of competitiveness. Even the southern coast down to Ica and the north of Arequipa will be competitive. The following figures have been worked-out with Brazilian experts that visited the northern coast areas (ref.: COMISA project 2003):
CONCEPT LABOR MACHINERY SUPPLIES OTHERS TOTAL PRODUCTION MT/Ha MT COST IN THE FIELD $ NATIONAL 196.25 143.35 575.88 483.15 1,398.63 140 9.99 BRAZIL (*) 133.52 204.24 470.42 41.57 849.75 84.5 10.06 COMISA 77.91 197.87 943.18 68.83 1,287.80 180 7.15

(*) Brazil has a cut period of 7 months vs 12 months in Peru.

As it can be noticed a Peruvian Project may show higher cost on the Supplies concept due to the permanent “ferti-irrigation” that should be foreseen. This technology even though requires greater investment it will end up with the lowest cost. Regarding the costs of Ethanol per liter, and taking the same level of industrial investment than that of Brazil, Peruvian costs are as follow:

COSTS INDUSTRIAL SUGAR CANE CROP AND TRANSPORT Depreciation A&G Financial Cost TOTAL $

Ltr

0.030 0.050 0.030 0.060 0.007 0.033 0.210

Contemplates the latest increment on investment costs

Some other sources - Cost Level for Ethanol: - Brazil: $0.25 / ltr (sugar cane) - USA - Canada: $0.35 - $0.39 / ltr (corn) - China $0.35 - $0.39 / ltr (corn) - EU >$0.50 / ltr (corn)

The Peruvian figures are based on an average productivity of 170 MT/Ha when as it may be observed nowadays, yields averaging 200 MT/Ha are being obtained, So, one may conclude that a reasonable cost per liter of Ethanol in Peru may be $0.15.

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PERU: THE MOST COMPETITIVE WORLDWIDE

Péru from Sugar Cane Eu 0.115 US$0.15

Level of economical viability: Brazil .- US$35 the barrel of petroleum USA .- US$45 to US$50

Perú: US$ 25

Peru

Peru optimal location to produce ethanol from sugar cane

SAO PAULO

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TWO AXELS OF DEVELOPMENT:

PERUVIAN ETHANOL MEGA-PROJECT

(Future)

Cassava Axle Sugar Cane Axle
Potential: 2.0 million hectares

Potential: 1.5 million hectares

Plus ... Other raw materials under investigation

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THE MARKET:
The ethanol market is defined for the obligation of the diverse countries (included Peru), to lower the emissions mixing the ethanol like additive to the gasoline because of the mandate of the Kyoto Protocol.

World Eastern Europe Arab Countries Norway Former UURRSS Eupean Union Japan

USA

The price of the ethanol is projected based on the latest increase in the price level of this biofuel that –as it has been demonstrated- follows the pacing of the petroleum based fuels; and because the foreseeable increasing demand with an also foreseeable shortage of the offer, as is shown in the following projection:

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PROJECTED WORLD-WIDE DEMAND TO YEAR 2010 IN MILLION DE M3 OF ETHANOL

Prospective Domestic Markets
(Fuel Ethanol million m3/yr, 2010)

USA BRAZIL JAPAN, all imported CHINA, partially imported EUROPEAN UNION WESTERN HEMISPHERE OTHER ASIA CANADA AFRICA AUSTRALIA

Now to be increased

18 - 20 15 - 18 8 - 12 6 - 12 9 - 14 1-3 1-2 1-2 0.5 - 1 0.5 - 1

“We will continue to move forward on a comprehensive energy policy that supports alternative sources of fuel like ethanol and biodiesel, so we can make this nation less dependent on foreign sources”
Vice President Dick Cheney, August 2004

“Renewable fuels, such as ethanol and biodiesel, play an important role in a comprehensive energy plan that promotes conservation and reduces dependence on foreign sources of energy”
President George Bush 2004

33.3% of renewable fuels; mainly ethanol …
President George Bush - Feb 2006

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Europe Projection of Demand - Production
USA Projection of Demand - Production Demand Production

Demand Production

After the announcement of President Bush, these figures may be tripled.

000 Million of Liters
Source: F.O. Licht

000 Million of Liters
Source: F.O. Licht

The demand projects to be higher than the production, that is one reason to foster the Ethanol production from sugar cane in the northern coast of Peru where there exist the best comparative advantages of the world. China is promoting the use of derivative petroleum fuels with addition of Ethanol in a pilot experience beginning with nine cities of the northeast and central regions. This action has been designed with the purpose of creating a new market for its surplus of cereals and of reducing the consumption of petroleum as well as reduce the levels of environmental contamination. In accordance with the figures provided by the Secretary of Development, Industry and Foreign Commerce of Brazil, that country could sell this year 500 million liters of Ethanol to China. Nevertheless, the potential demand China of this product is much bigger, being constituted in a market of extraordinary dimensions.

World Ethanol Exchange and Futures Market • • • Is being developed over time as traded volumes increase Requires international agreement on fuel ethanol specifications Requires liquidity – multiple producers and established markets, though may evolve like sugar, a “dump market” with volumes limited to those with non-preferential access CBOT is already operating Futures; NYMEX also is entering to Ethanol Major US ethanol producers may oppose as they don’t want free flow of information and fuel ethanol to be a commodity (although it is already close to be …)

• •

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Projection for Peru Just to frame the project within the potential context of Sugar Cane for ethanol development in Peru, it is important to take into consideration that our country has a conservative potential of 1 million hectares to develop in the northern coast (it is not advisable to plant Sugar Cane in the Forest where only 6 to 7 months a year of cropping is possible versus 12 month of the coast) which are projected in 20 years time with the following potential production level:

(*) The double of this level (that is to say 2 million hectares) is quite possible to be attained in the same time
frame according the market development and financial resources availability. With such potential, Peru would only offer in 20 years an equivalent to 4.3% of the worldwide average demand projected for year 2010 when a shortage of offer is foreseeable.

PERU AND ITS NATURAL REGIONS
MOUNTAIN COAST FOREST

NORTH

CENTER

SOUTH

Number of Micr oclimates as per aptitude
Localization of M icr oclimates Worldw ide Pe ru Per centage Agricultur e 60 55 91.70% Catt le 20 16 80.00% Fore stry 16 10 62.50% Non product ive 7 3 42.90% Tot al 103 84 81.60%

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As reference it is observed that Brazil has sowed around 2.7 millions hectares of Sugar Cane with an average productivity of 70 MT/Ha, being projected to reach in the year 2010, 5.0 millions hectares with average yield of 98 MT/Ha; in the year 2015, 8.0 millions hectares with yields of 126 TM/Ha; and in the year 2020, 13.0 millions hectares with yields of 140 TM/Ha. While in the Peruvian Northern Coast we can reach easily an average of 200 MT/Ha with a bigger sucrose content (impossible to obtain in Brazil); this would allow us to reach an equivalent on the average of 13% or more than the Brazilian production projected at year 2020; all this thanks to the comparative advantages of Peru represented by their significantly bigger productivity and their highest sucrose content. A sample of how the Northern Peruvian desert cam be transformed into productive land with dripping irrigation; productivities as high as over 200 MT/Ha of sugar cane are being obtained today. Because of that result we can confirm that no less than 2 million hectares can be developed for ethanol in the coming years only in the northern coast and make Peru the worldwide leader in competitiveness producing ethanol for export markets. The direct cost per liter of ethanol produced in Peru, will average less than $0.15 versus $0.25 of Brazil, over $0.35 of China and USA and over $0.50 in Europe.

Sugar Cane in the Northern Peruvian Desert: over 200 MT/Ha

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Perú
A forthcoming competitive offer: the Mega Project
• • • • Kyoto Protocol Compliance Should start with a level of 5% Ethanol replacement in gasoline… Not significant Ethanol local production as of now (2008) Prospection of development in Ethanol activity from sugar cane in the northern coast (Internal Demand for the whole country): Years Number Production Inter. Demand
(Acc. Has) (Million gls/year) (Million gls/year)

2010-11 2012-13 2014-15 2016-20 2021-25 •

80,000 200,000 400,000 700,000 1’000,000

335 839 1,678 2,936 4,195

13 26 53 79 159

Twice this capacity may be reached in the Northern Coast of Peru.

Also prospects the lowest production cost in the world market.

Competitiveness summary (based on a conservative productivity level of 170 MT/Ha):

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Financing.- Besides the availability of Funds in the International Market, the possibility of "Future Contract" to sale the production in various markets and the FinancingCollateralization scheme through “Trust in Guarantee Assets with Cash Flow Subordination and on-line Risk Management”; there is as additional complementary financing source "Certificates of CO2 Emissions Reduction" (Protocol of Kyoto), registering the successive projects, as CDM Projects (Clean Development Mechanism), in reason of the greening of big today arid extensions in the Peruvian Coast generating and fixing Oxygen; and because it is foreseen an automated operation for the Cane eliminating the burning used in manual crop, a highly polluted action. The price of these CO2 Certificates per ton of CO2. captured is going up. At the present time, the market is a "buyers' market" (World Bank, some European countries and limitedly USA), since only some few countries are forcing their industries to fulfill with the Kyoto Protocol. Nevertheless, it should be kept in mind that since year 2005 the European Union has implemented the Trading of Emissions mechanism in all its territory, what will cause a significant increase of the price of these certificates (initially estimated in about 10.00 Euros and then up to 20.00 Euros per ton of CO2).
LABV-PRMC

Ethanol Projects in Peru

PERU northern coast ideal to produce ethanol from Sugar Cane : 1. 2. 3. 4. Crop: 12 months/year Light hours per day Sun Radiation Difference of temeparture between day and night 5. Practically no rains

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PROJECT TECHNOLOGY and TECHNICAL SPECS (Referential Model)
The project id foreseeing the following technologies: Field Technology: 1. Water supply; depending on site election 2. Dripping Irrigation 3. Mechanical Crop Industrial technology: 1. Extraction through Diffuser System 2. Energy auto-generated by bagasse burning 3. High-tech Distillery 4. Effluent treatment

Results obtained in Dripping Irrigations recent experiences in the Northern Coast of Peru: It is important to remark that at the present time some new fields with dripping irrigation have actually a rising productivity in the Northern Peruvian Coast with the first cut between 16 and 18 months:

-

Cartavio (Trujillo): Laredo (Trujillo): Andahuasi (Lima):

220 MT/Ha 210 MT/Ha 280 MT/Ha

Raw Material Specs:
Reducing sucrose: Yield Average: Purity: Varieties: 3% to 4% 13% to 15% (total sugars) 90% H32 / H37/ and “Azul Casagrande”

Further information to be supplied.

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SUGARCANE SUBSURFACE-DRIP-IRRIGATION (S.D.I.)

A pro-environmental virtuous loop General Integrator:

SUGAR CANE SUGAR CANE TREATMENT DIFUSSER EXTRACTION
JUICES

FERMENTATION

WATER

BAGASSE
STEAM GENERATION

ENERGY DISTILLERY VINASSE

ETHANOL
To the Market

ELECTRIC GENERATOR

NaanDanJain NaanDanJain
ENERGY to the Public Network EFFLUENT TREATMENT BIO-FERTILIZER NUTRIGATION I N P by ... To the Market

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An Ethanol Project as it is appraised should be energetically independent with renewable energy from the bagasse of the sugar cane; and could have three products to offer: the ethanol, the bio-fertilizer and the energy to be sold in the public network in the rush hours

ETHANOL Specs:
Analysis Water Total alcohol Density (D20/4) Methanol Higher alcohols, C3-C5 Acidity (as acetic acid) Appearance Solvent-washed Gum Total Chlorine as Chlorides Total Sulphur Copper Conductivity, electrical pH

% by weight % by weight kg/m3 g/l g/l % by weight mg/100 ml mg/kg mg/kg mg/kg µs/m

max 0,5(=0,3 vol%) min 99,2(=99,5 vol%) max 792 max 4 (=0,5 vol%) max 16(=2,0 vol%) max 0,005(=40 mg/l) Free from particles max 5 max 2 max 10 max 0,1 max 500 6,5-9

Premises assumed for a first approach (investment costs adjusted will late increases): The main variables shown in the “General Input” chart have the following range in the model:

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FUNDING NEEDS for the PROJECT
We present as an average the Investment Prospection of a unit with initial capacity from 300.000 to 600.000 liters per day (lpd) Premises: - Investment in the order of US$164 million - Land contribution in the order of US$24 million - Third stage: to 1'000,000 lpd, not computed. The investment is auto-generated.

Assets and Cash Flow Evolution:

Value of Assets in the Trust Corpus ETHANOL Project - Peru
400 000US$ 300 200 100 0 1 2 3 4 5 6 7 8 9 10 11 12 13 End of Year Total Debt Assets Coverage

Subordinated Cash Flow ETHANOL Project - Peru
140 120 100 80 60 40 20 0 1 2 3 4 5 6 7 8 9 10 11 12 13 End of Year

000US$

Sales EBITDA Debt Service

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Net Present Value and IRR of the Investment (conservative scenario):

Credit Collateralization:
Type of Operation: Gradual Patrimony Back-up Project Finance, complemented with a Trust in Guarantee Assets (Independent Patrimony) with Cash Flow Subordination and on-line Risk Management.

Projection to final capacity: As a reference we present the prospected results of the project (conservative scenario) in 300.000 lpd to 600.000 lpd and finally to 1'000,000 lpd.

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