Lights on for an energy minnow

Ceramic Fuel Cells is attracting international attention for its innovative household power generators.

Portfolio point: Investors may find that the next step for the changing household energy market comes from a little -known Australian stock.

One of the most dangerous activities of any commentator is to express a degree of excitement about a stock that at March 31 had $17 million in the bank and is burning cash at the rate of about $5 million a quarter. It has a market capitalisation of about $120 million on the basis of a share price of about 8 cents.

Yet this company has developed technology in Australia that puts it in a position to be one of the major global beneficiaries of the Japanese nuclear disaster.

And a US based giant – the $4 billion capitalised Jabil – is so excited by the prospect that it has signed a memorandum of understanding with the Australian minnow to make the Australian products in Europe. Jabil is one of the biggest manufacturers of components for Apple (plus IBM, Cisco and GE). For a giant global manufacturer to sign an agreement with a tiny cash-strapped Australian company shows that the US company believes this is a product that, one way or another, is going to be manufactured on a massive global scale.

So after that build up, let me tell you the story. Ceramic Fuel Cells (CFU) developed a gas-driven generator that small enterprises and households can buy and install that silently generates electricity at a cost way under the majors. You can imagine how much opposition the incumbents have created when faced with this threat.

But painfully, step by step, the Australian company led by former Pacific Hydro chief Jeff Harding and CEO Brendan Dow not only made the technology work but developed a way to mass produce Ceramic’s so-called BlueGen generators. Most of the activity has been in Europe.

After the Japanese nuclear accident, Germany decided to scale back its massive investment in nuclear power. It is providing an array of incentives that will greatly improve the economics of manufacturing both Ceramic’s BlueGen small-scale electricity generator and its micro combined heat and power (mCHP) units which convert the heat generated by electricity generation to hot water. Ceramic is also developing markets in the UK, Austria and the Netherlands. Its problem is that at this stage the production volumes, while rising rapidly, are not big enough to reduce the purchase price to a level where there is a four to five year payback as a result of lower power bills. When that happens, BlueGen unit installation becomes a no-brainer for smaller enterprises and households.

To get to the required price level Ceramic needs to sell about 5,000 units a year in Europe, but current orders – while rising rapidly – are well short of the target. Nevertheless, for a unit that currently costs in the vicinity of €20,000, production of 5,000 is not a particularly high figure and as the German and other European government subsidies kick in then the price will fall.

Ceramic’s main rival comes from Japanese technology, and at this stage the Australian product is far more fuel efficient – but the Japanese have access to virtually unlimited capital. That’s a danger for the small Australian company.

A number of Australian state governments, including Victoria, have approved the units but once again production scale must be obtained to make it economic.

The bottom line is that Ceramic is at the stage where it needs capital on a larger scale to take advantage of its market position and its looming manufacturing deal with Jabil. I suspect that existing shareholders will need to decide whether to back the company to the next stage or whether some other group needs to take it further – either through a major placement or a full takeover.

All of these factors outlined above make Ceramic a very interesting company to watch, but also clearly a highly speculative stock at this stage.

It’s not often that a small Australian company gets to look at an enormous market and find it is the leading global player. Overseas institutions, a few individuals and Australian self-managed funds are its main shareholders. No large Australian institution is involved. Ceramic can see the lush ground ahead but it needs the money to cross into the green fields.

Governments around the world face enormous outlays to increase lower-carbon power generation and, in the case of Germany, replace nuclear. If they can encourage small enterprises and households to provide the capital while gaining much cheaper power their problem is solved.

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