Just some thoughts for discussion regarding the upcoming expectations of the market with regards to GDY, the flow tests and the financing situation.
I think we will now see the significance of the closed circuit flow tests being knocked down a peg by prospective shareholders (though even that is at least several months away). A close enough look at the technical aspects of the project show that it has a high probability of success, with the heat resource in place, freely extracted to the surface via in-situ fluids. Mineral scale is fully modelled from existing operations that deal with heated brines, and thermal depletion is governed by the extraction rate, which is controlled by the operators (i.e GDY control the depletion rate). In these economic conditions it is likely that investors need reassurance with regards to the +$3B capex (inclusive of $1B in infrastructure costs).
There are no electricity users adjacent to this project. Stage one of the commercialisation of their electrons will involve developing a 50MW module and building a 110 km transmission line to Moomba oil field. This will be followed by the widely quoted 500 km line to the national grid at Port Augusta, and/or the 490 km line to Olympic Dam. How does this get paid for when state governments can't commit to an unproven technology and capital markets are frozen? How can the company demonstrate to investors that it will eventually have the capacity the raise the requisite funds?
Australia has no consistent national legislation regarding geothermal exploration and production, and it would be highly unrealistic to expect that the Commonwealth has the capacity to implement such legislation. What we need is more consistent legislation between states, so that issues such as transmission (which can span several different state-based legislative schemes) can be addressed by companies to provide confidence to equity markets and the critical funding they supply.
Before adequate changes are made, the inconsistencies in regulation may prove more of a barrier to development than anticipated before this economic turmoil.
It's just a shame that this company's progress will probably be relegated to a technical curiosity until our governments are able to demonstrate a willingness to act and to secure our onshore energy assets. I have full confidence that there will indeed be assistance when the 1MW pilot plant and 50MW plant have demonstrated ongoing success. Excluding transmission infrastructure, this 50MW module alone is estimated to cost over $200M, 70% of which will be covered by GDY. You could add another $100M for infrastructure.
My point is that the commissioning process will require several hundred million dollars, followed by billions more. Heading toward a possible recession, the impetus is on the company to convince investors that all the current activities are part of a solid and defined business strategy. This cannot be done before the 1MW stage demonstrates ongoing success, and possibly not before the 50MW stage.
I certainly won't be waiting that long to take a position in the company. For me, the run up to the pilot plants completion should serve as a good entry point. I'm sure I'll sacrifice some upside to sit it out for that long, but I can't see these rotten markets getting excited about some a commercially vague venture much sooner than then.
The simple fact is, GDY will still produce the cheapest renewable electricity in Australia, and their resource has by far the longest life. They have demonstrated the heat, they have demonstrated the flow, they have demonstrated the backing (through the commitment of Origin). Now they just need to wait for the market to feel comfortable with their capital requirements, and that may take 50MW of proof.
What do you people reckon? Can the market get behind this before they demonstrate the financial backing? Will the share price really rally on the back of flow tests that are all but demonstrated in the previous data?
Cheers
RNE Price at posting:
77.0¢ Sentiment: LT Buy Disclosure: Not Held
