Dec 31, 2013
Year-END Newsletter

Abakan Year in Review

Setting New Benchmarks with Metals and Advanced Materials

Message from the CEO

I and everyone at Abakan hope the past year has brought much joy and prosperity to you, your family and friends.

I am pleased to be able to update you here on our progress over the past year. Although the valuation of Abakan’s shares have dropped this year, this does not reflect the significant challenges overcome by the Company, which I believe sets us up for a promising future. Nevertheless, I direct you to the section below titled 'Progress & Challenges' which did cause major delays in the expected progress of our pipe coating division.

Please also take the time to read the section below on our recent deal with Lissotschenko Microoptik "LIMO". What we have released so far on LIMO is a full disclosure, although it is without quantitative numbers and timelines. We will give a fuller description of LIMO in the near future. Take particular note of the second paragraph of this review on LIMO, these are very strong statements showing the potential LIMO has. So far few have understood the strength and broad scope LIMO’s technologies can address.

As 2013 comes to a close, we would like to thank you for your interest in and support of our Company. We are expecting a phenomenal 2014 and appreciate your continued support.

Robert Miller


MesoCoat Scales-Up PComP™ Coating Materials Production to Meet Increasing Customer Demand

In November 2013, MesoCoat announced the completion of ‘Phase I’ of its PComP nanocomposite coatings growth and expansion strategy, which involved installing additional powder production equipment to double throughput. ‘Phase II’, expected to be completed by the end of 2013, will add more PComP™ production equipment and sintering furnaces to expand production of this highly engineered product to 18 tons per year. ‘Phases III and IV’ are scheduled to expand production to 60, and then 180 tons per year over the next twelve months. Further growth and expansion plans over the next 3 years call for the acquisition of up to 10 US based thermal spray coating businesses that will have a total of 30 to 40 spray booths serving the growing oil and gas sector, each spray booth can generate up to $5 million in revenues.

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MesoCoat Commissions its First Clad Pipe Manufacturing Facility

In April 2013, MesoCoat commissioned its first clad pipe manufacturing facility in Euclid, Ohio to demonstrate, qualify, and commercialize its CermaClad corrosion- and wear-resistant clad pipes. The Euclid, Ohio plant is a 1-line CermaClad™ corrosion-resistant clad pipe manufacturing facility that has the capacity to produce up to $60 million of clad pipe for use in upstream oil and gas production. This plant is the first production facility worldwide that will use MesoCoat’s CermaClad™ high-speed large-area fusion cladding technology that produces a high quality product 40X faster than weld overlay processes, and at significantly lower capital and fixed costs compared to other production alternatives.

This facility will enable the validation of economic and production models that are the basis of the growth projected by the Abakan team for metallurgically clad pipe. Although the Ohio plant is smallest in terms of production capacity compared to planned clad pipe manufacturing facilities in other parts of the world, this plant is extremely critical as the pathfinder for full qualification and market entry of 12 meter CermaClad™ seamless clad pipes. Client approval from this facility will allow MesoCoat to enter the multi-billion dollar global market for clad pipe. The CermaClad™ corrosion resistant clad pipes will offer the most economical and environmentally sound alternative for the development of sour oil and gas reserves, including, pre-salt developments in Brazil and West Africa, deep water projects in the Gulf of Mexico, and the massive gas projects in SE Asia.

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Powdermet Spins Out Terves Inc. to Commercialize Engineered Reactive Materials for Oil and Gas Applications

In July 2013, Powdermet announced the launch of its wholly owned subsidiary, Terves Inc., to commercialize proprietary reactive materials technology for the shale gas and oil industry. Terves’ TervAlloy™ technology platform was originally developed at Powdermet, Inc., for the U.S. Department of Defense for reactive warheads. TervAlloy™ technology has since been reconfigured and customized into engineered reactive materials that can significantly improve the efficiency and safety of well isolation, perforation and completion for oil and gas companies operating in shale reserves in the United States and across the globe.

TervAlloy™ is a class of patented, environmentally responsive, lightweight metallic materials manufactured from magnesium and other light metals such as lithium that are high strength, machinable, and also respond to environmental stimuli such as changes in fluid, pH, temperature or electrical or magnetic fields to induce material changes such as decoherence (disintegration), gas generation, or heat generation. TervAlloy™ is engineered for various market applications including oil and gas tools for well isolation and completion (frac-balls, sleeves, and seats), well perforation, and fracturing, lightweight electronic packaging, beryllium replacement, airframe structures, missile airframes and rocket motor cases, and transportation. The primary application of TervAlloy™ for Oil and Gas include controlled disintegration well completion tooling and reactive tooling that provides for the generation of heat and gas pressure inside a formation.

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MesoCoat Incorporates MesoCoat Coating Services Inc. to Accelerate Entry in the High Value Coating Services Market

In August 2013, announced the incorporation of a new subsidiary, MesoCoat Coating Services Inc. (MCS), to provide thermal spray coating services using its multiple award-winning nanocomposite PComP™ coating materials to improve component longevity and to combat corrosion and wear in the oil and gas, mining, aerospace, chemicals, metal processing and metal finishing industries.

MCS will provide wear- and corrosion-resistant coating application services utilizing conventional thermal spray powders, as well as proprietary PComP™ nanostructured coating materials. MCS already has a fully functional thermal spray coating facility with one coating cell in Euclid, Ohio, and plans to expand operations with the addition of two thermal spray coating cells and other surface preparation and finishing equipment for larger components that will be capable of handling 40-foot components.

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MesoCoat Achieves AS9100C and ISO 9001:2008 Certifications

In February 2013, MesoCoat's Quality Management System was certified to AS9100C and ISO 9001:2008 standards by SAI Global after an intensive audit. The certifications apply to MesoCoat's metallurgical laboratory and coating services operations supporting its component manufacturing and repair division.

The AS9100C and ISO 9001:2008 certifications are awarded as an acknowledgement of a robust quality management system implemented by the company, and highlight its ability to consistently provide products that meet customer and regulatory standards. The certifications are a reflection of MesoCoat's continuous efforts to provide component manufacturing and repair services of the highest quality and will strengthen the company's competitive position and standardize quality processes across its entire PComP™ and coating services portfolio.

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Abakan partners with MetalSol to tap the Energy Reforms and Substantial Resources in Mexico

In September 2013, Abakan subsidiary MesoCoat announced its entry into the Mexican and Central American markets by signing an exclusive sales agent agreement with Metallurgic Solutions, S.A. de CV (“MetalSol”) to introduce MesoCoat’s products into Mexico, Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica, and Panama. MetalSol will also assist MesoCoat in the establishment of production and service operations in Mexico for its PComP™ long-life metal coatings, CermaClad™ clad steel, and future products that are currently under development.

Mexico is one of the ten largest oil producers in the world and the third-largest in the Western Hemisphere, making it ripe for companies manufacturing products and providing services to the Oil and Gas industry. Mexico is estimated to possess up to 27 billion barrels of oil in the deeper waters of the Gulf of Mexico (3 times Mexico’s current total proven reserves), with a majority of these new reserves being sour (corrosive). Mexico also has one of the world's largest shale gas resource bases. According to an initial assessment of world shale gas resources, Mexico has an estimated 681 tcf of technically recoverable shale gas resources (40 times their total proven reserves of conventional natural gas) — the fourth largest of any country examined in the study by the US Energy Information Administration.

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Abakan Announces Joint Development Agreement with Lissotschenko Mikrooptik GmbH to Develop Clad Tubulars and Low-Cost Thin Metallurgical Cladding

In December 2013, Abakan announced that it has signed an exclusive agreement with Lissotschenko Mikrooptik GmbH (LIMO), based in Germany for the development of a laser based system for the production of wear and corrosion resistant cladding to supply the multi-billion dollar coating market for 3 to 8 inch diameter pipe used extensively in the oil and gas industry. LIMO will design and build the laser coating systems, while Abakan will design the auxiliary components to install and operate these systems. The cooperation will focus initially on the cladding of the smaller-diameter thick-walled pipes, which are in constant demand due to the mounting development of large-scale offshore oil and gas fields. The prospect of supplying the demand for small diameter clad pipe adds to Abakan’s current focus on cladding large diameter (10 inches and up) pipe.

LIMO has demonstrated laser-melting technology that can produce smooth and thin coatings which, for the first time in history, exhibit a verifiable metallurgical bond almost without any metallurgical substrate effects. The LIMO technology is based on optical systems, which facilitate industrial level productivity for the seamless treatment of the inner diameters of pipes. The utilization of this technology in small diameter offshore pipe and in other industrial applications would have an effective life more than sufficient for most products where cladding is used. Hundreds of test sample coatings already conducted by LIMO on behalf of an oil major evidence the effectiveness of its technology for cladding applications.

The current process of relying on mechanically lined and clad plate-to-pipe solutions for clad pipes is not ideal for thick-walled pipes due to inspectability and quality concerns. Abakan believes that LIMO’s laser based system will result in a product that offers the ideal solution for producing small diameter clad pipes. Abakan expects that its collaboration with LIMO could also develop a product that enables very thin corrosion- and wear-resistant cladding for pipes, plates, and components that would compete directly with paints and epoxies. The new product envisioned would offer a 3-5 times longer life than coatings that are currently available, at a cost that would be only marginally higher when compared to the cost of the epoxies now used over a variety of applications, in the oil and gas, petrochemical, shipbuilding, tooling and infrastructure industries.

LIMO has over 300 patents, the in-house ability to produce 1,000’s of specialized lasers per year and an international team of more than 220 engineers, physicists, technicians and many other specialized staff who design, develop, manufacture and market innovative micro-optics and laser systems. Since the very beginning, LIMO has built a worldwide reputation with their refractive micro-optics technologies, and is considered a technology leader in the field of micro-optics.

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Powdermet Strengthens Partnerships with Department of Energy and Defense

In 2013, Powdermet has secured several significant partnerships with corporate, government and military agencies to advance commercialization of its EnComp™ energetic nanocomposites and MComP™ microcomposite materials for use in high-density energy storage and energy-efficient mechanical bearing markets. Powdermet partnered with the U.S. Army to develop applications requiring instant-on storage of a large amount of electrical energy at high voltages for long periods of time without significant current leakage. Additionally, Powdermet’s long-term collaboration with Michigan State University also received investment from the Department of Energy to further develop critical nanocomposite separators needed for ultra-high power density multivalent batteries based on ionic liquids. Powdermet has also partnered with the U.S. Navy to provide a solution to contamination issues in spherical plain airframe bearings using advanced coatings that have already been commercialized through MesoCoat.

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MesoCoat Partners with the #1 Material Joining and Welding Institute

In April 2013, MesoCoat partnered with Edison Welding Institute (EWI), the world leader in welding and allied technologies, to accelerate manufacturing scale-up of its CermaClad™ clad pipes. EWI will bring its world-renowned expertise to the project and provide simulation and controls development services to support the development of manufacturing process specifications and non-destructive testing procedures, followed by bimetallic pipe welding and joining process qualification. Engaging EWI to support development of the CermaClad™ large-area fusion cladding technology enables MesoCoat to tap into their incredible talent pool and knowledge base to continue to be on the forefront of science and innovation.

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Progress & Challenges

From Abakan’s First Quarter Report filed with the SEC on October 15, 2013

Management’s Discussion and Analysis - Results of Operations - MesoCoat Business
Despite unanticipated delays associated with scaling the CermaClad™ process to be used to coat 12 meter pipe, due primarily to mechanical and integration problems related to the first of its kind, prototype nature of the new full scale manufacturing equipment, MesoCoat has made significant progress in quality control and reliability of the pipe cladding process, including development of correlations between control variables, dependant variables, and cladding quality.

Working with EWI (Edison Welding Institute) and with additional internal resources, the Company continues to develop and refine detailed analytical models of the fusion process to predict and understand what goes on inside the pipe during the fusion cladding process, and how that relates to cladding and base metal quality and performance. Based on these models MesoCoat has been able to develop fully clad short sections of pipe with strong metallurgical bond, uniform quality, and good surface finish, which after completing additional internal testing will be released to Petrobras and others for initial qualification.

MesoCoat has also strengthened its development team by adding two individuals holding PhD’s with significant experience in metallurgy and coatings, completed installation and integration of an additional pipe cladding system, and restructured the cladding development team to allow development of manufacturing development and engineering validation activities to run in parallel instead of in series. The investment into development of validated simulation tools, the additional cladding system, and the restructuring and team expansion is intended to reduce development time line and risk of further delays to ensure availability of the final product at the earliest date possible.

Mattson Technology, Inc.
On April 7, 2011, MesoCoat and Mattson Technology Inc. (“Mattson”) entered into an Exclusivity Agreement for the supply of customized arc lamps for cladding applications. That agreement required MesoCoat to pay non-recurring engineering and exclusively purchase plasma arc lamp systems and power supplies customized by Mattson for Mesocoat’s field of use. Matson agreed to develop these specialized plasma arc lamp systems and exclusively sell such modified systems to MesoCoat in our field of use. The Exclusivity Agreement also required MesoCoat and Mattson to enter into a separate supply agreement for plasma arc lamps over a fixed number of years on terms set by the Exclusivity Agreement.

Mattson failed to provide plasma arc systems that were adequate in Mesocoat’s field of use, and has refused to enter into a long term supply agreement on the terms required by the Exclusivity Agreement. On July 12, 2013, MesoCoat sent its notice of breach of the terms of the Exclusivity Agreement and breach of related purchase orders. Mattson’s attempt to cure the breaches to date have been unsuccessful. MesoCoat continues to work with Mattson to achieve its goal of developing fully operational plasma arc lamp systems.

As a consequence of Mattson’s failure to provide fully functional and reliable plasma arc lamps as required, MesoCoat may be required to develop alternative technology and suppliers. Delays caused by late deliveries, the design and manufacturing defects, and insufficient technical support of the two lamp systems acquired from Mattson, and the breach of the Exclusivity Agreement have interfered with the MesoCoat’s ability to commence production as projected.

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Market Watch

New Entrants and Expansion by Competing firms Validates the Growing Clad Pipe Market

The growing demand for clad pipes has been evident over the past few years with record orders for clad pipes across the globe. Butting GmBH, the largest player in the mechanically lined clad pipe market, received approximately a $300 million order for clad pipes, its largest order in the company’s 230 year operating history. The Butting clad pipes would be deployed in offshore Brazil, and we have witnessed similarly large quantities of clad pipes being ordered for projects in Asia-Pacific and Middle East. For example Saudi Aramco awarded Saipem an approximate $200 million contract for cladding 22 kilometers of 36” pipes for the Wasit offshore gas field development project in the Persian Gulf.

To tap this growing demand, the current clad pipe and plate manufacturers have announced plans for expanding production capability; Butting has announced plans to set-up a clad pipe manufacturing facility in Brazil to serve Petrobras’s (NYSE: PBR) growing clad pipe requirements, ProClad has appointed QInvest to raise capital for increasing clad pipe production, Schulz invested roughly $300 million to set-up a seamless and clad pipe manufacturing facility, and PCC installs largest pipe cladding system in the U.S. On a more recent note; two multi-billion dollar Chinese steel companies Hebei Iron and Steel (000709.SZ) and Chu Kong (1938.HK), have ventured in to the metal cladding business.

Oil Major’s Sour Dreams

The International Energy Agency estimates that more than 70% of the remaining oil and gas reserves are highly corrosive (“sour”) and an increasing share of global oil and gas production is now offshore. To explore these corrosive reserves and especially the high-pressure high-temperature reserves found offshore, there is a need for pipes and components that can withstand the assault of extremely corrosive constituents present in these reserves.

Oil and gas companies have been exploring in progressively deeper fields. For example, Transocean Ltd recently stated that it drilled the deepest well in its company’s history, at 10,385 feet underwater. Drilling in deeper waters, along with the discoveries of new offshore oil and gas fields around the world, has led to strong increases in offshore production equipment. Noble Corporation stated in its FY12 earnings conference call that oil and gas E&P; companies announced 52 oil and gas field discoveries that were at least 4,000 feet underwater, breaking the previous record by 40%. Eighteen of these fields were at least 7,000 feet underwater and nine of these fields were at least 8,000 feet underwater. These numbers are indicative of the trend toward producing oil and gas in deeper offshore fields. It is expected that this trend will continue, which will create the need for increases in both the quality and quantity of clad pipe.

In addition, the high CO2 content witnessed in the reserves in the Asia-Pacific and MENA regions, and high H2S content in Gulf of Mexico, Brazil, and West Africa which when coupled with higher pressure and higher temperature of these deepwater reserves, make corrosion not just a concern but a challenge, a substantial challenge. To encounter such corrosive assault, it has become imperative to use corrosion-resistant clad pipes which perform the role of solid CRA pipes but at one-fifth the cost, thus making several of these challenging reserves economically viable.


MesoCoat Ranked as the #1 Fastest Growing Manufacturing Company in Ohio, #15 in the U.S.

In August 2013, MesoCoat was recognized by Inc. Magazine as one of the fastest-growing companies in the United States and has been ranked 15th in the top 100 fastest-growing manufacturing companies in the United States, and ranked the number one fastest growing manufacturing company in Ohio on the annual Inc. 500|5000 list. The Inc. 500 is an annual list of the 500 fastest-growing private companies in the United States, introduced in 1982.

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CermaClad™ Clad Pipe Manufacturing Technology Wins the AMM Steel Excellence Award of the Year

In June 2013, CermaClad™ received the Steel Excellence Award from American Metal Market (AMM) under the ‘Best Process Innovation category’; where other notable winners in other categories included the number one steel manufacturer ArcelorMittal (NYSE: MT), Nucor Corporation (NYSE: NUE), and AK Steel Holding Corporation (NYSE: AKS). The American Metals Market (AMM) Awards for Steel Excellence recognize processes, products and business developments that have made a profound impact on the steel industry. Each year, an independent panel of industry experts submits nominations, and this year there were a record number of nominations for this highly prestigious award.

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CermaClad™ Clad Pipes Win Pipeline Industries Guild’s “Subsea Pipeline Technology of the Year” Award

In March 2013, CermaClad™ clad pipe product was awarded the coveted “Subsea Pipeline Technology of the Year” award by the highly regarded Pipeline Industries Guild. The Pipeline Industries Guild was formed in 1957, and it is the only association worldwide to cater directly to the needs of the pipeline industry, regardless of engineering discipline, application or qualification. The Guild's membership comprises those with interests in pipelines that transport hydrocarbon products, chemicals, water, wastewater and many other substances, both on and offshore.

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Andrew Sherman Inducted to the Prestigious ‘American Society of Materials’ 2013 Class of Fellows

MesoCoat, Powdermet, and Terves CEO, Andrew Sherman was inducted to the highly prestigious ‘American Society of Materials’ (ASM) 2013 Class of Fellows. Recipients of one of the highest honors in the field of materials, ASM Fellows are technical and professional leaders who have been recognized by their colleagues and now serve as advisors to the society. ASM International established the honor of Fellow of ASM (FASM) in 1969 to provide recognition to ASM members for their distinguished contributions to materials science and engineering.

Powdermet receives 2013 Ohio Excellence Award

Powdermet has been selected for the 2013 Ohio Excellence Award amongst all its peers and competitors by the Small Business Institute for Excellence in Commerce (SBIEC). The SBIEC is a leading authority on researching, evaluating and recognizing companies across a wide spectrum of industries that meet its stringent standards of excellence. It has spearheaded the idea of independent enterprise and entrepreneurial growth allowing businesses of all sizes to be recognized locally and encouraged globally.

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Abakan Adds World-Renowned Welding Expert Damian Kotecki to Board of Advisors

Abakan appointed welding industry expert Dr. Damian Kotecki, Ph.D., PE to its Board of Advisors. Dr. Kotecki brings 43 years of welding expertise as well as his extensive technical and business network to the Board of Advisors, as Abakan transitions its CermaClad™ large-area cladding technology into full commercial production. Dr. Kotecki's extensive experience in welding research, pipeline failure analyses, welding training and specifications, welding procedure development, quality assurance and stainless/high-alloy welding filler metal and product development will help assure the company’s CermaClad™ products incorporate the highest levels of technical excellence.

In addition to co-authoring the leading textbook on stainless steel welding, Dr. Kotecki conducted welding research projects and pipeline failure analyses for the Battelle Memorial Institute, was the Director of Research for Teledyne McKay (now part of Illinois Tool Works) and retired as the Technical Director for Stainless and High Alloy Product Development for the world’s largest welding company, The Lincoln Electric Company. Dr. Kotecki is a former president of the American Welding Society (AWS), where he currently chairs the A5D subcommittee on stainless steel welding and the International Standards Activities Committee. He is also past chair of the International Institute of Welding Commission II Arc Welding and Filler Metals. Dr. Kotecki holds a BS and MS in Mechanical Engineering, as well as a Ph.D. in Mechanical Engineering with a minor in Metallurgical Engineering.

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