Profit for 2012/13 may not be as high as in the previous year, as CCF has lost a major client (Origin Energy). However, they have substantial recurrent revenue which will soften the impact somewhat.

The environmental benefits of planting trees on degraded land are obvious, but the company’s reliance on just one species in Australia is somewhat of a concern. Monocultures can be prone to diseases. Overall we see this company as positive, although still speculative.

Research provided by
August Investments Pty Ltd
(August Investments holds shares in CCF)

One of the reasons I’m interested in Kuth is because I believe management does a good job keeping investors informed. Just as they foreshadowed problems in Saipan, this announcement lets us know what’s going on, in some detail. The way I see it, Kuth is hoping that new legislation will allow the energy regulator to set a geothermal feed-in tariff, paving the way for an agreement with the retailer, and achieving the necessary certainty to attain project funding.

I like the plan. Although these are uncharted waters, Kuth just may be able to provide an alternative to burning imported diesel, thereby providing cheaper electricity to consumers, for a profit.

When I spoke to Managing Director David McDonald recently, he reminded me that UNELCO, a subsidiary of GDF Suez, and the sole energy retailer in Vanuatu, is in discussion with Kuth Energy for a PPA. He noted that:

“There are two components to a power purchase agreement… It needs an off-taker, and it needs a price… The price has to be determined by the regulatory authority, or by the government, for example, you do have feed-in tariffs in certain countries…”

The key is this – the new amendments, which haven’t yet become law, will allow the minister to set the price for geothermal energy. To quote David,

“Once that’s done, UNELCO will know exactly what the price will be, how we’re being regulated, and how they can pass it through in the tariff setting, and that’s the trigger for the project to move into the drilling phase.”

So, what did the Managing Director have to say about the Takara project?

“The dynamics are extremely different to operating in Australia… you have access to funding from development banks, [and] you’re displacing diesel… so the economics are far more attractive…”

“The next step for us is small gradient wells and they’ll only go down to about 30 metres, and really those wells are vey low cost.”

How much is that?

“Most of the cost is in mobilising the equipment – but less than $100,000…”

And what are these wells for?

“We’re trying to take the drill locations that we want to be able to drill into and verify what temperatures and pressures we have at 30 metres, so that we can then go ahead and design the well so that when the bigger rig comes in we know that we won’t hit high pressures at a very shallow depth.”

It’s apparently more costly to build your well if there are high pressures at a very shallow depth. Back to David…

“You’re better off to drill smaller holes, and get some understanding of what you’ve got at 30m… so that you can design the well accordingly.”

The conversation then turned to equity and capital structure; I changed the mood a little by steering the conversation away from the subject of raising capital for investment in Australian projects.

It turns out that David was touching on the Australian situation more as a counterpoint to the project in Vanuatu, which has “completely different economics.”

The price of imported diesel power can range from 50c -75c kw/hour in Vanuatu, and I my measure of Kuth’s prospects grew a little when David confidently pronounced that:

“When you are displacing diesel at that price the business proposition is actually quite attractive; it’s like people running around trying to put goldmines in places, when gold is at $1600 an ounce. Do they have trouble raising capital on the market? No, they don’t.”

I think it was the use of the rhetorical question that got me.

The conversation didn’t end there – we also touched on the other projects, personnel and share price. But that can be a separate post.

The author owns a tiny holding in KEN

Kuth Energy – or should I say KUTh – is an Australian geothermal company with an interesting history. Part of the suite of exploration companies set up prior to 2007 to investigate the potential of hot fractured rock geothermal, Kuth spent some time progressing its Tasmanian tenements, but did not receive a grant under the geothermal drilling program. This may have been a blessing in disguise, because the second round participants were unable to find matching funding and Kuth continued pursuing a unique strategy (on the ASX, at least) of developing geothermal resources on Pacific Islands.

In the last financial year, the company collected about $1.7 million, via the issue of new shares, and evidently spent a fair bit, because they only have an extra $400,000 cash at the end of the 2011/2012 financial year. Cash stands at about $1.4 million, so it’s therefore reasonable to assume that more dilution may occur down the track.

I can’t quite put my finger on the evidence, but – as someone who has followed the geothermal companies avidly – I have developed the view that Kuth has been fairly cautious with capital expenditure. I’ll be watching remuneration and other expenditure closely, but I have yet to see an instance where it seemed like funds were unwisely spent. Kuth has projects in a few different places…

Vanuatu

Vanuatu is Kuth’s most advanced project, and a successful development here would prove their strategy and substantially reduce the risks facing the company. The company hopes to debt finance the project and has been in talks with the European Investment Bank – see page 10 of the 2012 Annual Report.

Saipan

The story in Saipan highlights the risks of Kuth’s strategy in the pacific. In January, the government of the Commonwealth of the Northern Marianas had announced that Kuth had won a tender to develop geothermal energy in Saipan, and the company was a supported by a grant of up to $1.6 million from the United States, designed to de-risk early exploration. However, the project has effectively been cancelled, because the government has decided to grant a monopoly to local diesel generators for the next 25 years. This ends renewable energy development on the islands, and ensures that the population remains dependent on expensive diesel imports that pollute and damage their already-fragile natural environment. The decision is clearly not in the best interests of the population, and highlights the poor decision-making that occurs in jurisdictions without a strong civil society. You have to wonder how many citizens understand the price they will pay to ensure particular individuals can continue to make handsome profits from diesel power generation. Perhaps we shouldn’t be surprised considering Saipan’s record of appalling governance.

Fiji

Kuth is currently in the process of applying for geothermal licenses in Fiji. This is an early stage prospect for the company.

Papua New Guinea

As with Fiji, Kuth is still in the process of applying for geothermal exploration licenses. The process has been particularly lengthy.

Australia

Kuth’s Australian projects are currently on ice, awaiting some reasonable show of support from the government that they want to exploit the hot rock resources available.

Disclosure: I own a teensy parcel of shares in Kuth Energy, and have done so for quite some time.

At the current $2.45 per share, the dividend yield is 2.94%, but this is covered twice by the internal earnings yield of 6.1% (PE 16.3). The Cashflow yield is even higher, at 7.6%. ROE after tax is an impressive 34.8%. This is a typical profile for a growth stock, but unlike some growth stocks EAX’s balance sheet is extremely healthy. At 30 June 2012 EAX had no significant borrowings and there was $6.8M cash in the bank. Since then they have taken over a similar business, Ward Consulting, for $4.2M.

Energy Actions’ business growth is impressive. We have examined pre listing accounts back to 2008. Comparisons are difficult, but there is an obvious pattern of growth in profits and assets. In February 2012 the Federal Government’s announced that energy saving measures taken by small manufacturers will be subsidised on a 1:1 basis, compared to the previous 1:3 basis. This should bring more business Energy Actions’ way. A negative is that a large proportion of shares on issue are held by pre-listing investors, management and staff. They may be tempted to sell at share prices well above their pre-listing entry price.

Research provided by
August Investments Pty Ltd
(August Investments holds shares in EAX)

What is clear, however, is that the company reports just 25 new sales in the last 6 months. I’m not going to go and dump my holding on the basis of a tough 6 months for sales. In the 6 months to December 2011, they managed approximately 12 times that (roughly 300). So clearly sales can go up and down. The company is, importantly, increasing the rate at which they can install units. And this is more pressing than making new sales, right now.

I am taking a fresh look at this company. At the time of writing, the share price sits at 5.1c, which is significant for me because it’s the price at which I first bought CFU shares in 2009. Since then, we’ve seen a lot of dilution, but also a lot of progress. It would appear further dilution is inevitable. What about further progress?

Brendan Dow, in the past, has been extremely eloquent and forthcoming in responding to my emails. The most recent time I quizzed him, however, he did not reply nor did he acknowledge my email. I put it down to him being busy.

For the record, the questions he didn’t acknowledge on the 19th of June 2012 were these:

Am I correct to assume that the three units operating in a trial VPP are part of the 100 units ordered by Zestiq/Bluegeneration?

Have the Ideal Boilers/CFCL prototypes been tested, as planned?

I still don’t know the answer to the first question – let me know if you know.

The second question was answered in a reply to justinmetals, kindly posted on hotcopper.They apparently said; “In France, GdFSuez continues to operate the units developed by De Dietrich.” It’s not entirely clear whether the full 20 units are operating. Notably, the company no longer sees the need to have a section on France in its quarterly reports.

The third question is answered on page 4 of the July Update . The company wrote: “EON UK is installing 15 “Beta 1” units developed by Ideal, targeted installation in September.”

In the quarterly report for the period ending December 2011, the company wrote that the first phase of their cooperation with Jabil Circuit Inc was to source specific components from them. According to the July Update, this is proceeding as planned.

Another major development (again, in the July Update) is that Ceramic Fuel Cells has dumped HC Stark as their supplier of ceramic cells. This is mooted to further reduce the price of BlueGen units.

Indeed, the driving down of the price of units seems to be going to plan. However, we have to take their word for it, because the company refuses to separate the “Research and Product Development” category in their financial reports. It’s therefore impossible to see the supposedly falling cost of units reflected in the balance sheet. I want to see a category that lumps together ongoing manufacturing costs – namely staff costs for manufacturing and material costs for manufacturing. I want to know what is being spent on making products for delivery, so that I can watch it decrease per unit, in a broad sense, over time. I realise that with inventory and other variables the balance sheet will never tell me everything. But I’d like it to tell me something.

I realize that I’m just a guy who follows this company, and the only reason anyone should listen to me is that I’m enthusiastic and interested. However I have one suggestion to management. Please make the distinction between costs of building products for delivery, and the costs of R&D and other staff costs. That way, the whole world can see what you’re doing. Please share this important information.

You won’t find it (in full) in the quarterly, but the cryptic explanation for the current reporting method is found Note 1(e) of the Full Year Report 2011:

“The Statement of Comprehensive Income continues to be reported by function of expenses incurred rather than by their nature. The main reason for the classification of expenses into the functional sub-categories of Research & Product Development, General & Administration and Sales & Marketing are as follows:

1. Readers of the Group’s Statement of Comprehensive income will gain a better understanding of progress towards achievement of its business plans than they would otherwise have gained if reporting was based upon the nature of the cost. [What?!]
2. These classifications are widely recognized within the Australian and international financial community. [That bastion of integrity!]

[And Further…]

“Research & Product Development expense, as denoted in the Statement of Comprehensive Income includes all labour costs and direct material costs…”

[Find this on page 43.]

But wait a second… In the most recent Appendix 4C, on page 1, it says that “Staff Costs” includes “all Research & Product Development Staff Costs.” And the Research & Product Development costs “are the costs as defined in the Statutory Accounts, excluding staff costs.”

Is that clear for you? It took me at least half an hour to understand all this. Surely cryptic and opaque accounts, requiring cross-referencing between multiple documents, do not fit the definition of “well-written,” and they are hardly an incitement to invest.

Our problem is that we don’t get a clear idea of the costs of materials (for manufacture rather than research), and the duration and complexity of manufacture, as reflected by labour costs (which we expect to see reduce per unit, as a result of R&D).

If you’re a shareholder and you’re reading this, then I encourage you to send the company an email asking them to separate R&D costs, and the costs of building units for delivery (materials + labour). Please.

Without this information, I simply am not in a position to judge whether the company is proceeding merrily along the experience curve, as they claim to be. And neither are you.

The innovative form of the capital raising is said to be a world first and has caught the attention of corporate executives in Australia’s struggling geothermal sector.  Geothermal stocks on the ASX have been hit pretty hard by the current risk averse market and have suffered a further hit with recent tax loss selling.  These declining equity values have made it insanely difficult for Torey to secure the final 10% shortfall in funding required for the Copahue project.  However, adversity breeds innovation and Torey is proving himself to be a consistent performer with a real talent for securing finance even when few are listening.

Thankfully, financial institutions such as the Inter-American Development Bank (IDB) and the Corporacion Interamericana para el Financiamento de Infraestructura (CIFI) have done their due diligence on the project and are backing it with some serious dollars as previously announced – $210m senior debt with IDB, $22.5m drilling loan from CIFI, and a $17.5m capital contingency fund with AGS Capital Group LLC.

The company has now announced that in addition to the $22.5m drilling loan, CIFI will arrange up to $30m in project equity, via the issue of non-voting Preference Shares in a special purpose Project Company wholly owned by the parent company, Earth Heat.  Clearly, CIFI are impressed with the project and have an eager market of professional investors and organisations around the world ready to buy into South America’s first geothermal power plant.

The Preference Shareholders look set to save the project from what might have been an uncertain future, if Earth Heat had been forced to go to retail investors to raise capital.  Preference shares are understood to be worth US$1.00 each and can be converted, at any time in a ten year period, to ordinary shares on a 10 for 1 basis.  Holders of non-voting preference shares will also receive a quarterly dividend once revenues start to flow, subject to approval by the board.  This deal implies an initial fair value of 10c per share for the Copahue project, although Torey makes it clear that Preference Shareholders see value well above 10c per share which is why they are keen to buy.

While it’s tempting to imagine those buying preference shares sitting at a round table, clad in gleaming armour, the truth is not quite so shiny.  They will likely get the opportunity to have their cake (exposure to the most advanced project in EHR’s portfolio while being buffered from the volatility of the share market) and eat it too (dividends and an option to convert at a suitable time).

About Copahue

The Copahue project is set to be the first geothermal power plant in South America.  The resource is vapour dominated and has been assessed by SKM as having the capacity to generate 264MWe.  Importantly, the project is based on proven conventional volcanic geothermal.  The quality of the resource is such that an efficient and relatively inexpensive direct cycle solution has been proposed by Alstom Power, who have been selected to work on an “engineer, procure and construct” link solution for the project.  The scale of the project has recently been revised from a 30MW power plant to a 50MW power plant in response to strong demand from power offtakers.  Earth Heat have received letters of intent from three companies (Loma Negra, Electrometalurgica Andina SAIC, and Xstrata Copper) to purchase a total of 90MW of power.  It is anticipated that Xtrata Copper will sign a binding power purchase agreement in the future, in order to ensure the timely delivery of clean power to support their ‘El Pachon’ mega project, which is slated to commence in 2013.

By EHR Shareholder Craig Cowled

Many have supported the venture through capital raisings over the years. We hope to avoid more dilution. At this point the ability of the company to deliver on orders and build the book is pretty crucial.

I wrote some musings to Brendan Dow on March 30, 2012. In contrast to the epic delay in my reporting this, Mr Dow was kind enough to reply the same day. He happily reported that “production rates are still keeping pace with installations.”

Although there have been no big orders announced, he added that “the order book has continued to build as we receive follow on orders from Utilities who have completed the testing phase on their initial BlueGen installations.”

A mighty river starts with a trickle! Well, not if it is a glacier melting because of climate change. Discuss.

But I diverge – unlike the Managing Director:

“To answer your direct on Zestiq”, he wrote, “we have indeed commenced delivery and installation of a number of BlueGens and expect this activity to increase significantly over the coming months.”

Further “We’ve been furiously recruiting additional sales and support personnel to make sure we can meet the market opportunity in front of us.”

Furiously! I LOVE the passion!

Then he made a few sensible points about Australia not being Germany and it’s along way away and you should come and see how much more switched on they are.

Actually, that (last bit) is not what he said, that’s just what I think. Now if I can just find my lederhosen…

Metcash (MTS) is ethical, in my view, because it provides independent grocery stores the possibility of competing against Coles (owned by Wesfamers) and Woolworths.

I watch a bunch of ethical stocks, and this one has just announced the bad news that it is closing stores, firing people and will take a re-structuring write-down. It did, however, reaffirm guidance of moderate underlying earnings growth. However, this post is more a diversion into ethics than a discussion of Metcash as an investment.

Someone asked me, recently, why I don’t follow Woolworths (ASX: WOW) or Coles (ASX: WES)… Here’s my answer:

WOW is Australia’s biggest owner operator of poker machines (and WES owns more than a few).

The truth about pokies is that sad, addicted, desperate people fall into a trance (flashing lights etc) and shove in the money they need for:

a) School uniforms for kids
b) Decent food and pleasant treats around the house (eg soft toilet paper)
c) Health insurance, home insurance etc.

Pokies losses cause people to default on their mortgage – that means their kids are out of a home. Pokies losses are largest in lower income areas. This is not a harmless past time.

Pokies destroy relationships and their victims are anyone who relies on or loves the addict.

If you want to be some wealthy owner sitting in a room in front of a computer screen buying the right to profit from this misery, that’s a matter for you. I’ll pass.

One of the saddest things about our superannuation system is that many people who oppose this way of making money, are probably profiting from it themselves. They support the company, the directors and the share price, with their capital.

Let’s hope Metcash stays away from poker machines, so investors have at least one ethical option if they want to invest in the sector!

The author owns shares in Metcash.

However, the company made a loss for the half of almost $12.5 million dollars. The accounts don’t distinguish between actual Research and Development and the ongoing costs of building units. It really matters to me how much was spent on improving the units (for example, making them easier and cheaper to instal and assemble), and how much was spend on building them for delivery.

I would be worried if the costs of building a unit weren’t covered by the sale price. I didn’t participate in the share placement only so that more BlueGens would exist in the world!

I shared my concerns with Managing Director Brendan Dow and he kindly replied with the following, which I reproduce [in part] with permission:

“Your observation regarding the category “Research & Product Development” is correct. “Cost of Goods Sold” is included in this category, hence the reason for the increase against the same period last year when we only made a small number of BlueGen units. It’s likely in the future that we will show “COGS” separately, providing more clarity for Investors.

Let me assure you that we receive a strong positive gross margin for every single sale we make…”

Thanks Brendan, love your work.

In a slick move, EHR announced on the 7th of March that the company had raised $2.16 million by issuing shares at 3c to domestic and international sophisticated investors. The immediate result for shareholders, however, wasn’t so slick, with the share price diving to just below the issue price.

In what was perhaps a move to shore-up market support, the very next day (March 8), EHR announced it had mobilised crews to the site, thus “beginning the first phase of the field program which will support the commencement and efficient completion of the Bankable Feasibility Study.” The completion (and acceptance by the bankers) of this study will be a key landmark on the path to becoming electricity producers.

Marshall has suggested that this could occur by the end of 2013, but I would expect at least some technical delays given the huge number of geological variables in any project.

Finally, there is some indication that EHR is getting some attention – see this favourable coverage in the Australian Financial Review.

Update: In the end only $1.946 million was raised because some subscribers were not deemed to be sophisticated investors.