Hi all, I have just finished my first read-through of the report this morning.
I took a few notes as I was going through and thought I’d share my summary in case others can’t access the report (a VPN is required for Australians) and/or you don’t have the time. This is certainly not exhaustive, just my interpretation of the report - I may have some things wrong as I have been following Vulcan from arms' length, not in huge detail.
These seem to be the key points from J Cap:
Summary/abstract: “zero-carbon” promotion has driven SP x80; use of highly optimistic assumptions; have a track record of failure; used consultancies that were owned or acquired by Vulcan; geothermal extraction costs are higher than the company suggests; output is lower; environmental impact will drive public outcry, blocking permits which has happened in the past in the area.
PFS contained key assumptions provided by consultants owned by management, who were in turn incentivized by stock based performance.
Key information about the DLE technology is lacking – this is the technology that underpins the entire project. Vulcan claims their costs will be half of others.
Previous management attempts at geothermal projects have failed, in 2003 and 2016. CEO has never launched a lithium project to product (mondy:I think this is a cheap dig, there’s many companies currently in development and only a few actually producing, so you could say this of pretty much any lithium leadership team around the globe right now). COO previously ran a loss-making geothermal power consulting company.
Vulcan has moved between a brownfield and greenfield investment. January 2021 PFS is based on greenfield; September capital raise is for acquisition of existing brownfield energy (where the known performance parameters and capital costs are not overly attractive). The acquisition target was not revealed at the time of the capital raise.
PFS is contradictory in that independent expertise is promoted, but both are consultancies with ties to Vulcan beforehand, and whom were acquired thereafter. One company, Geo-co, presented different information in the 2021 PFS verses what they had presented to the German government in 2019 (mondy: the source part of the documentation is in German so I haven’t been able to verify it – but the gist is the 2021 PFS had a margin rate of 76% based on opex of EU0.061/Kwh, but the 2019 report had the operation running at a loss with opex of EU0.37/Kwh). Various other contradictions are noted, i.e. Geo-co used a discount rate of 9.3% in the 2019 report to the German government to estimate project returns, but in the 2021 PFS this was dropped to 6% to make the project profitable. J Cap allege they have found a range of discount rates of up to 19.4%; for context a rate of 8% would halve the NPV and a rate of 14% would deliver negative NPV. Other issues raised relate to flow rates – Vulcan’s PFS assumes flow rates of 100-120 litres/sec and a lithium recovery rate of 90%, whereas other projects have flow rates of 50-80 litres/sec and recovery rates of 70%.
The reasons given for the points raised under (6) above is largely a conflict of interest, i.e. the acquisitions of these consultants by Vulcan were not at arms’ length. Geo-co was loss-making but was acquired by Vulcan post-PFS for $4m in stock and earn outs. The owner was then made COO just days after the PFS was released. The Geo-T owner received 1.5m shares but resigned as a director at the end of March 2021, which JCap allege was so he did not need to disclose the sale of his shares. The relationships between Vulcan and these companies were disclosed in various documents, but not in the PFS or when the expert selection was announced.
A large section of the report (pages 7-11) titled ‘Project Killers’ questions the assumptions noted in point (6) above in further detail, i.e flow rate, earthquakes caused by seismic activity, etc. Some of the scientific commentary in the PFS around ability to interpret/make assumptions using seismic data is contrasted with comments from Geothermal scientists who disagreed that flow rates can be determined without actually drilling wells. Past protests against geothermal power in Germany are noted as well. The lithium concentration is critiqued and shown to be half of that of the Salton Sea in California (mondy: given Vulcan is intending to use DLE the lithium grade seems a moot point to me – part of the benefit of DLE is that it makes low-grade projects like Vulcan and Kachi feasible – but this of course means an acknowledgment that entire project hinges on the viability of the DLE tech). The report notes California’s Salton Sea has “been a graveyard for lithium-brine extraction companies” (but only mentions a single example).
The key critique of the project is titled ‘Voodoo’ (page 12) and puts a spotlight on the undisclosed DLE technology. It notes Vulcan have stated DLE is an established method, pointed to Livent’s use – but the report notes Livent’s technology is proprietary, and Livent’s project has a grade seven times higher than Vulcan’s. It is also pre-concentrated before going into the DLE process, not extracted under pressure such as a geothermal operation requires. Vulcan’s pilot plant results are explored, noting the lab tests were likely completed by Dupont, and mentions the fact photographs were supplied but no details on the absorbent used or the pilot operating conditions, noting that lithium has been extracted from seawater at the same level of purity.
The various characters involved in Vulcan are then explored, chiefly noting past failed attempts to get geothermal projects up and running. Horst Kreuter’s 2003 project failed because “no reasonable holes could be drilled in the rock, and the drills kept getting wedged in the borehole”. The 2016 project failed because “after drilling the well, the company deemed the flow rate too low to make the project viable, and it was abandoned”. Francis Wedin’s two strategic lithium projects in Portugal and Sweden were abandoned (mondy:no reason is given as to why). Wedin’s “hubris” is mentioned, noting in July 2021 he claimed Vulcan had discovered the resource themselves, whereas lithium in the Upper Rhine area submitted a detailed lithium exploration permit a year in advance of Vulcan, and other projects have pilot lithium extraction projects.
The report then explores past failed geothermal projects in the Upper Rhine Valley, noting of the nine major projects, four were halted before being commissioned being a 44% failure rate (mondy: this could be spun the other way, that five of nine have been successful which perhaps is not a bad strike rate, all things considered?) However of the five commissioned projects, 3 are not profitable, 1 is unknown, and 1 is profitable. All nine projects have flow rates well below what Vulcan proposes, the highest by far is 80 litres/sec. There are eight failed projects highlighted: 1980, 2003 (x2), 2007, 2009, 2013, 2016, 2020. The varied reasons given include: flow rates too low, unsuccessful drilling, oil stuck instead of lithium, damaged buildings from seismic activity, and a drilling event which left watch gushing out in front of the town finance ministry.
The end of the report focuses on earthquakes and public opposition in more detail, focusing on local politicians who oppose the project (mondy: this seems like a moot point to me, find any resource project in the world and there will be at least ten politicians who object to it for any variety of reasons, sensible or otherwise). This section of the report also considered “likely overruns” given the PFS metrics are so optimistic. This mainly focuses on drilling costs (given they plan to drill more than 26 wells to accommodate the five power plants, and the holes may go up to 5,000m deep. The high capex is also highlighted; J Cap allege they reviewed 47 projects and Vulcan’s was the highest. It is also noted Vulcan have an exploration license, not a drilling and production license, which could take a further 12 months (or longer with public opposition). Cutting corners to advance the project in a speedy manner would likely lead to higher failure rates/costs. This is where the report ends, with some further diagrams and appendices to validate some of the comments made.
Hope this is useful for those who don’t have time to go through the whole report (although I highly recommend it; putting aside the title page and the appendices, it is only 18 pages). Remember it is a short-seller report so some of the language is naturally sensationalist – you have to accept they have a clear agenda which is stipulated on the front/top banner on their website. This will be an interesting case to follow – I imagine Vulcan will come back with a fairly detailed response to the main issues, but perhaps with an interim 'holding pattern' statement with the usual comments about a biased/conflicted short seller.
(20min delay)