Yes, we did, and that’s why not everyone is getting terribly excited by the flow of “hot rocks” news from the likes of Petratherm, Green Rock and Geodynamics.
Oil and gas explorers, dating back to the time when Burmah Oil was the lead player in central Australia, have always known that rock temperature rises significantly at depth in that part of the world.
What’s amazing is that some uncritical observers see this as (a) something unusual and (b) a way to make money.
The Slug, much to the annoyance of the hot rock brigade, has never been a believer in either (a) or (b), and he’s greeting the flow of reports from the thermal explorers with more than a grain of salt.
Technically, and this is not The Slug’s strong suite, it seems that having established that the rocks are hot, it is time to start proving that they are hot enough, and the permeability good enough, for a continuous flow of steam off the rocks into turbines to produce electricity for sale.
The next few months should be a critical time in shifting the hot rock debate from the geological miracle of rising temperature at depth and in a uranium-rich area because we are approaching the second anniversary of the start of deep thermal-energy drilling in central Australia.
Hot rocks have been encountered (it would have news if they hadn’t) and some steam has flowed at the surface from water on the hot rocks – once, again this is in the so-what category.
The real test of hot rock theory is in demonstrating the business case of hot-rock energy in the middle of Australia. True, there are a few minesites to sell electricity to, such as Olympic Dam. But that does not address the question of what will it cost to develop, and how much will it cost to keep operating.
Without pouring too much cold water on the hot rock believers, it is interesting to have a closer look at what investors think of hot rocks. In other words, how much money is really riding on the big name players.
Leader of the pack is Geodynamics, the original proponent which is some two years into the game. When The Slug looked Geodynamics this morning it was up another 8c to $1.98, a price which capitalises the company at around $200 million.
To put that value into perspective, and assuming it was a conventional producer of goods and services, it implies future earnings of around $20 million a year – on a 10-times multiple.
Such valuations are meaningless, of course, in an exploration context. But what they do is help demonstrate that some investors are placing very large bets on Geodynamics successfully proving that it can produce steam off its hot rocks, and can produce commercially competitive electricity.
The Slug, to be a reasonable armchair critic, wishes them the best of luck. But he also points out that a mile-wide discrepancy is opening in the value being assigned to one player in the game compared with others doing almost exactly the same thing.
Petratherm, for example, reported last week that it had found signs of a big hot rock resource and its shares rose 1.5c to 37.5c this morning, a price which values the business at $7.5 million – a fraction of Geodynamics.
Green Rock said last Monday that it has hit “highly encouraging” hot granites at the Blanche-1 about 8km from the Olympic Dam copper/uranium mine – and the share price sagged from 22c to 21c, a price which values the business at $11 million.
It is possible that Geodynamics is streets ahead of its rivals and owns the best piece of hot rock in Australia and it is on the verge of something commercial.
But, The Slug cannot look at those market values $200 million versus $7.5 million and $11 million, for companies in the same early-stages of exploration for a resource which may, or may not, work without wondering why the gap is so large when so much remains to be proven.
