huntleys update, page-2

GDY’s successful one for three rights issue raised $49.8m before costs including $10m of over subscriptions, taking cash to $58m. At the end of March it had only $9m following a $12m raising in February. New funds will be used partly to pay the $32m cost of the new US drill rig, drill the Habanero-3 production well and finish Stage One reservoir circulation testing. The rig drills a larger and more robust 81/2” hole compared to the 6” used unsuccessfully last year. It also employs a conventional top drive which successfully drilled the Habanero-2 well. Shipping from Houston is underway.


GDY intends drilling Habanero-3 from mid 2007. This will enable production testing leading to the first formal geothermal reserve, proof of concept and completion of Stage One of the Company’s plans. The timetable calls for demonstration of heat extraction and a reserve calculation by the end of this year. Work then starts immediately on the Stage Two $20m 2-3MW pilot plant. This is to be followed by a Stage Three $226m 40MW HotRock40 plant. It was to be delivered by end 2011 but GDY now plans bringing this forward to end 2010. Timetable for ramp up via additional modules to 500MW by 2015 is unaffected. Confidence to accelerate development is because it has already proven temperatures up to 250-300°C, developed an underground heat exchanger and flowed hot fluids to the surface.


GDY holds geothermal licenses in South Australia, NSW and exploration permits in Queensland. In addition to the 390,000PJ identified on its leases in the Cooper Basin, the company has identified an additional prospective 300,000PJ. The size of the resource has little risk. The large granite orebodies have been clearly delineated and proven through years of petroleum exploration drilling. The risk is in how much energy can be extracted and at what cost. The 390,000PJ compares to Australia’s total proven and probable gas reserves of 140,000PJ. GDY’s modeling suggests its Cooper resources alone have the capacity to support over 10,000MW of electricity generation. A post Stage Three ramp-up to 500MW would be comparable to the output from the Snowy Mountain Scheme.


We downgrade our recommendation due to price strength. A touch disappointing was Woodside’s electing not to participate in capital raisings and diluting from 10.5% to 7.1%. ORG did purchase 2.6m new shares, its equity nonetheless falling from 14.4% to 11.4%. Their presence on the register instills confidence. Regardless, we have high hopes for the effectiveness of the new drill rig. It should deliver commercial scale wells suitable for subsequent developments. We stress GDY is a concept play, early stage and not for conservative investors. The appeal is genuine but high risk. If HFR does prove an economic form of bulk clean energy, the share price could rise by multiples. The horizontal nature and scale of the granite reservoir lends itself to replication of generation units. Completion of the circulation test could see power plant construction and GDY emerging with a real business.


GDY's 100% subsidiary Geodynamics Power Systems has entered into a Memorandum of Understanding with European company Exorka ehf. The two will look to a potential merger forming a new vehicle dedicated to the development of geothermal power plants based on Kalina cycle technology. Exorka ehf is majority owned by Geysir Green Energy an investor in renewable energy projects focusing on geothermal energy. Geodynamics has exclusive rights to Kalina Cycle Technology for Australia and NZ, which improves the conversion of heat to power.