View from the top: Wasabi Energy

Darshini Shah questions Wasabi Energy's chief operating officer Diane Bettess about market opportunities for the Kalina cycle power technology, progress on the company's existing projects and what is needed to propel the share price higher.

Can you explain what the Kalina Cycle power technology does?

In the simplest form, Kalina turns heat into power. The heat can be industrial heat, so heat from the industrial process or from the power generation itself, or renewable heat. Kalina takes the heat and turns it into steam. That steam goes through a steam turbine.

The difference in Kalina to any other process is that Kalina uses ammonia-water as a fluid that heat gets transferred into. The benefit of ammonia-water is that it has a variable boiling point, whereas water or organic fluids, which are the main competitors, have a constant boiling temperature. Because of the variable boiling point, it has more efficiency.

The Kalina Cycle against its competing technologies is up to 50% more efficient, particularly at low temperatures.

What are the market opportunities?

If you are a steelworks, a petrochemical refinery, a glass manufacturer, a power station - you name it - all these can use Kalina by capturing the waste heat. For example, about 60% of energy used in power generation is lost as waste heat, while about 50% of energy input of industrial processes is lost as waste heat.

What is important here is the price of power - people want a good price for the power being produced - along with an environmental reason to produce the power more efficiently.

So far, there haven't been compelling reasons for industries to go down this path. But the opportunities are there. For example, in the US, more than 100,000 megawatts (MW) of potential waste heat is produced - this is equivalent to what Japan uses per year. It's a large, overwhelming market out there.

In countries where there is a shortage of power, unreliable power, like South Africa, Pakistan, Japan, Taiwan - you start to see high tariffs. So the opportunity lies in places where there is a price incentive and environmental incentive.

When is the next news on the DG Kahn Kalina Cycle Plant in Pakistan due?

The next news flow on this project, or any other project, will happen with major milestones.

Why has there been a delay with DG Kahn?

DG Kahn is expected to be completed later this year. Part of the reason for the delay is the number of contractors on site. Bringing that together in any construction environment is always difficult. From Wasabi's point of view, we've done everything that we need to do. What we need to do is wait for everyone else to get the plant to completion.

We've completed a commissioning plan for the project and we're expecting it to come together in the next couple of months. It's going to be a great project for the company when it's finished.

What's the progress on the Kalina Cycle Eco Gen unit in Japan?

The Japan project is undergoing testing and commissioning. It was installed in December 2011. The testing and commissioning will continue over an extended period of time.

How long does the testing and commissioning last?

It's the first time that the Japanese have installed this on their hot spring and they want to look at all the different cycles on it.

The outside temperature changes the density of air. So the hotter it is, the less dense the air is and vice versa. So you produce more power in winter than you do in summer. [The Japanese] want to see the cycle go through.

So the cycle will go through extensive commissioning and testing because we also want to look at how the different components react to the different effects of the springs.

What's happening with the ArcelorMittal plant?

We're been working with ArcelorMittal for 18 months.

About six months ago, [ArcelorMittal] said that it was looking at its manufacturing strategy going forward with the steelworks, and that it was changing some of its processes. That change was going to have an effect on how much available heat there was.

We've been working with them closely to come to a conclusion as to what the best configuration is. And we're still in that process.

The good news is that there is a strong will on both sides to complete the project. So it's being delayed because of that change in ArcelorMittal's strategy.

There also appear to be setbacks with Husavik in Iceland?

In Iceland, we discovered late last year that there was a technical issue with the turbine. So, we've been working with the turbine manufacturer to come to a solution on it. And we're still working to that outcome.

We had been aiming for a 2013 completion, and we're still on track for that to happen.

What are the opportunities with the Tuzla geothermal power project in Turkey?

We announced in August that we had finalised the purchase of an option over 50% of a geothermal field in Turkey. Upon the exercise of that option, which we can do up until the end of 2013, we're currently working on plans on what we're going to do, when we're going to and how we're going to do it.

The project consists of 7.5 MW power plant. It also has the ability of a stage one build-out to have another power plant that would be somewhere between 14 and 17 MW of geothermal power. The field itself, through studies that we've done as well as other historical measures, has shown a potential of 80 MW.

So we have a step-up plan of expansion within the same 11-square-kilometre area, which is really beneficial because power is just being added to the grid.

Turkey has a known [power] rate of 10.5 US cents (6.5p) [per kilowatt hour]. This can be increased to about 13 cents. The 10.5 cent kilowatt hour rate is a very good rate globally.

The Turkish government has been very pro geothermal power. Turkey is highly dependent on power from outside. So it is looking to be more self-sufficient.

What's happening with South Africa?

Wasabi bought into a company called AAP Carbon. AAP Carbon do chemical conversions - they take gas and put it through an engine and they produce electricity. On the back of these engines, you can put a Kalina plant. This produces between 10% and 20% more power.

There's been an enormous power shortage in South Africa - their resource is not enough to meet demand. So they're importing power from Mozambique and other countries nearby. And they're also escalating their power prices quite high. For example, the city of Johannesburg has no gas. Everything's electric. South Africa can develop a market from things like shale gas, but it has no infrastructure for that. So the market conditions are right.

AAP in 2010 built a plant with International Ferro Metals, which has its own mining smelter. So they take the gas off the smelting process, clean it and put it through a bank of engines and they produce about 17 MW. I think they expect to have about 11% of its power used produced through this plant. We've been talking to them about putting a Kalina on the back of their plant. We're still having those discussions. That opportunity is there.

How do the revenue streams for Kalina work?

There are three types of revenues.

The first one is licensing fees. Our licensees pay an up-front fee for the technology and then they pay a fee per installed megawatt. That's a one-off fee. It's not an ongoing royalty stream. We get paid every time there is a new plant. And there are no restrictions on the number of plants that can be built.

But there are, within the licence agreements, milestones that our customers need to meet. If [the customers] don't meet the milestones, then we can revoke the licences. We didn't want the licensees tying up the technology and then not doing anything with it.

The second [revenue stream] is straight engineering fees. So someone does an EPC (engineer, procure, construct) contract and, like DG Kahn, comes and says: "I want a build a Kalina plant". It's a one-off project licence; it's a one-off design fee.

With build-own-operate (BOO), we build the plant ourselves and operate it for a period of time. Depending on the circumstances, we'll either sell the power back to the plant, which may be a steelworks as in the case of ArcelorMittal, or to the grid for a geothermal project. So it depends on who's the recipient of the power.

But we end up with a power purchase agreement to sell the power either back to the industrial facility or back into the grid or to someone else.

What is the lead time?

The general timeframe from contact to contract is, on average, between one and two years. And from signing the contract to building a plant is somewhere between 12 and 18 months.

Which revenue stream is the most important?

The past year revenues have been out of licensing fees and engineering fees. And we're building the business around BOO revenues.

So in terms of the revenue streams, until we get the BOO plants working on the ground, will largely come from licensing and engineering fees.

Our licensees, through FL Smidth and China, will bring in revenues through plants that are now getting built. The cement industry, through FL Smidth, will start generating a number of plants per annum. So we will start getting a number of revenue streams through that per annum.

China, likewise, has, in their five-year plan, energy-efficiency targets. It's gaining momentum.

So we should have two strong components from those two groups coming in as revenue streams.

So BOO is something that you're particularly focused on?

Yes. We always envisaged that we would have a predominance of BOO revenues over time. Our plan is to build up to 25 MW of BOO per annum.

But BOO is also the most capital-intensive?

Correct. For the licencing and engineering, we really just have an overhead cost. It's not a capital cost, but once we start building, we will have a capital cost.

What's in the pipeline?

Ruukki (Finland) has a five MW engine plant. Tata Steel has a 10 MW plant. We've done a feasibility study on a 28 MW plant on a subsidiary of Mitsubishi. You can put a Kalina Cycle on each one of those plants. All of these are sitting in the wings waiting to come through. That pipeline of potential opportunities is all on the cusp.

A lot of African countries operate off diesel gensets. If you operate off a diesel genset, it's probably costing you between about 40 and 80 cents per kilowatt hour. It's expensive. And you can capture the heat off your exhaust and get some more power for it.

So, we're in discussions with a group in Kenya about a generator opportunity. Kenya is a huge geothermal area. So it also has a lot of opportunity in low-temperature geothermal resources.

When do you believe the company will be profitable?

We don't do forecasts currently, but we're working hard to become profitable through the strategies that we have around Turkey, South Africa and other opportunities that we're constantly looking at. We also have investments, so our results get affected by that.

Why did you increase your ownership in AquaGuardian?

The increase in ownership was due to a loan that we given the business. In December last year, the loan became due and so we changed our debt position in the company to equity.

AquaGuardian has great applications for people whose water resources are scarce. Our main target is really the mining industry, which uses processed water or has a source of water that is hugely valuable.

AquaGuardian is gaining momentum in the market. So the increased ownership had been beneficial from that point of view. We're interested to see its development before we actually decide what we will finally do with this investment. We'll see what happens over these next 12 months.

How much cash do you have?

On 2 July, including receipt of the placing funds on that day, Wasabi had a cash balance of AU$4.77 million (£3.03 million).

The cash-flow statement for the end of the quarter will be coming out this month - this will give an update on the cash balance.

Is there a risk of another capital raising soon?

We look at the share placings either as a funding mechanism or as a project development mechanism. We're conscious of the dilution factor on shareholders, and we don't want to dilute. We know we have a lot of shares on issue and placements will only be used for strategic purposes.

The shares are trading at a low - why do you think that is?

General market conditions aren't really working in our favour. It's a fairly thinly-traded stock as well. I don't think that helps us.

What is the free float?

The top 20 shareholders own about 80% of the stock. This includes management and institutional investors, etc.

What do you think the company needs to do to get the share price back up again?

We need to produce results with the projects. The delivery of the DG Kahn plant is a major milestone. That is something that we're focused on doing. We have an active programme in announcements, meeting institutional investors and media.

What assurances can the company provide to private investors that their investment in the company will have any value in the medium term?

The best assurance I can give you is that I'm a shareholder too. [Executive chairman] John Bryne, who owns about 11% of the company, is still buying shares in the company.

Market conditions, government policies and incentives are all pointing towards energy being a key component of the future. This style of business is giving you, in essence, free energy because you're recycling your own. In a world where the demand for energy in increasing, you need ways to meet that demand without damaging the environment.

When is the AGM?

Wednesday 17 October in Australia.

Is there going to be an AGM in London?

No, not at this stage. But we do hold meetings with media, like this one, via which shareholders can be informed. When you've got lots of news, it's an easier thing to do than just regurgitating the same old thing.

Is there any final message for shareholders?

We're definitely focused on our power business. We see a strong pipeline of opportunities. The market factors are all pointing in the right direction for Wasabi to be successful.

I can honestly say management is working day and night to bring value to our shareholders.