Went to the CFU Open day on Monday which was attended by other...

Went to the CFU Open day on Monday which was attended by other garden variety shareholders like me – about 20 or so I think. Not anyone elite in sight, so clearly it was just shareholders who were on the waiting list from the last Open Day.

Before I answer the specific questions, I’ll make a few general comments.

I came away very impressed with the company and where they are at the moment – the financial issues notwithstanding, they are clearly on top of their game both technically and in terms of strategy. During the visit there was plenty of time to ask technical and more financial / market oriented questions and Brendon Dow came in at the end of the visit for about half an hour for a relaxed and candid chat. Got to stand next to the only existing BlueGen unit and touch it – nothing particularly exciting there – but got to see the unit boil a kettle and ran hot water from a tap connected to a domestic hotwater unit running from BlueGen. Ooooh errrr!

One thing that really impressed me was that they only started developing the BlueGen product in February, when they realised that they could generate 60% electrical efficiency. The motivation being that this level of electrical efficiency was required to make a fuel cell generator attractive in climates where the heat recovery proposition was not mandatory for economic viability, but what was impressive was that they were able to re-configure their technology, albeit largely unchanged from that used in the integrated MCHP into a new product so rapidly.

So now to the specific questions, and after that some comments about the share price, cash-position, competitors, the fuel cell market in general and orders etc.

1. Where has the new money from the capital raisings been invested? Is it held in government guaranteed accounts?

Brendon Dow assured me with a wry grin that the proceeds of the capital raising are tucked away in cash management accounts.

2. Do their estimates of a $1,100 savings per year / 7 year payback take into account either export back to the grid and/or using it for hot water?

I asked some questions about the nature of the economic modelling surrounding this payback period and was not given a definitive answer. However it was agreed that significant subjectivity surrounds these projections based on assumed usage and cost trends etc.

I believe that the key features included or excluded in the modelling were:
- hot water energy recovery – this was included in modelling, but clearly will be subject to significant variability
- grid export – this was included, but is not as lucrative as it could be due to the low feed-in tariffs in Victoria
- CPI indexing of the cost of mains electricity – this was included
- Sustainability rebates etc – not included I think, but highly likely in the future
- Impact of Carbon Trading Permits – not included I think, but inevitable in the future, making mains electricity more expensive

All in all, I think these projections for BlueGen are conservative and the company wanted demonstrate (and indeed the motivation for BlueGen was) that it makes economic sense without excessive “sweeteners”. With the addition of incentives (which are already in place in many parts of the world – hence the focus on Germany for example) the BlueGen proposition is more attractive.

3. Why did their announcement state that they 'plan to make BlueGen available in Victoria from early 2010'? Whether they end up having agreements with other states/territories or application partners in other states/territories or not, surely once BlueGen is available it would be available country-wide. Just because the Victorian premier attended the launch, and they happen to be based in Victoria and have their first deal (sort of) with a Victorian organisation (VicUrban), you'd think there were no other opportunies in the rest of the country from reading the release.

I didn’t really question their motivation for the Vic-centric announcement, but they assured me that BlueGen will be available to anyone who wants it anywhere in the world! They did make the point however that the economics of any generation technology will be region specific, due to the nature and structure of different markets – eg. NSW is even different to Vic due to Feed-ins, access to reticulated gas etc etc.

4. Have they approached the Australian utility companies (especially AGL ... what a great way to sell extra gas?!) for potential partnering deals (possibly similar to EON etc., whereby the utility sells the unit to the customer or owns it and keeps the exported energy & has less costs due to reduced energy distribution requirements)?

In short, yes, they are looking at this distribution model. This makes more sense in the long run as the unit is more attractive on many levels to a utility. Aside from the base economic proposition mentioned above, the potential to monetise the CO2 savings across a large customer base makes things more attractive – this is something not available to an individual home owner (however it will still be available to anyone)

5. How far away an industrial generator is.......... liberating factories from reliance on the power grid with a bigger unit would seem to be an absolute winner!

This is not a target for CFU in the near term as their compact stack design is simply incompatible with a large scale generator due to feed and exhaust gas distribution issues within the stack which have been extensively optimised for the small scale stack.

Obviously the potential is there for development of a large scale generator, but I wouldn’t expect anything for at least 5 years on this front as this would require significant additional research and they need to turn their existing research into money.

6. Can the generator be modified to run on something other than coal (like biodiesel)

Not sure if I understand this question – the unit takes a natural gas feed, but could feasibly run on any gasified hydrocarbon fuel. Bio diesel I imagine could be possible, but again, it is not a focus when the majority of the market is there for natural gas.

7. Can the unit be made in a different shape, other than a dishwasher?!

Didn’t really get an answer for this one, but I expect it could be – we looked inside the demo BlueGen unit and it was pretty tightly packed with componentry, but the actual fuel cell stack and plant could feasibly be contained in something more slender – I expect, given their short development time for BlueGen that this could be done very quickly.

And now some more general commentary arising predominantly from the informal post-tour chat:

Share Price and Register

Brendon Dow made the comment that he thought the billion-plus share register was not necessarily a bad thing, particularly as it made the stock attractive to traders (and no, I am sure there are none floating around here on the CFU thread..are there?) due to its liquidity which then also made the company better known.

He then made a comment regarding the amount of shares traded in the past couple of days and its current lofty share price which I quote “might be getting a bit ahead of itself” given where CFU are at (at the time it was about 25c). I am inclined to agree with him, although he probably was being too candid here. Actually I sold all of my shares in the past couple of days, as if some loony wanted to buy them off me for 28 c on the strength of the recent announcement then they could have them.

Don’t get me wrong, I am a long termer with this stock, but the last couple of days have been too good an offer to refuse and I will buy back in when things settle down again.


Cash-position,

The company expects that the current cash will see them out for two years, by which time they expect to be cash-flow positive. They did not rule out further opportunity-based working capital requirements if necessary and highlighted that as they move to production they may need some form of debt facility to smooth out cash flow as they will have to maintain stock inventories etc…


Competitors

There was a lengthy discussion re. competitors, of which Ceres and Kyocera were flagged as they major ones, however CFU believe that they are 2 years ahead of them. 60% electrical efficiency is well above all other fuel cell technologies and none of the other companies have even developed and demonstrated an integrated product that exports power to the grid. Brendon Dow made the comment that he felt Ceres, and also all the US companies (eg. Bloom Technologies and Peak Energy) were yet to back up hype with substance – too much blue sky.

He also made the comment that at the recent Hannover fuel cell fair in late April (the world’s pre-emminent fuel cell event) there was a huge response to the BlueGen launch there and the word from the competitors was that they were impressed at the modularity and simplicity of the system.

I have seen some discussion on here in the past few days re. competing technologies, Gas Turbines in particular, and this was also discussed. The current best outcomes for large scale combined cycle gas turbine power generation which includes heat recovery are around 60% (Siemens and GE), but as mentioned elsewhere, you then have transmission losses which will reduce the overall system efficiency. CFU’s units have 60 % electrical efficiency which rises to 85% with heat recovery and no transmission losses, so there is still a big advantage.

The fuel cell market in general.

Following on from the above, the general perception of the fuel cell market has been one of more hype than substance, so much so that Brendon stated that after their announcement of 60% efficiency, he had utilities calling him from overseas stating that they did not believe the announcement. Clearly, CFU is turning the hype into substance – however it still needs to turn this into dollars.

Orders and Markets

The issue of future orders was discussed but clearly no price sensitive information could be released without a “Please explain” from the ASX. That said, at the recent Hannover fuel cell fair, Brendon Dow said that they had an overwhelming response to the BlueGen launch with 80-90 expressions of interest in the product from all over the world. He didn’t’ say what types of organisations were interested, but they are currently following up all of these leads to turn the EOI’s into orders.

The US market was discussed and it was mentioned that a potential US distributor (not sure if this is for BlueGen or a MCHP product) was actually onsite on Monday to find out more about CFU’s products. The US market was described as promising, but not as lucrative as others in the immediate term due to its highly fragmented nature. Key locations might be targeted – notably California and the North East.


All in all, as I said the visit was very positive and it is clear that a huge amount of technical effort has gone into the development of CFU’s products and that the majority of the step-change technical hurdles are overcome. Where they are it is a relatively static design that clearly performs better than anyone elses and they are continually learning more and more about how to better control their production and operation to improve both performance and reliability. I have no doubts that they will land orders over the next year and already they are attracting much more interest. I think with the worst of the global meltdown behind us (hopefully), more risky technologies like these will gradually become favourable again. The big question now will be whether they can get cash flow positive by 2H 2011.

Cheers and good luck to all holders….