Gambling Greenie  September 3, 2018


Not Waving, Drowning?

TENS OF MILLIONS of dollars has been sunk into a wave energy company by the WA  and federal governments over the years, and millions more by shareholders.

"Sunk" may be the operative word.

Carnegie Wave Energy was formed in 1987 with the deceptively simple notion that it should be possible to use a buoy bobbing up and down in the waves to pump water ashore at high pressure to drive an electricity generator.  A bonus was that the pressurised seawater could also be pushed through the membranes of a desalination plant, without the need for conventional power-hungry pumps.  No coal, oil or gas required.  Brilliant!

Seven years ago, swept along on a wave of enthusiasm, the Gambling Greenie paid 11c each for 15,000 shares in the venture.  Not brilliant. 

The shares are now worth less than 2c, and last time he looked, would-be sellers outnumbered buyers by three to one.  That's the sort of investment your granny wouldn't touch with a ten-foot boat hook.

Carnegie logo

BUT THINGS ARE CHANGING. In December 2016Carnegie acquired Energy Made Clean, a company specialising in large-scale solar and battery storage, and changed its name to Carnegie Clean Energy, with the ASX code CCE.

Should a company diversify, or stick to its core business?  

In May, spruiking its $6 mln fund-rasing share offer at 3c a share, Carnegie’s CEO Michael  Ottaviano said:  "Carnegie has successfully diversified from being a pure play wave energy business to growing its solar and battery microgrid business, both broadening its opportunities and de-risking the company."

But Carnegie is now selling EMC to TAG Pacific  (ASX: TAG) in exchange for some 58.5 mln TAG shares, worth about $4.4 mln.  The deal would give Carnegie de facto control of TAG, owning about a third of TAG, except that Carnegie is giving the shares away to existing Carnegie shareholders, on the basis of one TAG for every three CCE.

If the deal goes through (and it is still subject to approval by both Carnegie and TAG shareholders) it will leave Carnegie heavily dependent on the success or failure of the latest version  of its big buoys, CETO 6, due for deployment off Albany, WA, during the 2019/2020 summer.  It will keep its microgrid on Garden Island, and its 50 per cent stake in the 10 MW Northam Solar Farm, which is expected to start generating electricity before the end of the year.  But most Carnegie's eggs will be back in one basket.

The proposed deal is no great windfall for small shareholders in Carnegie.  The TAG shares the GG will get if it goes ahead will probably be worth about $370.  Anything under $300 is normally regarded on the stock market as an "unmarketable parcel".

That leaves the GG several hard choices.  He can gamble on Carnegie's new buoy and buy more CCE shares.   He can buy additional TAG shares to be sure he has a big enough parcel to sell, potentially enabling him to cash in his  $90 "windfall".  Or he can effectively write both TAG and CCE off as a dead loss and shove them in his bottom drawer.

The CCE/TAG deal depends partly on TAG being able to raise at least $4 mln from shareholders.  Details have not been finalised at the time of writing, and it is possible that only institutions and wealthy investors will be offered the chance to buy new TAG shares at a discount, but the offer might also be extended to the likes of your humble GG. 

m:power logo

IF ALL GOES WELL, TAG (to be renamed MPower Group) and EMC will have combined revenue of more than $50 mln, committed orders worth about $20 mln and hopefully become a profitable market leader.

Accountancy firm HLB Man Judd, acting as independent advisers on behalf of TAG shareholders, reckon TAG shares are worth between 4c and 6c now, but between 5 and 8.1c if the deal goes through.  The higher figure was based partly on the assumption that the $4 mln could be raised by selling only 40 mln new shares at 10c each.  TAG shares haven't been as high as 10c since mid-July, so a share offer at that price will be a guaranteed flop.  It seems likely that TAG will have to cut the offer price and push out 50 or even 60 mln new shares to raise the money, which will dilute the value of existing TAG shares.

With the asking price on the market at 9c, the Green Gambler has put in a cheeky offer for 15,000 TAG at 7c.  Total cost, including commission, $1,060, if the order is filled.   Don’t tell Granny.

CARNEGIE LOST some $64 mln in the year to June, mostly due to an accounting change which wrote $35 mln off the value of CCE's intellectual property, and $12 mln off the value of goodwill and intellectual property in the EMC business.

The company seems to have two main problems.  The idea of a buoy bobbing about in the briny is not that simple.  The maths involved in modelling the movement of the water and therefore the most efficient design is complex, and the engineering involved just in tethering the things to the seabed is challenging.  It has taken about $140 mln and 30 years to get this far.

The second problem is that wave energy's competitors, especially solar, are becoming cheaper all the time.

The good news is that other wave energy developers have gone bankrupt, given up, or run into technical problems.  Carnegie is the only outfit in the world which has succeeded in harnessing wave power continuously for four seasons, supplying electricity to the Department of Defence on WA's Garden Island.

CETO 6 is designed to provide up to 1.5 MW of power from a single large buoy. It has already undergone wave testing at the Wave Energy Research Centre  in collaboration with the University of WA. The Australian Renewable Energy Agency has put $13 mln into the project, and the WA government has kicked in a further $15.75 mln grant. That’s a serious vote of confidence — governments do not hand out such sums easily. 

More recently, Carnegie has signed a collaboration agreement with Enel Green Power, (EGP) which will invest $US 1 mln ($A1.6 mln) into the research project. More important than the money, though is the fact that Enel will become a member of the technical advisory committee of   both Carnegie and UWA’s Wave Energy Research Centre. EGP is a division of the Enel Group, one of the world’s largest energy companies.  They ought to know a serious renewable energy opportunity when they see one.  

And who knows, down the track the Enel Group may even make a bid for Carnegie.

The Gambling Greenie has added 60,000 CCE shares to his portfolio, paying $0.018 a share, or $1,090 including broker’s commision.

Please, please, don’t tell Granny.

Last updated: 3 September 2018