Djibouti Rb milestone-ehr-initial-valuation-report1

Parti Djibouti
Parti DjiboutiGérant à Chef d'entreprise

Djibouti Rb milestone-ehr-initial-valuation-report1

Geothermal Focus with Great Prospects
Earth Heat Resources Limited (EHR) is an Australia based geothermal energy focused
company. It has 11 geothermal exploration licenses (GELs) in Australia besides two
upcoming projects in Argentina and Djibouti, as well as a small stake in a North American
shale play that it is looking to convert into annuity. The Copahue (Argentina) and Fiale
(Djibouti) projects will have a capacity of 180 MW upon completion and would transform
EHR into a significant geothermal player.
The Copahue project is located in a historically active volcanic area and prior testing has
detected commercially viable, vapor dominated geothermal reserve. A pilot project was also
established for several years supplying electricity to a nearby town. The Renewable Energy
Act in Argentina provides for pricing of geothermal power produced by EHR at $100-
$120/MWh, in addition to other benefits such as carbon and tax credits. This is attractive
vis-à-vis similar agreements in Australia for $75-$80/MWh and $85-$135/MWh in the US.
The Fiale project has also shown promising results, registering temperatures of up to 359
°C at 2,000 meters. This project is located in the Assal region within the Rift Valley, an area
of recent volcanic activity and, tectonically, the most active structure in the zone. Hence,
given the advanced stages of its projects, EHR‟s risk profile is low and attractive.
Besides Djibouti, EHR believes there is strong opportunity to develop geothermal in other
East African regions, viz. Kenya, Tanzania, Uganda, Zambia, Rwanda and Burundi, a view
with which we concur although one we have not included in valuation which only includes
contribution from Copahue and Fiale. We have used the Discounted Cash Flow
Methodology for valuing EHR and initiate coverage with a target price of A$0.226/share
Investment Arguments
 Attractive Risk Profile: EHR has a favorable risk profile with significant progress on
the confirmation and feasibility stages. The minimum guaranteed price for the Copahue
project at $100-$120/MWh is attractive and EHR is currently exploring financing options
for developing this project. For the Fiale project, it is evaluating off-take agreements
and has agreed on the different development tranches with its JV partner, Electricitie
de Djibouti. Previous drilling has led to significant progress on this project. Hence, there
is considerable visibility in terms of revenue and cash flows for these two projects
 Strong Macro Support: EHR‟s projects have facilitating macro-economic conditions
such as availability of existing power lines; plentiful water supply; attractive off-take
agreements; expensive alternate energy source (particularly relevant for Fiale where
diesel costs more than twice the expected off-take price); and government support
 Socius Investment Provides Comfort: Socius Capital, a US based PE firm, has
recently made an A$5 million investment in the company. It has an impressive track
record in the clean energy sector and usually invests in companies with a minimum
EBITDA of $2 million for four to six years. Further, it has invested at the current market
price and benefits just like other public investors. We believe this provides incentive to
prospective investors looking to benefit from Socius Capital‟s investment expertise
 Attractively Valued: We have valued EHR on the basis of Discounted Cash Flow
Valuation, taking into account the expected cash flows from the Copahue and Fiale
projects. We assume the Copahue project to fully come on line by 2015 while the Fiale
project is expected to be fully operational by 2017. The total capital expenditure on the
projects is expected to be ~$600 million. Our model provides a fair value of
A$0.226/share. We haven‟t factored contribution from any other project and believe
that there is significant upside potential from the last traded price of A$0.051/share
Price (A$): 0.051
Target Price (A$): 0.226
Beta: 1.1
Price/Book Ratio: 2.1
Debt/Equity Ratio: 0.0
Listed Exchange: ASX
Recent News
16/03/2011: Earth Heat Resources signs
MoU with Drake & Scull Water and Power
(DSWP) to jointly explore, bid for and secure
geothermal project opportunities in the
Middle East and Africa
08/03/2011: Earth Heat Resources Limited
announced that it has engaged the services
of specialist consulting group Sinclair Knight
Merz (SKM) to provide independent services
15/02/2011: Earth Heat appoints key
personnel in Argentina for Copahue
geothermal project
14/02/2011: Earth Heat Resources receives
A$5 million investment support from Socius
Capital Group LLC
Shares in Issue
566.22 M
Market Cap
(A$M) 28.88
52 Week (High): A$0.095
52 Week (Low): A$0.013
Earth Heat Resources Limited
(Ticker:ASX:EHR)
April 13, 2011
www.RBMILESTONE.com
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EHR (LHS) ASE 200 (RHS)
Equity Research and Market Intelligence
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Earth Heat Resources Limited
Company Overview
Introduction
Earth Heat Resources (EHR) is engaged in geothermal exploration activities in Argentina,
Djibouti and Australia. In addition, the company is planning to explore opportunities in coal
bed methane, the other area of its clean energy focus. The company was formerly known
as Fall River Resources Limited (FRV) but changed its name in July 2010 after acquiring
Earth Heat Australia Pty Limited in January 2010 which was engaged in geothermal
exploration, primarily in Australia. In 2009, the management reviewed the company‟s
strategy and concluded that EHR‟s success would be more likely if the company pursued
opportunities in the New Energy sector. In line with this new objective, the company sold
its non-core assets including the sale of West Florence Oil and Gas property to ASX-listed
Adelaide Energy Limited in June 2010.
Prior to the acquisition, EHR or FRV as previously known had mounted debt worth $4
million and faced considerable uncertainty. Subsequently, the company reached a
settlement with its creditors and raised approximately $1.2 million to fund working capital,
therefore becoming debt-free. During the period the company also changed its
management and relocated to Adelaide, Australia.
Exhibit 1 : Key Achievements
Key Achievements in 2010
May 2010 Announced acquisition of Copahue project
Fixed residual FRV issues
June 2010 Divested remaining significant stake to ADE
July 2010 Rebranded to Earth Heat Resources from FRV
August 2010 Roadshow in North America to introduce major fund investors to the company‟s prospects
September 2010 Commencement of JV with Electricitie Di Djibouti and strategic investor discussions
October 2010 Announcement of participation in the Fiale Development project
February 2011 A$ million strategic investment announced by a sophisticated investor
Source: RB Milestone, Company Reports
The company farmed- into the Copahue project based in Argentina in May 2010 and the
Fiale project in Djibouti, East Africa in October 2010. These two projects have the potential
to generate 180 MW of geothermal energy upon completion. The company is looking to re-
list on the Toronto Stock Exchange in 2011 where there are more New Energy companies
listed than on the ASX. Also, financing options for the geothermal sector are limited in
Australia while, in contrast, investor appetite for the same is much stronger in North
America. Recent fund raisings by Magma Energy and Ram Power on the TSX corroborate
the same. EHR also believes that the financing for Fiale and Copahue would be easier
than projects in Australia, given the maturity profile of these projects, which can even
enable debt financing and allow the company to avoid financing through significant equity
dilution
In February 2011, New York-based Socius Capital Group LLC made an investment of A$5
million into the company. Socius has an impressive investment record in clean technology
companies as well as other emerging growth companies. EHR will be using the funds to
progress the Copahue project in Argentina including the feasibility study with
environmental surveys and front-end engineering and design, in addition to taking care of
commercial aspects of the development.
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Key Projects
Copahue Project, Argentina
EHR acquired the Copahue project in Argentina in May 2010 under a Heads of Agreement
(HOA) signed with Geothermal One Inc. of Canada. EHR has 87.5% interest in the
earnings from the project after covering certain costs of the development.
Exhibit 2 : Copahue Project Area
Source: Company Reports
The Copahue project was offered by the Neuquen Provincial and Argentinean government
authorities for open tender in 2010. Under the Renewable Energy Act (REA), the
Argentinean federal government guarantees a purchase price of $100-$120/MWh for the
first 30MW of geothermal sourced electricity being produced in Argentina. The equivalent
average price offered in Australia is $70-$85/MWh, which underscores the attractiveness
of the power purchase agreement. The REA gives EHR an option to secure the
guaranteed price or seek higher pricing by selling electricity to more suitable parties that
are willing to pay a higher price for the power.
Additional details of the HOA are:
 EHR can earn a 50% interest by meeting the expenditure requirements to complete
bid stages 1-2 which include geophysical, geological and engineering studies leading
to a scoping study, at an estimated cost of $18 million
 EHR can earn a further 25% interest by meeting the expenditure requirements to
complete stages 3-4 which include site works and preparation for full feasibility study
at a cost of approximately $35 million
 Upon completion of stage 4, Geothermal One has the option to sell the project to EHR
or participate in the JV by meeting its pro-rata proportion of ongoing expenditure. It
also has the option of transferring its 12.5% interest in the project to EHR if EHR is
willing to cover all expenditure in the third period of earning
 Finally, despite the above-mentioned estimated expenditure, EHR has to undertake a
minimum expenditure of at least $15 million during the first two years. Total cost of the
project is estimated to be ~$100 million
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The Copahue project is located in the Western part of Argentina‟s Neuquen province,
~300 km from the province‟s capital, a few kms from the Chilean border and 55 kms from
the national electricity market interconnector. There is an existing power line in place that
connects the old site to Caviahue ski village, which is in turn connected to the national grid
through first Loncopahue and then into Zappala. This existing power line is an attractive
feature of the project because if EHR operates at a lower baseload (e.g. 10 MW), then it
can readily sell to the closest market in Caviahue but if it expands then it can supply to a
party that would require a larger output and having an existing power line reduces the risk
of transmission losses, which is an important consideration during power purchase
agreement negotiations.
The geothermal resource occurs on the North-East flank of the Copahue volcano which is
a young, historically active stratovolcano. The project is also situated in a broad Caldera
believed to have formed before the Copahue volcano. The Caldera retains its expression
as a valley with steep walls. Erosions have caused gaps in several points which provide
access to the Cophaue-Caldera area from more populated areas of Argentina to the East.
Principal activities in the area are tourism and low-intensity agriculture. One of the zones
of thermal manifestations related to the geothermal resource, Termas de Copahue, has
been developed for seasonal use as a therapeutic spa.
Geothermal exploration and development activities have been undertaken at Copahue
since the 1970s, including a number of superficial and shallow exploratory surveys
(geology, geochemistry, geophysics and temperature gradient drilling). Four deep wells
with depths reaching as much as 1,414 meters have also been drilled in the area. These
wells have demonstrated the presence of commercially viable, vapor-dominated
geothermal reservoir in at least a part of the project.
One of the four wells was used to supply a pilot power plant with a capacity of slightly less
than one MW for several years. The most recent well was drilled to supply a district
heating system at Termas de Copahue, a pipeline was constructed for that purpose but is
no longer in use.
A deeper feasibility study conducted by Japanese International Cooperation Agency in
1992 indicated that an area ~4km
2
around the pilot power plant had the potential to
support an additional 30 MW power station with individual wells capable of producing more
than 7 MW p.a. Subsequent shallow gradient holes and studies indicated that the
geothermal potential might support over 100 MW of power generation as the reservoir is
expected to extend over 30 km
2
or more. Hence, significant infrastructure for geothermal
activities is already in place.
Other Important Highlights of the Project:
 Comprises an identified initial 30 MW geothermal development with possibilities for
significant expansion
 Hot, dry vapor (steam) dominated reservoirs with temperatures of 235 degrees
Celsius at 600 meters located in the Copahue volcanic complex provide the
geothermal heat source
 Development expected to produce first power and generate revenue within 4 years
 Power lines connected from site to nearby town of Caviahue, which in turn is
connected to the grid
 Plentiful water supply in the Patagonian locality
 In between two major roads connecting Argentina and Chile
 Neuquen Province, with a population of 475,000, is a prosperous resource state
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Earth Heat Resources Limited
 Adjoining Mendoza with a population of 1.7 million is a prosperous tourist and wine
district
Commercial Aspects of the Project
 At 30 MW and pricing of $110/MWh, we compute revenues of ~ $27.5 million p.a.
 EHR has computed an IRR exceeding 25% over the 30-year expected life of the
project
 Existing power lines adjacent to the pilot plant enables the company to supply
electricity to end users such as mine operators at a higher price than what it will
receive from the Argentinean government
Fiale Project, Djibouti
In October 2010, EHR signed a Memorandum of Understanding with the Djibouti Ministry
of Energy and Natural Resources and Electricitie de Djibouti. The project involves staged
development of a 150-MW project over several years.
Under a Heads of Agreement (HOA) it signed during the year, EHR is entitled to:
 Lodge certain applications for geothermal application areas in Kenya, consequent
upon discussion with the Mines Ministry
 Continue to access identified highly-prospective geothermal tenements in Djibouti
 Acquire rights to continue a number of filed exploration applications in Botswana for
coal bed methane opportunities
Exhibit 3 : Geothermal System
Source: Company Reports
During the quarter ended December 2010, the company engaged in discussions with
Electricitie De Djibouti, its JV partner in the project, about the structure of the JV and the
underlying power purchase agreement (PPA). The Fiale project has had six wells drilled to
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date, with highly promising results, particularly in terms of productivity. Temperatures have
been recorded up to 359 degrees Celsius at a depth of 2,000 meters.
EHR will develop the project in three phases as follows:
 To define, develop and install a 50 MW plant as soon as feasible
 To define and expand to 100 MW capacity
 To define and expand to 150 MW total capacity
The first stage involves a full geological and geophysical survey; approvals for drillings;
engineering studies; identification of accessible and appropriate drilling locations;
tendering and permitting of drilling rig; and the mobilization of construction materials and
equipment and other services to the site. EHR‟s exploitation program to define the first
phase is expected to be completed by mid 2011. The company is exploring a number of
JV discussions and progressing financing options via debt and equity for this project.
Six wells have been drilled to date and by 2013, the first tranche is expected to become
fully operational with 50 MW capacity coming on line. The work on the next tranche will
start immediately after that.
South Australia GELs
The company was granted additional geothermal licenses in April 2010, bringing its total
GELs to 11, covering an area of ~16,850 sq. km. The area is located in a higher heat flow
zone known as the South Australian Heat Flow Anomaly.
Exhibit 4 : South Australian GELs
Source: Company Reports
EHR believes this area to be promising as it contains a thick layer of shales and similar
sediments which are likely to act as geothermal “insulators” and is also blessed with the
thickest and most extensive development of potential shallow reservoirs. EHR also
anticipates that previous igneous intrusive activity has added to the heat-generating
capacity of the basement rocks. The company also believes that salt features present
could act as natural vertical conduits for focusing heat into the target shallow reservoir
layers. Other positive factors include the fact that an electricity transmission infrastructure
is already in place and located conveniently. This is a region where previously positive
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exploration results have been reported by listed companies such as Petratherm Limited,
Geothermal Resources Limited, Torrens Energy Limited and Eden Energy Limited.
Exhibit 5 : Earth Heat Interests
Source: Company Reports; Note: Location of EHR resources shown in the green with the major ASX listed company
tenements who have reported positive heat flows.
EHR successfully applied for suspension of its GELs in South Australia for a period of 12
months beginning September 30, 2010, in light of the challenging market conditions faced
in Australia by the company and other geothermal explorers in general. The company
doesn‟t expect to incur any significant expenditure on this asset in the near future.
Other Assets
The company is pursuing an agreement with its JV partner and operator Samson Oil and
Gas to convert its interest in the Baxter Shale project, located in Wyoming US, to a royalty.
In addition, the company is also pursuing coal bed methane development and alternative
energy opportunities in other East African countries apart from Djibouti. EHR particularly
finds the prospects in its Kenyan and Botswana interests buoyant.
Exploration Commitments
 Spring River Oil and Gas Interests. The exploration expenditure commitments
related to EHR‟s share of the activities required to be conducted in compliance with
the licensing terms. There is no fixed financial commitment under the license terms
 Australian Geothermal Interests. There is no minimum exploration expenditure
commitment according to the license terms
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Earth Heat Resources Limited
Industry Overview
Introduction
Geothermal energy emanates from the heat contained within the earth that can be utilized
for energy production purposes. The first measurements of heat taken by thermometer
were probably performed in 1740 by De Gensanne in a mine near Belfort, in France. By
1870, modern scientific methods were being used to study the thermal regime of the earth,
but it was not until the 20th century and the discovery of the role played by radiogenic heat
that mankind could fully comprehend such phenomena as heat balance and the earth's
thermal history.
It has been estimated that the total heat content of the earth, calculated above an
assumed average surface temperature of 15 °C, is in the order of 12.6 x 1024 MJ and that
of the crust is 5.4 x 1021 MJ. It shows that earth contains immense thermal energy of
which only a fraction could be utilized by mankind. The utilization is limited to areas in
which geological conditions permit a carrier (water in the liquid or steam phases) to
'transfer' the heat from deep hot zones to or near the surface, thus giving rise to
geothermal resources. Innovative techniques in the near future, however, may offer new
perspectives in this sector.
Exhibit 6 : Geothermal System
Source: International Geothermal Association
The earth has an internal heat content of 1031 joules, of which about 20% is residual heat
from planetary accretion and the remainder generated by higher radioactive decay rates in
the past. Natural heat flows are not in equilibrium and the planet is slowly cooling down on
geologic timescales. For example, the mantle‟s temperature has decreased by about 300-
350 °C in three billion years, remaining at ~4,000 °C at its base. Human extraction taps a
minute fraction of the natural outflow, often without accelerating it, hence geothermal
energy is considered to be sustainable because heat extraction amounts are small when
compared to the earth‟s heat content.
An important factor in geothermal energy is geothermal gradient which refers to an
increase in the earth‟s temperature with respect to depth. Modern technology allows
depths of up to 10,000 meters and the average geothermal gradient is 2.5-3 °C/100
meters. In other words, if the mean annual temperature of the external air is 15 °C, then
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Earth Heat Resources Limited
the temperature at a depth of 2,000 meters can be expected to be about 65°-75 °C and at
3000 meters, 90°-105 °C, etc. There are, however, areas in which the geothermal gradient
is far from the average value. Areas in which the deep rock basement has undergone
rapid sinking and the basin is filled with geologically 'very young' sediments, the
geothermal gradient may be lower than 1 °C/100 meters. On the other hand, there are
some 'geothermal areas' in which the gradient is more than ten times the average value.
Geothermal systems are found in regions with normal or slightly above-normal geothermal
gradient, especially in the regions around plate margins where the geothermal gradient
may be significantly higher than the average value. In the first case, the systems will be
characterized by low temperatures, usually no higher than 100 °C at economic depths,
while in the second the temperatures could cover a wide range from low to very high,
reaching even above 400 °C. A geothermal system comprises a heat source, a reservoir
and a fluid. The heat source can be either a very high temperature (> 600 °C) magmatic
intrusion that has reached relatively-shallow depths (5-10 km) or, as in certain low-
temperature systems, the earth's normal temperature which, as we explained earlier,
increases with depth. The reservoir is a volume of hot permeable rocks from which the
circulating fluids extract heat. The reservoir is generally overlain by a cover of
impermeable rocks and connected to a surficial recharge area through which the meteoric
waters can replace or partly replace the fluids that escape from the reservoir through
springs or through extraction by boreholes. The geothermal fluid is water, mostly meteoric
water, in liquid or vapor form, depending on its temperature and pressure. This water often
carries with it chemicals and gases such as CO2, H2S, etc. Figure 6 is a simplified
representation of an ideal geothermal system.
In a geothermal system, heat source is the only element that needs to be natural while the
other two could be artificial. For example, geothermal fluids extracted from a reservoir to
drive a turbine in a geothermal power plant could, after their utilization, be injected back
into the reservoir through specific injection wells. In this way, natural recharge of the
reservoir is integrated with an artificial recharge. For many years now re-injection has also
been adopted in various parts of the world as a means of drastically reducing the impact
on the environment of geothermal plant operations. An example of this is the Hot Dry
Rocks, which resulted from an experiment conducted in 1970 in New Mexico, USA. In Hot
Dry Rocks, high-pressure water is pumped through the body of a hot compact rock,
leading to hydraulic fracturing. The heated water is then forced out through a second well
drilled into the rock.
According to International Geothermal Association (IGA), there were ~8,933-MW capacity
geothermal power plants installed in 24 countries in 2005 generating 55,709 GWh of
power annually. The capacity has increased by a CAGR of 3.7% to reach 10,715 MW in
2010 while power generation has touched 67,246 GWh. By 2015, IGA expects the
capacity to reach 18,500 MW at a CAGR of 11.5%, with the US leading with ~7.8 GW of
new capacity in pipeline. As many as 70 countries have planned capacity additions during
the period including those in Europe and the Americas that did not have geothermal plants
in 2010. The power generation target for renewable energy sources is generally set in
terms of proportion of total electricity production, ranging between 5% and 30%. For
example, Europe has targeted 20% of its power generation from renewable sources by
2020, Brazil 75% by 2030, and China 15% by 2020.
Geothermal plants are costly to build – the exploration, drilling and installation costs are
high – compared to conventional plants. Drilling accounts for over half the total costs.
However, once installed, the maintenance costs are fairly low. Moreover, a geothermal
plant requires very little fuel (needed for pumping only) and is thus immune to fuel price
fluctuations. Hence, in feasible areas where the generation can be considerable,
geothermal can prove to be a low-cost, environment-friendly alternative. The oldest and
most commercially-viable geothermal systems are volcanic associated developments.
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Earth Heat Resources Limited
Extraction
Traditionally, geothermal plants were built on the edges of tectonic plates where high-
temperature geothermal resources are available near the surface but later improvement in
technology, drilling and extraction techniques enabled plants to be set up over a broader
geographic area.
Electrical plant construction and well drilling costs are at about €2-5 million per MW of
electrical capacity, while the break-even price of a typical project is 0.04-0.10 € per kWh.
The cost and size of a plant varies according to the end use. For example, direct heating
applications can use much shallower wells with lower temperatures, so smaller systems
with lower costs and risks are feasible.
Extraction is carried out in following three steps:
 Geological Studies. Geological and hydrogeological studies help in identifying the
location and extension of the areas worth investigating. They also facilitate production
processes and identify suitable extraction techniques
 Geochemical Surveys. A geochemical survey consists of sampling and chemical
and/or isotope analysis of the water and gases from geothermal manifestations (hot
springs, fumaroles, etc.) or wells in the study area. Geochemical surveys are used in
determining whether the geothermal system is water or vapor dominated, estimating
temperature at depth; homogeneity of the water supply; and chemical characteristics
of the deep fluid, etc. Some of the techniques used at this stage such as seismics,
gravity and magnetic are even used during the final stages of extraction to better
define the shape, size, depth and other important characteristics of the geological
structure
 Drilling. This represents the final phase of the exploration program and is the only
means of determining the real characteristics of the geothermal reservoir and thus of
assessing its potential
Types of Geothermal Power Plants
There are three types of geothermal power plants:
 Dry Steam Power Plant. It is the first but the least common type of geothermal
plants. In this system, dry steam straight from the production well (or the geothermal
reservoir) is utilized. The high–pressure, dry steam passes up the production well and
through a rock catcher which consists of a series of mesh filters that catch any rocks,
stones or other debris which can damage the turbine blades. The steam then passes
through a steam turbine that produces electricity. The steam exits into a turbine
condenser that is under a vacuum and forms the condensate which is then pumped
through a series of scrubbing towers that remove the gases which are non-
condensate. From here, it is pumped on to the water cooling towers where the
condensate is cooled and any remaining non-condensable gases are re-circulated to
the scrubbers before being re-injected into the cooled condensate down into the
injection well and back into the geothermal reservoir
 Flash Steam Power Plant. This type of plant injects water and condensate into the
geothermal reservoir through the injection well and forces water at high temperature
up through the production well. From the production well it is pumped through a series
of pressure vessels which are at a lower internal pressure than the hot geothermal
fluid, causing it to flash off into low, medium and high pressure steam. The steam then
passes through the turbine condensing and returning to the geothermal reservoir
along with the non-condensable gases through the injection well
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 Binary Cycle Power Plant. This type of plant uses high-temperature geothermal
water to heat another fluid which has a lower boiling point than water. The secondary
fluid, usually isobutene or isopentane, is heated by the geothermal water through a
heat exchanger and flashes off into vapor. This vapor is used to drive a turbine and
condensed back to a fluid before returning to the heat exchanger to start the cycle
again. Because the geothermal fluid passes from the production well through the heat
exchanger and back down the well in a continuous circuit, this is a closed loop
system. Therefore, in this type of plant there is no escape of noxious gases and there
is no gas scrubbing required
Applications
Approximately 70 countries made direct use of 270 petajoules (PJ) of geothermal heating
in 2004, more than half of which went for space heating and a third for heated pools. The
remainder supported industrial and agricultural applications. Global installed capacity was
28 GW but capacity factors tend to be low (30% on average) since heat is mostly needed
in winter. The above figures are dominated by 88 PJ of space heating extracted by an
estimated 1.3 million geothermal heat pumps with a total capacity of 15 GW. Heat pumps
for home heating are the fastest-growing means of exploiting geothermal energy, with a
global annual growth rate of 30% in energy production.
Following are the important utilizations of geothermal resources:
Electricity Generation
Electricity generation as an application for geothermal systems is gaining popularity.
Electricity is generated using either turbines or binary plants. Conventional steam turbines
require fluids at temperatures of at least 150 °C. With this type of unit, steam consumption
(from the same inlet pressure) per kilowatt-hour of electricity produced is almost double
that of a condensing unit. However, atmospheric exhaust turbines are extremely useful as
pilot plants; stand-by plants in the case of small supplies from isolated wells; and for
generating electricity from test wells during field development. They are also used when
the steam has a high non-condensable gas content (>12% in weight). The atmospheric
exhaust units can be constructed and installed very quickly and put into operation in little
more than 13-14 months from their order date. This type of machine is usually available in
small sizes
Exhibit 7 : Atmospheric Exhaust Geothermal Power Plant
Source: International Geothermal Association
The binary plants utilize a secondary working fluid, usually an organic fluid (typically n-
pentane), that has a low boiling point and high vapor pressure at low temperatures as
compared to steam. The secondary fluid is operated through a conventional Rankine cycle
(ORC): geothermal fluid yields heat to the secondary fluid through heat exchangers in
which this fluid is heated and vaporizes. The vapor produced drives a normal axial flow
turbine and is then cooled and condensed, at which point the cycle begins again. Binary
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plants are usually constructed in small modular units of a few hundred kWe to a few MWe
capacity. These units can then be linked up to create power plants of a few tens of
megawatts. Their cost depends on a number of factors, particularly on the temperature of
the geothermal fluid produced which influences the size of the turbine, heat exchangers
and cooling system. The total size of the plant has little effect on the specific cost as a
series of standard modular units is joined together to obtain larger capacities.
Binary plant technology is a very cost-effective and reliable means of generating electricity
from the energy available from water-dominated geothermal fields.
Exhibit 8 : Geothermal Binary Power Plant
Source: RB Milestone, International Geothermal Association
Direct Heat
Heat generation is the most common, oldest and versatile utilization of geothermal energy.
The best-known forms of utilization include bathing; space and district heating; agricultural
applications; aquaculture; and some industrial uses but heat pumps are the most
widespread (12.5% of the total energy use in 2000). Geothermal district heating systems
are capital intensive. The main costs are initial investment costs, for production and
injection wells; down-hole and transmission pumps, pipelines and distribution networks;
monitoring and control equipment; peaking stations and storage tanks. Operating
expenses, however, are comparatively lower than in conventional systems, and consist of
pumping power, system maintenance, quality control and management.
Agricultural Applications
Agricultural applications of geothermal fluids consist of open-field agriculture and
greenhouse heating. Thermal water can be used in open-field agriculture to irrigate and/or
heat the soil. The greatest drawback in irrigating with warm waters is that in order to obtain
any worthwhile variation in soil temperature such large quantities of water are required, at
temperatures low enough to prevent damage to the plants, that the fields would be
flooded. One possible solution to this problem is to adopt a subsurface irrigation system
coupled with a buried-pipeline soil-heating device. The most common application of
geothermal energy in agriculture, however, is in greenhouse heating which has been
developed on a large scale in many countries.
Industrial Applications
Finally, geothermal energy is also used in industrial applications such as process heating;
evaporation; drying‟ distillation‟ sterilization; washing; de-icing; and salt extraction.
Additional examples also include concrete curing; bottling of water and carbonated drinks;
paper and vehicle parts production; oil recovery; milk pasteurization; leather industry;
chemical extraction; CO2 extraction; laundry use; diatomaceous earth drying; pulp and
paper processing; and borate and boric acid production. There are also plans to utilize
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Earth Heat Resources Limited
low-temperature geothermal fluids to de-ice runways and disperse fog at some airports. A
cottage industry has developed in Japan that utilizes bleaching properties of the H2S in
geothermal waters to produce innovative and much-admired textiles for ladies' clothing.
Major Producing Countries
In 2010, the United States led the world in geothermal electricity production with 3,086
MW of installed capacity from 77 power plants. The largest group of geothermal power
plants in the world is located at The Geysers, a geothermal field in California. The
Philippines comes next with 1,904 MW of capacity on line. Geothermal contributes 18% to
the country‟s total electricity generation. Geothermal power plants now exist in 19
countries and new plants continue to be commissioned annually, such as in Indonesia,
Italy, Turkey, and the United States in 2009. Chevron Corporation is the world's largest
private geothermal electricity producer.
Exhibit 9 : Installed Geothermal Capacity (2010)
Source: Geothermal Energy Association, RB Milestone
Since 2004, significant additions of electric capacity have taken place in Indonesia,
Iceland, New Zealand, the United States and Turkey, with Turkey and Iceland each
experiencing growth of more than 200 per cent. Global capacity has increased 1.8 GW
since 2004. During 2009, the US saw six new plants come on line – increasing domestic
capacity by an estimated 181 MW, or 6 percent – followed by Indonesia (137 MW), Turkey
(47 MW), and Italy (40 MW) for a total of at least 405 MW added. While this was less than
the 456 MW added in 2008, it was considerably larger than the 2007 market of 315 MW. In
addition, in the US states of Louisiana and Mississippi, two projects were initiated to
generate geothermal power with hot water produced by oil and gas wells. By the end of
2009, geothermal power plants operated in 24 countries and totaled approximately 10.7
GW of capacity, generating more than 67 TWh of electricity annually. Nearly 88% of that
capacity is located in seven countries.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
InMW
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Earth Heat Resources Limited
Growth Drivers
Strong Contribution from Copahue, Argentina
In case of the Copahue project, significant infrastructure is already in place since it had a
small-scale pilot geothermal plant running in the 1990s. The pilot testing also mitigates
operational risk to a great extent. Further, it also meets essential check-points for a
successful geothermal plant such as heat; porosity/permeability; pressure; site access;
and power agreement. Below are the project economics that are attractive and will provide
a significant boost to EHR‟s income stream. The income stream doesn‟t include other
benefits such as carbon credits, input tariff bonuses, tax credits, accelerated depreciation,
etc.
Exhibit 10 : Project Economics - Copahue
Parameter Economics
1 MW of Geothermal Produces ~8500 MWh p.a.
Renewable Act PPA at $ 120/MW ~1 million revenue per year
Operating and Maintenance Cost $30/MW
Pre-tax Equity Cash Flow ~765K/MW p.a.
Annual Total Pre-tax Cash Flow (for a net 30 MW plant) $23 million
Annual After Tax Cash Flow (assuming tax rate of 35%) $14.9 million
Source: RB Milestone, Company Reports
Good Support For Geothermal Globally
There is growing support for geothermal development globally and as pointed out in the
Industry Overview section, governments all over the world have set aggressive targets for
renewable energy as a proportion of total energy in the near term. With oil prices
breaching the century mark, geothermal systems along with other renewable energy
sources have become increasingly viable. Governments are also providing support, in
terms of attractive PPAs and tax breaks, which further lifts the after-tax cash flows of
geothermal developers.
There Can Be Further Upside from Djibouti
One of the most exciting events in the past year for EHR was the addition of the Fiale
geothermal development in its portfolio. At 150 MW this project is five times the size of the
Copahue project. This catapults the company into the upper echelons of independent
geothermal producers.
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Earth Heat Resources Limited
Exhibit 11 : Djibouti
Source: Company Reports
The Republic of Djibouti is a small, stable African country with a population of under 1
million. The country hosts a number of international military bases and is entirely reliant on
diesel for power generation. The cost of the diesel is about $ 24 cents/KWh, or about $
240/MWh, which augurs well for geothermal development. Located in the Lake Assal
region of Djibouti, the Fiale Project is considered to be one of the most strategic
geothermal opportunities within the Africa Rift Valley. Lake Assal is an area of recent
volcanic activity ascertained from drilling in 1980s and has recently come under intense
focus of international geothermal players. This area is characterized by the presence of
geothermal resources revealed by numerous hot springs found in different parts of the
country.
The Assal drift is tectonically the most active structure in the zone of crustal divergence in
Afar. The Assal area constitutes a typical oceanic-type rift valley with a highly-developed
graben structure displaying axial volcanism. The area is complex in structure because of a
series of active volcanism. Further, the series are generally composed of phyphyritic
basalt formations and hyaloclasites.
There is considerable infrastructure development underway in the country, promoting
additional state and private enterprise which will lift the power demand in the country over
the next 20 years. The power infrastructure operated by EDD is located a short distance
from the Fiale project, a big benefit for rapid commercialization at much lower cost for the
electricity generated. In addition, EHR‟s JV with EDD as the sole provider of retail
electricity services in the country underpins the ability for this project to generate
substantial cash flows for a long period of time.
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Earth Heat Resources Limited
Regional Dynamics in East Africa Are Positive
The African Energy Commission estimates the potential geothermal capacity in East Africa
to be over 10,000 MW, with Djibuti having a potential capacity of between 230 MW and
860 MW. In addition, East Africa is energy deficient with only 5-10% rural households
having access to electricity. So far only Kenya (167 MW) and Ethiopia (7.2 MW) use
geothermal energy in East Africa. Thus, there are plenty of untapped geothermal
opportunities in this region.
In line with its objective to invest into mature projects with lower risk profile, EHR
announced entry into Africa in August 2010. Besides Djibouti, the company is also looking
at Botswana and Kenya where regional dynamics for geothermal development are very
attractive. Kenya is the most-advanced geothermal province in Africa with low sovereign
risk and availability of funding for project financing. On the other hand, Botswana has
consistently ranked among one of the top African investment destinations. Another
catalyst is low domestic energy supplies despite abundant supply of coal.
Exhibit 12 : Rift Valley
Source: Company Reports
Further, the demand for electricity is robust in these countries due to improving economic
conditions, rising population and a lack of conventional sources all of which bodes well for
strong growth for the renewable sector in the region.
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Earth Heat Resources Limited
Exhibit 13 : Change in Demand for Electricity (2009)
Source: RB Milestone, Company Reports
Given the energy-deficient nature of the African economies, there is considerable
opportunity for EHR to build on its Fiale project in Djibouti. EHR believes that there is
significant potential to develop the resources in the East African Rift Valley countries.
Exhibit 14 : Potential in Africa
Source: Company Reports
Low Risk Profile
The risk profile of EHR is quite low compared to other players in the geothermal sector.
Below are the some of the key differences between the Copahue project and Australian
geothermal systems:
 Reservoirs in Argentina are dry-steam dominated unlike that in Australia, which
eliminates the need to inject fluids artificially to sustain production
 In Argentina, reservoirs exist naturally, while in Australia, hot-dry rock projects require
a reservoir to be created
 The total depth for primary target in the Copahue project is 1,400 meters, whereas in
Australia typical depth for wells are between 3,000 meters and 5,000 meters
 Drilling cost for the Copahue project is expected to be between $1.7 million and $3
million. In Australia, drilling costs for hot-dry rock type ranges from $14-25 million
0%
2%
4%
6%
8%
10%
12%
14%
Djibouti Kenya Tanzania Uganda Zambia Rwanda Burundi
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Earth Heat Resources Limited
 The Copahue project has produced steam historically and thus is sustainable, which
drastically reduces the uncertainty regarding the timing and extent of revenue for
similar exploration projects in Australia
 There is no equivalent volcanic geothermal project in Australia like the one in
Argentina
Exhibit 15 : Development Stage In A Typical Geothermal Project
Source: RB Milestone, Company Reports
There are three stages in a typical geothermal development project:
 Confirmation Stage: Geothermal reservoirs are typically discovered by accident
through mineral exploration or by visible surface evidence such as hot pools or
geysers. Exploratory slim-hole wells are drilled to map such reservoirs. The
confirmation stage ends with an independent consultant‟s report verifying the
existence of the reservoir and the minimum capacity it can support
 Drilling and Feasibility Study Stage: At least three production wells are drilled in
this stage. These are 12 inches in diameter and 500 -3,000 meters deep. Drilling of a
well costs anywhere between $3 million and $6 million. This stage ends with a
feasibility study conducted by independent consultants. The study defines the map,
size and flow rates more practically and adds an economic feasibility assessment
 Construction Stage: A first positive feasibility study is the first domino that enables
permitting, which then enables a long-term PPA with the local grid operator, thus
enabling debt and equity financing. A geothermal plant will normally take 18 months to
start power generation after the completion of the drilling process
EHR is well ahead of its peers in terms of the progress on the first two stages. It already
has signed a power purchase agreement, is discussing financing options with different
parties and has even forecast the expected cash flows from the Copahue project.
Confirmation
stage
Drilling and
Feasibility Study
Construction
Stage
EHR's projectshave alreadymade significant
progressacrossthese stages
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Earth Heat Resources Limited
Strategic Investment Provides Comfort
The A$5 million investment by Socius Capital provides significant comfort and reinforces
prospective investors‟ belief in the company‟s prospects. The investment has been at
market price and not at a discount; hence there is no equity dilution. In addition, Socius
benefits only if the market price rises and would have conducted its due-diligence before
investing in EHR. The company is fully funded at this stage to complete a concept study
and pre-feasibility assessment on the Copahue project and the investment has
transformed EHR into a development company from an exploration company.
SWOT of Earth Heat Resources Limited
Strengths
 The acquisition of Earth Heat Limited has proved to be fruitful for the company as
evident in the award of the Fiale project in Djibouti
 Copahue project with Geothermal One Inc. will provide significant cash flows in the
near term
 Highly-experienced management team with history in subsurface development
 Full historic feasibility study; 4 deep wells; shallow, very high temperatures (235 °C at
600 meters); transmission lines within 30m of old pilot plant; and attractive guaranteed
off-take pricing
 The Fiale project has shown excellent results during the drilling phase with very high
temperatures
Weaknesses
 The company has not yet turned operationally profitable. Income for the last years
was driven by one-off sale of an asset in the US
 The company has not operated a geothermal plant, especially a large plant like Fiale
historically
Opportunity
 There is considerable scope of New Energy including geothermal energy in the
emerging economies which are energy deficient and haven‟t developed conventional
energy to a large scale
 Governments globally are providing an impetus to develop greener technologies for
reducing reliance on conventional energy sources and move towards more
environment-friendly sources
 Regional dynamics in East Africa are very positive
Threat
 Inability to raise capital for financing exploration activities
 As the company has not yet operated a geothermal plant, it may face operational
problems which can drive up costs and reduce or erode profits
 A reduction in prices of conventional or non-conventional alternate energy sources
can make geothermal development unviable
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Earth Heat Resources Limited
Latest Financial Results
Exhibit 16 : Annual Income Statements
Australian $
Year Ended
June 30, 2009
Year Ended
June 30, 2010
YoY%
Revenue 2,068 -
Directors‟ fees (142,383) 93,399 -165.6%
Debenture interest, discount amortization and accretion (220,993) 134,207 -160.7%
Equipment depreciation (3,027) (1,272) -58.0%
Foreign exchange (loss)/gain 6,895 (268) -103.9%
Interest on loans (56,721) (5,222) -90.8%
Management fees (58,000) (22,000) -62.1%
Office (47,010) (11,128) -76.3%
Professional fees (240,788) (154,455) -35.9%
Insurance - (16,543)
Shareholder costs (34,299) (72,001) 109.9%
Property investigation (39,158) (13,199) -66.3%
Regulatory and filing fees (29,866) (8,658) -71.0%
Salaries and benefits (350,713) 357,807 -202.0%
Travel and promotion (1,325) (49,030) 3600.4%
Profit/(loss) before other items (1,215,320) 231,637 -119.1%
Current asset impairment expense (318,714) -
Reduction in convertible debentures and other liabilities - 2,194,372
Geothermal project expenses written off - (190,180)
Natural gas and petroleum project interests written off (474,235) (119,699) -74.8%
Interest income - 244
Other revenue 101,874 75,000 -26.4%
Income tax expense - -
Income for the year (1,906,395) 2,191,374 -214.9%
Basic eps (in cents) (2.10) 0.90 -142.9%
Diluted eps (in cents) (2.10) 0.89 -142.4%
Source: Company Filings, RB Milestone
As EHR was in development stage during the year, the company did not earn any
revenue. Reduction in convertible debentures and other liabilities of ~$2.2 million resulted
from the disposal of its oil and gas assets in the US, leading to a profit of $2.2 million for
the year.
Valuation & Investment View
We have valued EHR using the Discounted Cash Flow Methodology. We have made
explicit forecasts until 2022 for computing Free Cash Flow to Equity (FCFE), beyond that
we have assumed no terminal growth rate. Below are some of the key assumptions we
have made in our model:
 Factored in only the Copahue and Fiale projects in our valuation
 Parity between US$ and A$
 Copahue project is expected to come online fully by 2015 and we have assumed
uniform progress until then, i.e. 20% completion by 2011, 40% by 2012 and so on
 Similarly, we have assumed the Fiale project to fully come online by 2017 and have
forecast similar progress as that for Copahue
 Operating cost of $30/MWh
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Earth Heat Resources Limited
 Pricing: Copahue - $110/MWh, Djibouti - $100/MWh
 Capital Expenditure for Copahue and Djibouti estimated to be $100 million and $500
million, respectively
 Debt/Equity ratio of ~60% during the development stage but debt assumed to be fully
paid later
 Cost of Equity of 15%
 Tax rate of 35%
Below is our valuation for EHR, which comes to $0.226 per share
Exhibit 17 : EHR Valuation
FCFE Valuation for EHR in $ 000
Cost of equity
12.8%
Rf
5.5%
Risk Premium
6.5%
Beta
1.1
Terminal g
0%
PV of terminal value
23,706
Value of equity
128,034.9
Number of shares O/S
566,219.0
Value per share (in cents)
22.61
Current market price (in cents)
5.1
Upside/(downside)
343.4%
Source: RB Milestone, Bloomberg
We also compared the peer valuation for EHR but believe that the comparable valuation
varies considerably primarily due to the different risk profiles of its peers. As mentioned
earlier, EHR‟s risk profile is far more attractive than most of its peers which may explain
why the market accords it a higher multiple on EV/Reserve basis.
Exhibit 18 : Peer Valuation
Name Reserves (in PJ) EV (A$ mn) EV/Reserves
Geodynamics 244,000 25.3 103.8x
Geothermal Resources 84,000 2.8 33.3x
Green Rock Energy 870,000 9.1 10.5x
Greenearth Energy 280,600 3.9 13.8x
Hot Rock 180,000 6.8 37.6x
Kuth Energy 361,000 2.4 6.8x
Panax Geothermal 332,000 14.1 42.6x
Petratherm 230,000 14.9 65.0x
Torrens Energy 780,000 1.5 1.9x
Earth Heat Resources 172,985 26.7 154.5
Source: RB Milestone, Bloomberg
Finally, we computed the sensitivity of EHR‟s fair value based on different scenarios. We
get a strong upside even in the most bearish of scenarios for the company. Hence we
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Earth Heat Resources Limited
initiate coverage on EHR with a price target of $0.226 per share and an upside potential
343.4%. At current valuation, the downside risk is very limited.
Exhibit 19 : Cost of Equity and Operating Cost
Source: RB Milestone, Bloomberg
Exhibit 20 : Copahue Sensitivity – Pricing and Cost of Equity
Source: RB Milestone, Bloomberg
Exhibit 21 : Copahue Sensitivity – Pricing and Capacity
Source: RB Milestone, Bloomberg
22.6 9% 10% 11% 12% 13% 14% 15% 16% 17%
10 44.97 41.09 37.59 34.41 31.54 28.94 26.57 24.42 22.47
15 41.46 37.87 34.63 31.70 29.04 26.63 24.45 22.46 20.66
20 38.37 35.05 32.05 29.34 26.89 24.66 22.64 20.81 19.14
25 35.29 32.25 29.49 27.00 24.75 22.70 20.85 19.16 17.63
30 32.22 29.44 26.94 24.67 22.61 20.75 19.06 17.52 16.12
35 29.14 26.64 24.38 22.33 20.47 18.79 17.26 15.88 14.61
40 26.07 23.84 21.82 19.99 18.34 16.84 15.47 14.23 13.10
45 23.01 21.05 19.28 17.67 16.22 14.90 13.70 12.60 11.61
50 21.28 19.47 17.83 16.34 15.00 13.77 12.66 11.66 10.74
Operatingcost($/MWh)
Cost of Equity
22.6 70 80 90 100 110 120 130 140 150
9% 27.87 28.96 30.04 31.13 32.22 33.30 34.39 35.48 36.57
10% 25.48 26.47 27.46 28.45 29.44 30.43 31.43 32.42 33.41
11% 23.32 24.22 25.13 26.03 26.94 27.84 28.74 29.65 30.55
12% 21.36 22.19 23.02 23.84 24.67 25.49 26.32 27.14 27.97
13% 19.59 20.35 21.10 21.86 22.61 23.37 24.12 24.88 25.63
14% 17.99 18.68 19.37 20.06 20.75 21.44 22.13 22.82 23.51
15% 16.53 17.16 17.79 18.42 19.06 19.69 20.32 20.95 21.59
16% 15.20 15.78 16.36 16.94 17.52 18.10 18.68 19.26 19.84
17% 13.99 14.52 15.06 15.59 16.12 16.65 17.18 17.72 18.25
Pricing $/MWh
CostofEquity
22.6 70 80 90 100 110 120 130 140 150
10 17.67 17.92 18.17 18.42 18.67 18.92 19.17 19.43 19.68
15 18.15 18.52 18.90 19.28 19.66 20.03 20.41 20.79 21.17
20 18.63 19.13 19.64 20.14 20.64 21.15 21.65 22.15 22.66
25 19.11 19.74 20.37 21.00 21.63 22.26 22.89 23.51 24.14
30 19.59 20.35 21.10 21.86 22.61 23.37 24.12 24.88 25.63
35 20.07 20.96 21.84 22.72 23.60 24.48 25.36 26.24 27.12
40 20.56 21.56 22.57 23.58 24.58 25.59 26.60 27.60 28.61
45 21.04 22.17 23.30 24.44 25.57 26.70 27.83 28.98 30.29
50 21.52 22.78 24.04 25.29 26.55 27.81 29.09 30.57 32.08
Pricing $/MWh
Capacity(inMW)
23
Earth Heat Resources Limited
Exhibit 22 : Fiale Sensitivity – Pricing and Cost of Equity
Source: RB Milestone, Bloomberg
Exhibit 23 : Fiale Sensitivity – Pricing and Capacity
Source: RB Milestone, Bloomberg
Key Risk Factors
 Execution Risk. All of EHR‟s projects are in development stage and thus failure in
planned execution can be a concern
 Financing Risk. All the projects need a significant development capital outlay during
their installation. EHR‟s prospects are significantly linked to identifying funding
sources for its projects. Failure to obtain financing as and when needed can impact
the continuation of EHR‟s operations
 Regulatory Risk. EHR‟s success will depend to a large extent on regional
government policies, subsidies, tax rebates and other support. For example, the
Copahue project has been a contract at a beneficial rate. Withdrawal of such policies
or introduction of a policy which impacts the geothermal industry can affect the
company‟s prospects
 Forecast Risk. Although the company has reasonably assessed the profitability from
its Copahue project including capital outlay, maintenance expenses etc, there is
possibility that the actual costs can be substantially greater than the forecast costs,
which may considerably affect the profitability of the company
 Operating Risks. The company may be exposed to several risks such as operational
and technical difficulties encountered in mining including difficulties in commissioning
and operating plant and equipment; mechanical failure or plant breakdown; adverse
weather conditions; industrial and environmental accidents; industrial disputes; and
unexpected shortages or increases in the cost of consumables, spare parts, plant and
equipment
22.6 60 70 80 90 100 110 120 130 140
9% 17.37 20.11 22.81 27.51 32.22 36.93 41.68 47.07 52.52
10% 15.89 18.40 20.87 25.15 29.44 33.74 38.08 43.02 48.03
11% 14.56 16.85 19.11 23.02 26.94 30.86 34.82 39.35 43.96
12% 13.35 15.45 17.52 21.09 24.67 28.25 31.87 36.04 40.29
13% 12.25 14.17 16.08 19.34 22.61 25.89 29.20 33.04 36.95
14% 11.25 13.02 14.77 17.75 20.75 23.75 26.78 30.32 33.93
15% 10.35 11.97 13.58 16.31 19.06 21.80 24.58 27.85 31.18
16% 9.52 11.02 12.49 15.00 17.52 20.04 22.59 25.60 28.68
17% 8.77 10.15 11.51 13.81 16.12 18.43 20.77 23.56 26.40
Pricing $/MWh
CostofEquity
Pricing/MWh
22.6 60 70 80 90 100 110 120 130 140
80 9.69 10.72 11.76 12.79 13.83 14.84 15.86 17.44 19.18
90 10.05 11.22 12.38 13.55 14.69 15.83 17.61 19.58 21.54
100 10.42 11.71 13.01 14.29 15.56 17.36 19.54 21.72 23.91
110 10.78 12.21 13.63 15.03 16.66 19.06 21.46 23.87 26.27
120 11.15 12.70 14.24 15.76 18.15 20.77 23.39 26.01 28.63
130 11.52 13.20 14.85 16.80 19.64 22.47 25.31 28.15 31.31
140 11.88 13.69 15.46 18.07 21.12 24.18 27.24 30.49 34.13
150 12.25 14.17 16.08 19.34 22.61 25.89 29.20 33.04 36.95
160 12.61 14.66 17.11 20.61 24.10 27.59 31.42 35.60 39.77
Capacity(inMW)
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Earth Heat Resources Limited
Management and Board of Directors
Dr. Raymond Shaw, Chairman
Dr. Raymond Shaw is a geologist and geophysicist with more than 30 years of experience
in the resources and energy sector, including the oil, gas and coal industries. He
commenced his professional career as a petroleum explorationist with Shell Development
Australia in Perth prior to working for various consulting groups, including the Swiss
international consulting firm Petroconsultants SA, for which he served as its resident
director based in Singapore responsible for its Far East operations. He has provided
consultancy to industry, government and international aid agencies on a variety of
resource projects throughout Australia and Asia including the World Bank, Asia
Development Bank and AusAID. Dr. Shaw was the founding Managing Director of Great
Artesian Oil and Gas Limited prior to its listing on the ASX in 2003 until April 2007.
Mr. Torey Marshall, Managing Director
Mr. Torey Marshall is a geologist with broad-based technical and business development
experience in the minerals, petroleum and geothermal sectors. This has resulted in the
successful execution of various exploration programs (some resulting in discoveries) in a
number of different areas. Having worked extensively as an exploration geoscientist, his
skills have been considerably expanded to include senior management experience of
various private and public (unlisted) companies. As part of his consulting practice, he has
developed strategies for, and acquired projects on behalf of a number of clients. He has
assisted a number of private and public companies in building their businesses to enhance
shareholders‟ value such as Phoenix Oil and Gas Limited; Australian Oil Company
Limited; Red Gum Resources Limited; Great Artesian Oil and Gas Limited; and QGC
Limited. He is a director of Red Gum Resources Limited and Polymetalic Exploration Pyt
Limited.
Mr. Alexander Rose-Innes, Executive Director
Mr. Alexander Rose-Innes, a portfolio manager for long/short equities and global macro
funds, has extensive experience in the equity capital markets of Australia. With a strategic
focus on the resources sectors of the ASX, JSE and FTSE markets, Alexander has a deep
knowledge of African politics and business including a wide variety of contacts through his
macroeconomic research that guides investment decisions. Appointed in July 2010, he will
be responsible for Business Development and Finance. Alexander is currently employed
as a Macroeconomic Analyst and Portfolio Manager with Coldstream Investment Holdings
where he maintains a balanced portfolio of equities, derivatives, bonds and commodities.
Previous experience includes Invicta Holdings Pvt Limited in South Africa and Publishing
and Broadcasting Limited.
Mr. Norman J Zillman, Non-Executive Director
Mr Normal Zillman has held positions of Exploration Manager and subsequently Deputy
General Manager of Crusader Limited; General Manager Exploration and Production of
Claremont Petroleum NL and Beach; and manager of the Petroleum Branch of the
Queensland Department of Mines and Energy and State Mining Engineer for Petroleum.
He has also held the position of Regional Manager of Northern Queensland for the
Department of Mines and Energy based in Charters Towers where he supervised all
aspects of mineral exploration and mining activities in that region. He has held a wide
variety of public company positions including foundation Managing Director of Queensland
Gas Company Limited; foundation Chairman of Great Artesian Oil and Gas Limited;
Chairman of China Yunnan Copper Limited; Director of Planet Gas Limited; non-executive
Chairman of Blue Energy Limited; and non-executive Chairman of Hot Rocks Limited. Mr
Zillman is a member of the Australasian Institute of Mining and Metallurgy and the
Petroleum Exploration Society of Australia.
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Earth Heat Resources Limited
Mr. David Sutton, Independent Non-Executive Director
Mr. David Sutton has many years of experience as a director of companies in stock
broking and investment banking under his belt. He is a director of Dayton Way Financial
Pvt Limited as well as two listed companies, Sinovus Mining Limited and Imperial
Corporation Limited. He is a former director of Martin Place Securities Pvt Limited.
Mr. Stephen Pearce, Non-Executive Director
Mr. Pearce is a practicing lawyer who specializes in corporate and securities work in
Vancouver, British Columbia. Stephen serves as a director and/or officer of the following
mainly resource-related public companies: Neodym Technologies Inc. (NEX–V) (Director,
Corporate Secretary); Sable Resources Limited (TSX–V) (Director, Corporate Secretary);
Flying A Petroleum Limited (TSX-V); Sunorca Development Corp. (CSNX); and Golden
Goliath Resources Limited (TSX–V) (Director, Corporate Secretary). Stephen has a law
degree from the University of British Columbia and economics degree from York
University.
26
Earth Heat Resources Limited
Disclaimer
Some of the information in this report relates to future events or future business and financial
performance. Such statements constitute forward-looking information within the meaning of
the Private Securities Litigation Act of 1995. Such statements can be only predictions and the
actual events or results may differ from those discussed due to, among other things, the risks
described in „Earth Heat Resources Limited' company reports. The content of this report with
respect to Earth Heat Resources Limited has been compiled primarily from information
available to the public released by Earth Heat Resources Limited through news releases and
ASX filings on the Australian Stock Exchange. Earth Heat Resources Limited is solely
responsible for the accuracy of that information. Information as to other companies has been
prepared from publicly available information and has not been independently verified by Earth
Heat Resources Limited or RB Milestone Group (RBMG). Certain summaries of scientific
activities and outcomes have been condensed to aid the reader in gaining a general
understanding. For more complete information about Earth Heat Resources Limited, the
reader is directed to the Company's website at www.earthheat.com.au. This report is
published solely for information purposes and is not to be construed as an offer to sell or the
solicitation of an offer to buy any security in any state. Past performance does not guarantee
future performance. This report is not to be copied, transmitted, displayed, distributed (for
compensation or otherwise), or altered in any way without RBMG's prior written consent.
RBMG is not compensated for any analytical research and evaluation services that are
performed for Earth Heat Resources Limited but RBMG has received cash compensation
(under twenty thousand US dollars) in exchange for other segregated services.

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Djibouti Rb milestone-ehr-initial-valuation-report1

  • 1. Geothermal Focus with Great Prospects Earth Heat Resources Limited (EHR) is an Australia based geothermal energy focused company. It has 11 geothermal exploration licenses (GELs) in Australia besides two upcoming projects in Argentina and Djibouti, as well as a small stake in a North American shale play that it is looking to convert into annuity. The Copahue (Argentina) and Fiale (Djibouti) projects will have a capacity of 180 MW upon completion and would transform EHR into a significant geothermal player. The Copahue project is located in a historically active volcanic area and prior testing has detected commercially viable, vapor dominated geothermal reserve. A pilot project was also established for several years supplying electricity to a nearby town. The Renewable Energy Act in Argentina provides for pricing of geothermal power produced by EHR at $100- $120/MWh, in addition to other benefits such as carbon and tax credits. This is attractive vis-à-vis similar agreements in Australia for $75-$80/MWh and $85-$135/MWh in the US. The Fiale project has also shown promising results, registering temperatures of up to 359 °C at 2,000 meters. This project is located in the Assal region within the Rift Valley, an area of recent volcanic activity and, tectonically, the most active structure in the zone. Hence, given the advanced stages of its projects, EHR‟s risk profile is low and attractive. Besides Djibouti, EHR believes there is strong opportunity to develop geothermal in other East African regions, viz. Kenya, Tanzania, Uganda, Zambia, Rwanda and Burundi, a view with which we concur although one we have not included in valuation which only includes contribution from Copahue and Fiale. We have used the Discounted Cash Flow Methodology for valuing EHR and initiate coverage with a target price of A$0.226/share Investment Arguments  Attractive Risk Profile: EHR has a favorable risk profile with significant progress on the confirmation and feasibility stages. The minimum guaranteed price for the Copahue project at $100-$120/MWh is attractive and EHR is currently exploring financing options for developing this project. For the Fiale project, it is evaluating off-take agreements and has agreed on the different development tranches with its JV partner, Electricitie de Djibouti. Previous drilling has led to significant progress on this project. Hence, there is considerable visibility in terms of revenue and cash flows for these two projects  Strong Macro Support: EHR‟s projects have facilitating macro-economic conditions such as availability of existing power lines; plentiful water supply; attractive off-take agreements; expensive alternate energy source (particularly relevant for Fiale where diesel costs more than twice the expected off-take price); and government support  Socius Investment Provides Comfort: Socius Capital, a US based PE firm, has recently made an A$5 million investment in the company. It has an impressive track record in the clean energy sector and usually invests in companies with a minimum EBITDA of $2 million for four to six years. Further, it has invested at the current market price and benefits just like other public investors. We believe this provides incentive to prospective investors looking to benefit from Socius Capital‟s investment expertise  Attractively Valued: We have valued EHR on the basis of Discounted Cash Flow Valuation, taking into account the expected cash flows from the Copahue and Fiale projects. We assume the Copahue project to fully come on line by 2015 while the Fiale project is expected to be fully operational by 2017. The total capital expenditure on the projects is expected to be ~$600 million. Our model provides a fair value of A$0.226/share. We haven‟t factored contribution from any other project and believe that there is significant upside potential from the last traded price of A$0.051/share Price (A$): 0.051 Target Price (A$): 0.226 Beta: 1.1 Price/Book Ratio: 2.1 Debt/Equity Ratio: 0.0 Listed Exchange: ASX Recent News 16/03/2011: Earth Heat Resources signs MoU with Drake & Scull Water and Power (DSWP) to jointly explore, bid for and secure geothermal project opportunities in the Middle East and Africa 08/03/2011: Earth Heat Resources Limited announced that it has engaged the services of specialist consulting group Sinclair Knight Merz (SKM) to provide independent services 15/02/2011: Earth Heat appoints key personnel in Argentina for Copahue geothermal project 14/02/2011: Earth Heat Resources receives A$5 million investment support from Socius Capital Group LLC Shares in Issue 566.22 M Market Cap (A$M) 28.88 52 Week (High): A$0.095 52 Week (Low): A$0.013 Earth Heat Resources Limited (Ticker:ASX:EHR) April 13, 2011 www.RBMILESTONE.com 800 1,300 1,800 2,300 2,800 3,300 3,800 4,300 4,800 5,300 0.000 0.010 0.020 0.030 0.040 0.050 0.060 0.070 0.080 0.090 Apr-10 Jun-10 Aug-10 Sep-10 Nov-10 Dec-10 Jan-11 Mar-11 Apr-11 EHR (LHS) ASE 200 (RHS) Equity Research and Market Intelligence
  • 2. 2 Earth Heat Resources Limited Company Overview Introduction Earth Heat Resources (EHR) is engaged in geothermal exploration activities in Argentina, Djibouti and Australia. In addition, the company is planning to explore opportunities in coal bed methane, the other area of its clean energy focus. The company was formerly known as Fall River Resources Limited (FRV) but changed its name in July 2010 after acquiring Earth Heat Australia Pty Limited in January 2010 which was engaged in geothermal exploration, primarily in Australia. In 2009, the management reviewed the company‟s strategy and concluded that EHR‟s success would be more likely if the company pursued opportunities in the New Energy sector. In line with this new objective, the company sold its non-core assets including the sale of West Florence Oil and Gas property to ASX-listed Adelaide Energy Limited in June 2010. Prior to the acquisition, EHR or FRV as previously known had mounted debt worth $4 million and faced considerable uncertainty. Subsequently, the company reached a settlement with its creditors and raised approximately $1.2 million to fund working capital, therefore becoming debt-free. During the period the company also changed its management and relocated to Adelaide, Australia. Exhibit 1 : Key Achievements Key Achievements in 2010 May 2010 Announced acquisition of Copahue project Fixed residual FRV issues June 2010 Divested remaining significant stake to ADE July 2010 Rebranded to Earth Heat Resources from FRV August 2010 Roadshow in North America to introduce major fund investors to the company‟s prospects September 2010 Commencement of JV with Electricitie Di Djibouti and strategic investor discussions October 2010 Announcement of participation in the Fiale Development project February 2011 A$ million strategic investment announced by a sophisticated investor Source: RB Milestone, Company Reports The company farmed- into the Copahue project based in Argentina in May 2010 and the Fiale project in Djibouti, East Africa in October 2010. These two projects have the potential to generate 180 MW of geothermal energy upon completion. The company is looking to re- list on the Toronto Stock Exchange in 2011 where there are more New Energy companies listed than on the ASX. Also, financing options for the geothermal sector are limited in Australia while, in contrast, investor appetite for the same is much stronger in North America. Recent fund raisings by Magma Energy and Ram Power on the TSX corroborate the same. EHR also believes that the financing for Fiale and Copahue would be easier than projects in Australia, given the maturity profile of these projects, which can even enable debt financing and allow the company to avoid financing through significant equity dilution In February 2011, New York-based Socius Capital Group LLC made an investment of A$5 million into the company. Socius has an impressive investment record in clean technology companies as well as other emerging growth companies. EHR will be using the funds to progress the Copahue project in Argentina including the feasibility study with environmental surveys and front-end engineering and design, in addition to taking care of commercial aspects of the development.
  • 3. 3 Earth Heat Resources Limited Key Projects Copahue Project, Argentina EHR acquired the Copahue project in Argentina in May 2010 under a Heads of Agreement (HOA) signed with Geothermal One Inc. of Canada. EHR has 87.5% interest in the earnings from the project after covering certain costs of the development. Exhibit 2 : Copahue Project Area Source: Company Reports The Copahue project was offered by the Neuquen Provincial and Argentinean government authorities for open tender in 2010. Under the Renewable Energy Act (REA), the Argentinean federal government guarantees a purchase price of $100-$120/MWh for the first 30MW of geothermal sourced electricity being produced in Argentina. The equivalent average price offered in Australia is $70-$85/MWh, which underscores the attractiveness of the power purchase agreement. The REA gives EHR an option to secure the guaranteed price or seek higher pricing by selling electricity to more suitable parties that are willing to pay a higher price for the power. Additional details of the HOA are:  EHR can earn a 50% interest by meeting the expenditure requirements to complete bid stages 1-2 which include geophysical, geological and engineering studies leading to a scoping study, at an estimated cost of $18 million  EHR can earn a further 25% interest by meeting the expenditure requirements to complete stages 3-4 which include site works and preparation for full feasibility study at a cost of approximately $35 million  Upon completion of stage 4, Geothermal One has the option to sell the project to EHR or participate in the JV by meeting its pro-rata proportion of ongoing expenditure. It also has the option of transferring its 12.5% interest in the project to EHR if EHR is willing to cover all expenditure in the third period of earning  Finally, despite the above-mentioned estimated expenditure, EHR has to undertake a minimum expenditure of at least $15 million during the first two years. Total cost of the project is estimated to be ~$100 million
  • 4. 4 Earth Heat Resources Limited The Copahue project is located in the Western part of Argentina‟s Neuquen province, ~300 km from the province‟s capital, a few kms from the Chilean border and 55 kms from the national electricity market interconnector. There is an existing power line in place that connects the old site to Caviahue ski village, which is in turn connected to the national grid through first Loncopahue and then into Zappala. This existing power line is an attractive feature of the project because if EHR operates at a lower baseload (e.g. 10 MW), then it can readily sell to the closest market in Caviahue but if it expands then it can supply to a party that would require a larger output and having an existing power line reduces the risk of transmission losses, which is an important consideration during power purchase agreement negotiations. The geothermal resource occurs on the North-East flank of the Copahue volcano which is a young, historically active stratovolcano. The project is also situated in a broad Caldera believed to have formed before the Copahue volcano. The Caldera retains its expression as a valley with steep walls. Erosions have caused gaps in several points which provide access to the Cophaue-Caldera area from more populated areas of Argentina to the East. Principal activities in the area are tourism and low-intensity agriculture. One of the zones of thermal manifestations related to the geothermal resource, Termas de Copahue, has been developed for seasonal use as a therapeutic spa. Geothermal exploration and development activities have been undertaken at Copahue since the 1970s, including a number of superficial and shallow exploratory surveys (geology, geochemistry, geophysics and temperature gradient drilling). Four deep wells with depths reaching as much as 1,414 meters have also been drilled in the area. These wells have demonstrated the presence of commercially viable, vapor-dominated geothermal reservoir in at least a part of the project. One of the four wells was used to supply a pilot power plant with a capacity of slightly less than one MW for several years. The most recent well was drilled to supply a district heating system at Termas de Copahue, a pipeline was constructed for that purpose but is no longer in use. A deeper feasibility study conducted by Japanese International Cooperation Agency in 1992 indicated that an area ~4km 2 around the pilot power plant had the potential to support an additional 30 MW power station with individual wells capable of producing more than 7 MW p.a. Subsequent shallow gradient holes and studies indicated that the geothermal potential might support over 100 MW of power generation as the reservoir is expected to extend over 30 km 2 or more. Hence, significant infrastructure for geothermal activities is already in place. Other Important Highlights of the Project:  Comprises an identified initial 30 MW geothermal development with possibilities for significant expansion  Hot, dry vapor (steam) dominated reservoirs with temperatures of 235 degrees Celsius at 600 meters located in the Copahue volcanic complex provide the geothermal heat source  Development expected to produce first power and generate revenue within 4 years  Power lines connected from site to nearby town of Caviahue, which in turn is connected to the grid  Plentiful water supply in the Patagonian locality  In between two major roads connecting Argentina and Chile  Neuquen Province, with a population of 475,000, is a prosperous resource state
  • 5. 5 Earth Heat Resources Limited  Adjoining Mendoza with a population of 1.7 million is a prosperous tourist and wine district Commercial Aspects of the Project  At 30 MW and pricing of $110/MWh, we compute revenues of ~ $27.5 million p.a.  EHR has computed an IRR exceeding 25% over the 30-year expected life of the project  Existing power lines adjacent to the pilot plant enables the company to supply electricity to end users such as mine operators at a higher price than what it will receive from the Argentinean government Fiale Project, Djibouti In October 2010, EHR signed a Memorandum of Understanding with the Djibouti Ministry of Energy and Natural Resources and Electricitie de Djibouti. The project involves staged development of a 150-MW project over several years. Under a Heads of Agreement (HOA) it signed during the year, EHR is entitled to:  Lodge certain applications for geothermal application areas in Kenya, consequent upon discussion with the Mines Ministry  Continue to access identified highly-prospective geothermal tenements in Djibouti  Acquire rights to continue a number of filed exploration applications in Botswana for coal bed methane opportunities Exhibit 3 : Geothermal System Source: Company Reports During the quarter ended December 2010, the company engaged in discussions with Electricitie De Djibouti, its JV partner in the project, about the structure of the JV and the underlying power purchase agreement (PPA). The Fiale project has had six wells drilled to
  • 6. 6 Earth Heat Resources Limited date, with highly promising results, particularly in terms of productivity. Temperatures have been recorded up to 359 degrees Celsius at a depth of 2,000 meters. EHR will develop the project in three phases as follows:  To define, develop and install a 50 MW plant as soon as feasible  To define and expand to 100 MW capacity  To define and expand to 150 MW total capacity The first stage involves a full geological and geophysical survey; approvals for drillings; engineering studies; identification of accessible and appropriate drilling locations; tendering and permitting of drilling rig; and the mobilization of construction materials and equipment and other services to the site. EHR‟s exploitation program to define the first phase is expected to be completed by mid 2011. The company is exploring a number of JV discussions and progressing financing options via debt and equity for this project. Six wells have been drilled to date and by 2013, the first tranche is expected to become fully operational with 50 MW capacity coming on line. The work on the next tranche will start immediately after that. South Australia GELs The company was granted additional geothermal licenses in April 2010, bringing its total GELs to 11, covering an area of ~16,850 sq. km. The area is located in a higher heat flow zone known as the South Australian Heat Flow Anomaly. Exhibit 4 : South Australian GELs Source: Company Reports EHR believes this area to be promising as it contains a thick layer of shales and similar sediments which are likely to act as geothermal “insulators” and is also blessed with the thickest and most extensive development of potential shallow reservoirs. EHR also anticipates that previous igneous intrusive activity has added to the heat-generating capacity of the basement rocks. The company also believes that salt features present could act as natural vertical conduits for focusing heat into the target shallow reservoir layers. Other positive factors include the fact that an electricity transmission infrastructure is already in place and located conveniently. This is a region where previously positive
  • 7. 7 Earth Heat Resources Limited exploration results have been reported by listed companies such as Petratherm Limited, Geothermal Resources Limited, Torrens Energy Limited and Eden Energy Limited. Exhibit 5 : Earth Heat Interests Source: Company Reports; Note: Location of EHR resources shown in the green with the major ASX listed company tenements who have reported positive heat flows. EHR successfully applied for suspension of its GELs in South Australia for a period of 12 months beginning September 30, 2010, in light of the challenging market conditions faced in Australia by the company and other geothermal explorers in general. The company doesn‟t expect to incur any significant expenditure on this asset in the near future. Other Assets The company is pursuing an agreement with its JV partner and operator Samson Oil and Gas to convert its interest in the Baxter Shale project, located in Wyoming US, to a royalty. In addition, the company is also pursuing coal bed methane development and alternative energy opportunities in other East African countries apart from Djibouti. EHR particularly finds the prospects in its Kenyan and Botswana interests buoyant. Exploration Commitments  Spring River Oil and Gas Interests. The exploration expenditure commitments related to EHR‟s share of the activities required to be conducted in compliance with the licensing terms. There is no fixed financial commitment under the license terms  Australian Geothermal Interests. There is no minimum exploration expenditure commitment according to the license terms
  • 8. 8 Earth Heat Resources Limited Industry Overview Introduction Geothermal energy emanates from the heat contained within the earth that can be utilized for energy production purposes. The first measurements of heat taken by thermometer were probably performed in 1740 by De Gensanne in a mine near Belfort, in France. By 1870, modern scientific methods were being used to study the thermal regime of the earth, but it was not until the 20th century and the discovery of the role played by radiogenic heat that mankind could fully comprehend such phenomena as heat balance and the earth's thermal history. It has been estimated that the total heat content of the earth, calculated above an assumed average surface temperature of 15 °C, is in the order of 12.6 x 1024 MJ and that of the crust is 5.4 x 1021 MJ. It shows that earth contains immense thermal energy of which only a fraction could be utilized by mankind. The utilization is limited to areas in which geological conditions permit a carrier (water in the liquid or steam phases) to 'transfer' the heat from deep hot zones to or near the surface, thus giving rise to geothermal resources. Innovative techniques in the near future, however, may offer new perspectives in this sector. Exhibit 6 : Geothermal System Source: International Geothermal Association The earth has an internal heat content of 1031 joules, of which about 20% is residual heat from planetary accretion and the remainder generated by higher radioactive decay rates in the past. Natural heat flows are not in equilibrium and the planet is slowly cooling down on geologic timescales. For example, the mantle‟s temperature has decreased by about 300- 350 °C in three billion years, remaining at ~4,000 °C at its base. Human extraction taps a minute fraction of the natural outflow, often without accelerating it, hence geothermal energy is considered to be sustainable because heat extraction amounts are small when compared to the earth‟s heat content. An important factor in geothermal energy is geothermal gradient which refers to an increase in the earth‟s temperature with respect to depth. Modern technology allows depths of up to 10,000 meters and the average geothermal gradient is 2.5-3 °C/100 meters. In other words, if the mean annual temperature of the external air is 15 °C, then
  • 9. 9 Earth Heat Resources Limited the temperature at a depth of 2,000 meters can be expected to be about 65°-75 °C and at 3000 meters, 90°-105 °C, etc. There are, however, areas in which the geothermal gradient is far from the average value. Areas in which the deep rock basement has undergone rapid sinking and the basin is filled with geologically 'very young' sediments, the geothermal gradient may be lower than 1 °C/100 meters. On the other hand, there are some 'geothermal areas' in which the gradient is more than ten times the average value. Geothermal systems are found in regions with normal or slightly above-normal geothermal gradient, especially in the regions around plate margins where the geothermal gradient may be significantly higher than the average value. In the first case, the systems will be characterized by low temperatures, usually no higher than 100 °C at economic depths, while in the second the temperatures could cover a wide range from low to very high, reaching even above 400 °C. A geothermal system comprises a heat source, a reservoir and a fluid. The heat source can be either a very high temperature (> 600 °C) magmatic intrusion that has reached relatively-shallow depths (5-10 km) or, as in certain low- temperature systems, the earth's normal temperature which, as we explained earlier, increases with depth. The reservoir is a volume of hot permeable rocks from which the circulating fluids extract heat. The reservoir is generally overlain by a cover of impermeable rocks and connected to a surficial recharge area through which the meteoric waters can replace or partly replace the fluids that escape from the reservoir through springs or through extraction by boreholes. The geothermal fluid is water, mostly meteoric water, in liquid or vapor form, depending on its temperature and pressure. This water often carries with it chemicals and gases such as CO2, H2S, etc. Figure 6 is a simplified representation of an ideal geothermal system. In a geothermal system, heat source is the only element that needs to be natural while the other two could be artificial. For example, geothermal fluids extracted from a reservoir to drive a turbine in a geothermal power plant could, after their utilization, be injected back into the reservoir through specific injection wells. In this way, natural recharge of the reservoir is integrated with an artificial recharge. For many years now re-injection has also been adopted in various parts of the world as a means of drastically reducing the impact on the environment of geothermal plant operations. An example of this is the Hot Dry Rocks, which resulted from an experiment conducted in 1970 in New Mexico, USA. In Hot Dry Rocks, high-pressure water is pumped through the body of a hot compact rock, leading to hydraulic fracturing. The heated water is then forced out through a second well drilled into the rock. According to International Geothermal Association (IGA), there were ~8,933-MW capacity geothermal power plants installed in 24 countries in 2005 generating 55,709 GWh of power annually. The capacity has increased by a CAGR of 3.7% to reach 10,715 MW in 2010 while power generation has touched 67,246 GWh. By 2015, IGA expects the capacity to reach 18,500 MW at a CAGR of 11.5%, with the US leading with ~7.8 GW of new capacity in pipeline. As many as 70 countries have planned capacity additions during the period including those in Europe and the Americas that did not have geothermal plants in 2010. The power generation target for renewable energy sources is generally set in terms of proportion of total electricity production, ranging between 5% and 30%. For example, Europe has targeted 20% of its power generation from renewable sources by 2020, Brazil 75% by 2030, and China 15% by 2020. Geothermal plants are costly to build – the exploration, drilling and installation costs are high – compared to conventional plants. Drilling accounts for over half the total costs. However, once installed, the maintenance costs are fairly low. Moreover, a geothermal plant requires very little fuel (needed for pumping only) and is thus immune to fuel price fluctuations. Hence, in feasible areas where the generation can be considerable, geothermal can prove to be a low-cost, environment-friendly alternative. The oldest and most commercially-viable geothermal systems are volcanic associated developments.
  • 10. 10 Earth Heat Resources Limited Extraction Traditionally, geothermal plants were built on the edges of tectonic plates where high- temperature geothermal resources are available near the surface but later improvement in technology, drilling and extraction techniques enabled plants to be set up over a broader geographic area. Electrical plant construction and well drilling costs are at about €2-5 million per MW of electrical capacity, while the break-even price of a typical project is 0.04-0.10 € per kWh. The cost and size of a plant varies according to the end use. For example, direct heating applications can use much shallower wells with lower temperatures, so smaller systems with lower costs and risks are feasible. Extraction is carried out in following three steps:  Geological Studies. Geological and hydrogeological studies help in identifying the location and extension of the areas worth investigating. They also facilitate production processes and identify suitable extraction techniques  Geochemical Surveys. A geochemical survey consists of sampling and chemical and/or isotope analysis of the water and gases from geothermal manifestations (hot springs, fumaroles, etc.) or wells in the study area. Geochemical surveys are used in determining whether the geothermal system is water or vapor dominated, estimating temperature at depth; homogeneity of the water supply; and chemical characteristics of the deep fluid, etc. Some of the techniques used at this stage such as seismics, gravity and magnetic are even used during the final stages of extraction to better define the shape, size, depth and other important characteristics of the geological structure  Drilling. This represents the final phase of the exploration program and is the only means of determining the real characteristics of the geothermal reservoir and thus of assessing its potential Types of Geothermal Power Plants There are three types of geothermal power plants:  Dry Steam Power Plant. It is the first but the least common type of geothermal plants. In this system, dry steam straight from the production well (or the geothermal reservoir) is utilized. The high–pressure, dry steam passes up the production well and through a rock catcher which consists of a series of mesh filters that catch any rocks, stones or other debris which can damage the turbine blades. The steam then passes through a steam turbine that produces electricity. The steam exits into a turbine condenser that is under a vacuum and forms the condensate which is then pumped through a series of scrubbing towers that remove the gases which are non- condensate. From here, it is pumped on to the water cooling towers where the condensate is cooled and any remaining non-condensable gases are re-circulated to the scrubbers before being re-injected into the cooled condensate down into the injection well and back into the geothermal reservoir  Flash Steam Power Plant. This type of plant injects water and condensate into the geothermal reservoir through the injection well and forces water at high temperature up through the production well. From the production well it is pumped through a series of pressure vessels which are at a lower internal pressure than the hot geothermal fluid, causing it to flash off into low, medium and high pressure steam. The steam then passes through the turbine condensing and returning to the geothermal reservoir along with the non-condensable gases through the injection well
  • 11. 11 Earth Heat Resources Limited  Binary Cycle Power Plant. This type of plant uses high-temperature geothermal water to heat another fluid which has a lower boiling point than water. The secondary fluid, usually isobutene or isopentane, is heated by the geothermal water through a heat exchanger and flashes off into vapor. This vapor is used to drive a turbine and condensed back to a fluid before returning to the heat exchanger to start the cycle again. Because the geothermal fluid passes from the production well through the heat exchanger and back down the well in a continuous circuit, this is a closed loop system. Therefore, in this type of plant there is no escape of noxious gases and there is no gas scrubbing required Applications Approximately 70 countries made direct use of 270 petajoules (PJ) of geothermal heating in 2004, more than half of which went for space heating and a third for heated pools. The remainder supported industrial and agricultural applications. Global installed capacity was 28 GW but capacity factors tend to be low (30% on average) since heat is mostly needed in winter. The above figures are dominated by 88 PJ of space heating extracted by an estimated 1.3 million geothermal heat pumps with a total capacity of 15 GW. Heat pumps for home heating are the fastest-growing means of exploiting geothermal energy, with a global annual growth rate of 30% in energy production. Following are the important utilizations of geothermal resources: Electricity Generation Electricity generation as an application for geothermal systems is gaining popularity. Electricity is generated using either turbines or binary plants. Conventional steam turbines require fluids at temperatures of at least 150 °C. With this type of unit, steam consumption (from the same inlet pressure) per kilowatt-hour of electricity produced is almost double that of a condensing unit. However, atmospheric exhaust turbines are extremely useful as pilot plants; stand-by plants in the case of small supplies from isolated wells; and for generating electricity from test wells during field development. They are also used when the steam has a high non-condensable gas content (>12% in weight). The atmospheric exhaust units can be constructed and installed very quickly and put into operation in little more than 13-14 months from their order date. This type of machine is usually available in small sizes Exhibit 7 : Atmospheric Exhaust Geothermal Power Plant Source: International Geothermal Association The binary plants utilize a secondary working fluid, usually an organic fluid (typically n- pentane), that has a low boiling point and high vapor pressure at low temperatures as compared to steam. The secondary fluid is operated through a conventional Rankine cycle (ORC): geothermal fluid yields heat to the secondary fluid through heat exchangers in which this fluid is heated and vaporizes. The vapor produced drives a normal axial flow turbine and is then cooled and condensed, at which point the cycle begins again. Binary
  • 12. 12 Earth Heat Resources Limited plants are usually constructed in small modular units of a few hundred kWe to a few MWe capacity. These units can then be linked up to create power plants of a few tens of megawatts. Their cost depends on a number of factors, particularly on the temperature of the geothermal fluid produced which influences the size of the turbine, heat exchangers and cooling system. The total size of the plant has little effect on the specific cost as a series of standard modular units is joined together to obtain larger capacities. Binary plant technology is a very cost-effective and reliable means of generating electricity from the energy available from water-dominated geothermal fields. Exhibit 8 : Geothermal Binary Power Plant Source: RB Milestone, International Geothermal Association Direct Heat Heat generation is the most common, oldest and versatile utilization of geothermal energy. The best-known forms of utilization include bathing; space and district heating; agricultural applications; aquaculture; and some industrial uses but heat pumps are the most widespread (12.5% of the total energy use in 2000). Geothermal district heating systems are capital intensive. The main costs are initial investment costs, for production and injection wells; down-hole and transmission pumps, pipelines and distribution networks; monitoring and control equipment; peaking stations and storage tanks. Operating expenses, however, are comparatively lower than in conventional systems, and consist of pumping power, system maintenance, quality control and management. Agricultural Applications Agricultural applications of geothermal fluids consist of open-field agriculture and greenhouse heating. Thermal water can be used in open-field agriculture to irrigate and/or heat the soil. The greatest drawback in irrigating with warm waters is that in order to obtain any worthwhile variation in soil temperature such large quantities of water are required, at temperatures low enough to prevent damage to the plants, that the fields would be flooded. One possible solution to this problem is to adopt a subsurface irrigation system coupled with a buried-pipeline soil-heating device. The most common application of geothermal energy in agriculture, however, is in greenhouse heating which has been developed on a large scale in many countries. Industrial Applications Finally, geothermal energy is also used in industrial applications such as process heating; evaporation; drying‟ distillation‟ sterilization; washing; de-icing; and salt extraction. Additional examples also include concrete curing; bottling of water and carbonated drinks; paper and vehicle parts production; oil recovery; milk pasteurization; leather industry; chemical extraction; CO2 extraction; laundry use; diatomaceous earth drying; pulp and paper processing; and borate and boric acid production. There are also plans to utilize
  • 13. 13 Earth Heat Resources Limited low-temperature geothermal fluids to de-ice runways and disperse fog at some airports. A cottage industry has developed in Japan that utilizes bleaching properties of the H2S in geothermal waters to produce innovative and much-admired textiles for ladies' clothing. Major Producing Countries In 2010, the United States led the world in geothermal electricity production with 3,086 MW of installed capacity from 77 power plants. The largest group of geothermal power plants in the world is located at The Geysers, a geothermal field in California. The Philippines comes next with 1,904 MW of capacity on line. Geothermal contributes 18% to the country‟s total electricity generation. Geothermal power plants now exist in 19 countries and new plants continue to be commissioned annually, such as in Indonesia, Italy, Turkey, and the United States in 2009. Chevron Corporation is the world's largest private geothermal electricity producer. Exhibit 9 : Installed Geothermal Capacity (2010) Source: Geothermal Energy Association, RB Milestone Since 2004, significant additions of electric capacity have taken place in Indonesia, Iceland, New Zealand, the United States and Turkey, with Turkey and Iceland each experiencing growth of more than 200 per cent. Global capacity has increased 1.8 GW since 2004. During 2009, the US saw six new plants come on line – increasing domestic capacity by an estimated 181 MW, or 6 percent – followed by Indonesia (137 MW), Turkey (47 MW), and Italy (40 MW) for a total of at least 405 MW added. While this was less than the 456 MW added in 2008, it was considerably larger than the 2007 market of 315 MW. In addition, in the US states of Louisiana and Mississippi, two projects were initiated to generate geothermal power with hot water produced by oil and gas wells. By the end of 2009, geothermal power plants operated in 24 countries and totaled approximately 10.7 GW of capacity, generating more than 67 TWh of electricity annually. Nearly 88% of that capacity is located in seven countries. 0 500 1,000 1,500 2,000 2,500 3,000 3,500 InMW
  • 14. 14 Earth Heat Resources Limited Growth Drivers Strong Contribution from Copahue, Argentina In case of the Copahue project, significant infrastructure is already in place since it had a small-scale pilot geothermal plant running in the 1990s. The pilot testing also mitigates operational risk to a great extent. Further, it also meets essential check-points for a successful geothermal plant such as heat; porosity/permeability; pressure; site access; and power agreement. Below are the project economics that are attractive and will provide a significant boost to EHR‟s income stream. The income stream doesn‟t include other benefits such as carbon credits, input tariff bonuses, tax credits, accelerated depreciation, etc. Exhibit 10 : Project Economics - Copahue Parameter Economics 1 MW of Geothermal Produces ~8500 MWh p.a. Renewable Act PPA at $ 120/MW ~1 million revenue per year Operating and Maintenance Cost $30/MW Pre-tax Equity Cash Flow ~765K/MW p.a. Annual Total Pre-tax Cash Flow (for a net 30 MW plant) $23 million Annual After Tax Cash Flow (assuming tax rate of 35%) $14.9 million Source: RB Milestone, Company Reports Good Support For Geothermal Globally There is growing support for geothermal development globally and as pointed out in the Industry Overview section, governments all over the world have set aggressive targets for renewable energy as a proportion of total energy in the near term. With oil prices breaching the century mark, geothermal systems along with other renewable energy sources have become increasingly viable. Governments are also providing support, in terms of attractive PPAs and tax breaks, which further lifts the after-tax cash flows of geothermal developers. There Can Be Further Upside from Djibouti One of the most exciting events in the past year for EHR was the addition of the Fiale geothermal development in its portfolio. At 150 MW this project is five times the size of the Copahue project. This catapults the company into the upper echelons of independent geothermal producers.
  • 15. 15 Earth Heat Resources Limited Exhibit 11 : Djibouti Source: Company Reports The Republic of Djibouti is a small, stable African country with a population of under 1 million. The country hosts a number of international military bases and is entirely reliant on diesel for power generation. The cost of the diesel is about $ 24 cents/KWh, or about $ 240/MWh, which augurs well for geothermal development. Located in the Lake Assal region of Djibouti, the Fiale Project is considered to be one of the most strategic geothermal opportunities within the Africa Rift Valley. Lake Assal is an area of recent volcanic activity ascertained from drilling in 1980s and has recently come under intense focus of international geothermal players. This area is characterized by the presence of geothermal resources revealed by numerous hot springs found in different parts of the country. The Assal drift is tectonically the most active structure in the zone of crustal divergence in Afar. The Assal area constitutes a typical oceanic-type rift valley with a highly-developed graben structure displaying axial volcanism. The area is complex in structure because of a series of active volcanism. Further, the series are generally composed of phyphyritic basalt formations and hyaloclasites. There is considerable infrastructure development underway in the country, promoting additional state and private enterprise which will lift the power demand in the country over the next 20 years. The power infrastructure operated by EDD is located a short distance from the Fiale project, a big benefit for rapid commercialization at much lower cost for the electricity generated. In addition, EHR‟s JV with EDD as the sole provider of retail electricity services in the country underpins the ability for this project to generate substantial cash flows for a long period of time.
  • 16. 16 Earth Heat Resources Limited Regional Dynamics in East Africa Are Positive The African Energy Commission estimates the potential geothermal capacity in East Africa to be over 10,000 MW, with Djibuti having a potential capacity of between 230 MW and 860 MW. In addition, East Africa is energy deficient with only 5-10% rural households having access to electricity. So far only Kenya (167 MW) and Ethiopia (7.2 MW) use geothermal energy in East Africa. Thus, there are plenty of untapped geothermal opportunities in this region. In line with its objective to invest into mature projects with lower risk profile, EHR announced entry into Africa in August 2010. Besides Djibouti, the company is also looking at Botswana and Kenya where regional dynamics for geothermal development are very attractive. Kenya is the most-advanced geothermal province in Africa with low sovereign risk and availability of funding for project financing. On the other hand, Botswana has consistently ranked among one of the top African investment destinations. Another catalyst is low domestic energy supplies despite abundant supply of coal. Exhibit 12 : Rift Valley Source: Company Reports Further, the demand for electricity is robust in these countries due to improving economic conditions, rising population and a lack of conventional sources all of which bodes well for strong growth for the renewable sector in the region.
  • 17. 17 Earth Heat Resources Limited Exhibit 13 : Change in Demand for Electricity (2009) Source: RB Milestone, Company Reports Given the energy-deficient nature of the African economies, there is considerable opportunity for EHR to build on its Fiale project in Djibouti. EHR believes that there is significant potential to develop the resources in the East African Rift Valley countries. Exhibit 14 : Potential in Africa Source: Company Reports Low Risk Profile The risk profile of EHR is quite low compared to other players in the geothermal sector. Below are the some of the key differences between the Copahue project and Australian geothermal systems:  Reservoirs in Argentina are dry-steam dominated unlike that in Australia, which eliminates the need to inject fluids artificially to sustain production  In Argentina, reservoirs exist naturally, while in Australia, hot-dry rock projects require a reservoir to be created  The total depth for primary target in the Copahue project is 1,400 meters, whereas in Australia typical depth for wells are between 3,000 meters and 5,000 meters  Drilling cost for the Copahue project is expected to be between $1.7 million and $3 million. In Australia, drilling costs for hot-dry rock type ranges from $14-25 million 0% 2% 4% 6% 8% 10% 12% 14% Djibouti Kenya Tanzania Uganda Zambia Rwanda Burundi
  • 18. 18 Earth Heat Resources Limited  The Copahue project has produced steam historically and thus is sustainable, which drastically reduces the uncertainty regarding the timing and extent of revenue for similar exploration projects in Australia  There is no equivalent volcanic geothermal project in Australia like the one in Argentina Exhibit 15 : Development Stage In A Typical Geothermal Project Source: RB Milestone, Company Reports There are three stages in a typical geothermal development project:  Confirmation Stage: Geothermal reservoirs are typically discovered by accident through mineral exploration or by visible surface evidence such as hot pools or geysers. Exploratory slim-hole wells are drilled to map such reservoirs. The confirmation stage ends with an independent consultant‟s report verifying the existence of the reservoir and the minimum capacity it can support  Drilling and Feasibility Study Stage: At least three production wells are drilled in this stage. These are 12 inches in diameter and 500 -3,000 meters deep. Drilling of a well costs anywhere between $3 million and $6 million. This stage ends with a feasibility study conducted by independent consultants. The study defines the map, size and flow rates more practically and adds an economic feasibility assessment  Construction Stage: A first positive feasibility study is the first domino that enables permitting, which then enables a long-term PPA with the local grid operator, thus enabling debt and equity financing. A geothermal plant will normally take 18 months to start power generation after the completion of the drilling process EHR is well ahead of its peers in terms of the progress on the first two stages. It already has signed a power purchase agreement, is discussing financing options with different parties and has even forecast the expected cash flows from the Copahue project. Confirmation stage Drilling and Feasibility Study Construction Stage EHR's projectshave alreadymade significant progressacrossthese stages
  • 19. 19 Earth Heat Resources Limited Strategic Investment Provides Comfort The A$5 million investment by Socius Capital provides significant comfort and reinforces prospective investors‟ belief in the company‟s prospects. The investment has been at market price and not at a discount; hence there is no equity dilution. In addition, Socius benefits only if the market price rises and would have conducted its due-diligence before investing in EHR. The company is fully funded at this stage to complete a concept study and pre-feasibility assessment on the Copahue project and the investment has transformed EHR into a development company from an exploration company. SWOT of Earth Heat Resources Limited Strengths  The acquisition of Earth Heat Limited has proved to be fruitful for the company as evident in the award of the Fiale project in Djibouti  Copahue project with Geothermal One Inc. will provide significant cash flows in the near term  Highly-experienced management team with history in subsurface development  Full historic feasibility study; 4 deep wells; shallow, very high temperatures (235 °C at 600 meters); transmission lines within 30m of old pilot plant; and attractive guaranteed off-take pricing  The Fiale project has shown excellent results during the drilling phase with very high temperatures Weaknesses  The company has not yet turned operationally profitable. Income for the last years was driven by one-off sale of an asset in the US  The company has not operated a geothermal plant, especially a large plant like Fiale historically Opportunity  There is considerable scope of New Energy including geothermal energy in the emerging economies which are energy deficient and haven‟t developed conventional energy to a large scale  Governments globally are providing an impetus to develop greener technologies for reducing reliance on conventional energy sources and move towards more environment-friendly sources  Regional dynamics in East Africa are very positive Threat  Inability to raise capital for financing exploration activities  As the company has not yet operated a geothermal plant, it may face operational problems which can drive up costs and reduce or erode profits  A reduction in prices of conventional or non-conventional alternate energy sources can make geothermal development unviable
  • 20. 20 Earth Heat Resources Limited Latest Financial Results Exhibit 16 : Annual Income Statements Australian $ Year Ended June 30, 2009 Year Ended June 30, 2010 YoY% Revenue 2,068 - Directors‟ fees (142,383) 93,399 -165.6% Debenture interest, discount amortization and accretion (220,993) 134,207 -160.7% Equipment depreciation (3,027) (1,272) -58.0% Foreign exchange (loss)/gain 6,895 (268) -103.9% Interest on loans (56,721) (5,222) -90.8% Management fees (58,000) (22,000) -62.1% Office (47,010) (11,128) -76.3% Professional fees (240,788) (154,455) -35.9% Insurance - (16,543) Shareholder costs (34,299) (72,001) 109.9% Property investigation (39,158) (13,199) -66.3% Regulatory and filing fees (29,866) (8,658) -71.0% Salaries and benefits (350,713) 357,807 -202.0% Travel and promotion (1,325) (49,030) 3600.4% Profit/(loss) before other items (1,215,320) 231,637 -119.1% Current asset impairment expense (318,714) - Reduction in convertible debentures and other liabilities - 2,194,372 Geothermal project expenses written off - (190,180) Natural gas and petroleum project interests written off (474,235) (119,699) -74.8% Interest income - 244 Other revenue 101,874 75,000 -26.4% Income tax expense - - Income for the year (1,906,395) 2,191,374 -214.9% Basic eps (in cents) (2.10) 0.90 -142.9% Diluted eps (in cents) (2.10) 0.89 -142.4% Source: Company Filings, RB Milestone As EHR was in development stage during the year, the company did not earn any revenue. Reduction in convertible debentures and other liabilities of ~$2.2 million resulted from the disposal of its oil and gas assets in the US, leading to a profit of $2.2 million for the year. Valuation & Investment View We have valued EHR using the Discounted Cash Flow Methodology. We have made explicit forecasts until 2022 for computing Free Cash Flow to Equity (FCFE), beyond that we have assumed no terminal growth rate. Below are some of the key assumptions we have made in our model:  Factored in only the Copahue and Fiale projects in our valuation  Parity between US$ and A$  Copahue project is expected to come online fully by 2015 and we have assumed uniform progress until then, i.e. 20% completion by 2011, 40% by 2012 and so on  Similarly, we have assumed the Fiale project to fully come online by 2017 and have forecast similar progress as that for Copahue  Operating cost of $30/MWh
  • 21. 21 Earth Heat Resources Limited  Pricing: Copahue - $110/MWh, Djibouti - $100/MWh  Capital Expenditure for Copahue and Djibouti estimated to be $100 million and $500 million, respectively  Debt/Equity ratio of ~60% during the development stage but debt assumed to be fully paid later  Cost of Equity of 15%  Tax rate of 35% Below is our valuation for EHR, which comes to $0.226 per share Exhibit 17 : EHR Valuation FCFE Valuation for EHR in $ 000 Cost of equity 12.8% Rf 5.5% Risk Premium 6.5% Beta 1.1 Terminal g 0% PV of terminal value 23,706 Value of equity 128,034.9 Number of shares O/S 566,219.0 Value per share (in cents) 22.61 Current market price (in cents) 5.1 Upside/(downside) 343.4% Source: RB Milestone, Bloomberg We also compared the peer valuation for EHR but believe that the comparable valuation varies considerably primarily due to the different risk profiles of its peers. As mentioned earlier, EHR‟s risk profile is far more attractive than most of its peers which may explain why the market accords it a higher multiple on EV/Reserve basis. Exhibit 18 : Peer Valuation Name Reserves (in PJ) EV (A$ mn) EV/Reserves Geodynamics 244,000 25.3 103.8x Geothermal Resources 84,000 2.8 33.3x Green Rock Energy 870,000 9.1 10.5x Greenearth Energy 280,600 3.9 13.8x Hot Rock 180,000 6.8 37.6x Kuth Energy 361,000 2.4 6.8x Panax Geothermal 332,000 14.1 42.6x Petratherm 230,000 14.9 65.0x Torrens Energy 780,000 1.5 1.9x Earth Heat Resources 172,985 26.7 154.5 Source: RB Milestone, Bloomberg Finally, we computed the sensitivity of EHR‟s fair value based on different scenarios. We get a strong upside even in the most bearish of scenarios for the company. Hence we
  • 22. 22 Earth Heat Resources Limited initiate coverage on EHR with a price target of $0.226 per share and an upside potential 343.4%. At current valuation, the downside risk is very limited. Exhibit 19 : Cost of Equity and Operating Cost Source: RB Milestone, Bloomberg Exhibit 20 : Copahue Sensitivity – Pricing and Cost of Equity Source: RB Milestone, Bloomberg Exhibit 21 : Copahue Sensitivity – Pricing and Capacity Source: RB Milestone, Bloomberg 22.6 9% 10% 11% 12% 13% 14% 15% 16% 17% 10 44.97 41.09 37.59 34.41 31.54 28.94 26.57 24.42 22.47 15 41.46 37.87 34.63 31.70 29.04 26.63 24.45 22.46 20.66 20 38.37 35.05 32.05 29.34 26.89 24.66 22.64 20.81 19.14 25 35.29 32.25 29.49 27.00 24.75 22.70 20.85 19.16 17.63 30 32.22 29.44 26.94 24.67 22.61 20.75 19.06 17.52 16.12 35 29.14 26.64 24.38 22.33 20.47 18.79 17.26 15.88 14.61 40 26.07 23.84 21.82 19.99 18.34 16.84 15.47 14.23 13.10 45 23.01 21.05 19.28 17.67 16.22 14.90 13.70 12.60 11.61 50 21.28 19.47 17.83 16.34 15.00 13.77 12.66 11.66 10.74 Operatingcost($/MWh) Cost of Equity 22.6 70 80 90 100 110 120 130 140 150 9% 27.87 28.96 30.04 31.13 32.22 33.30 34.39 35.48 36.57 10% 25.48 26.47 27.46 28.45 29.44 30.43 31.43 32.42 33.41 11% 23.32 24.22 25.13 26.03 26.94 27.84 28.74 29.65 30.55 12% 21.36 22.19 23.02 23.84 24.67 25.49 26.32 27.14 27.97 13% 19.59 20.35 21.10 21.86 22.61 23.37 24.12 24.88 25.63 14% 17.99 18.68 19.37 20.06 20.75 21.44 22.13 22.82 23.51 15% 16.53 17.16 17.79 18.42 19.06 19.69 20.32 20.95 21.59 16% 15.20 15.78 16.36 16.94 17.52 18.10 18.68 19.26 19.84 17% 13.99 14.52 15.06 15.59 16.12 16.65 17.18 17.72 18.25 Pricing $/MWh CostofEquity 22.6 70 80 90 100 110 120 130 140 150 10 17.67 17.92 18.17 18.42 18.67 18.92 19.17 19.43 19.68 15 18.15 18.52 18.90 19.28 19.66 20.03 20.41 20.79 21.17 20 18.63 19.13 19.64 20.14 20.64 21.15 21.65 22.15 22.66 25 19.11 19.74 20.37 21.00 21.63 22.26 22.89 23.51 24.14 30 19.59 20.35 21.10 21.86 22.61 23.37 24.12 24.88 25.63 35 20.07 20.96 21.84 22.72 23.60 24.48 25.36 26.24 27.12 40 20.56 21.56 22.57 23.58 24.58 25.59 26.60 27.60 28.61 45 21.04 22.17 23.30 24.44 25.57 26.70 27.83 28.98 30.29 50 21.52 22.78 24.04 25.29 26.55 27.81 29.09 30.57 32.08 Pricing $/MWh Capacity(inMW)
  • 23. 23 Earth Heat Resources Limited Exhibit 22 : Fiale Sensitivity – Pricing and Cost of Equity Source: RB Milestone, Bloomberg Exhibit 23 : Fiale Sensitivity – Pricing and Capacity Source: RB Milestone, Bloomberg Key Risk Factors  Execution Risk. All of EHR‟s projects are in development stage and thus failure in planned execution can be a concern  Financing Risk. All the projects need a significant development capital outlay during their installation. EHR‟s prospects are significantly linked to identifying funding sources for its projects. Failure to obtain financing as and when needed can impact the continuation of EHR‟s operations  Regulatory Risk. EHR‟s success will depend to a large extent on regional government policies, subsidies, tax rebates and other support. For example, the Copahue project has been a contract at a beneficial rate. Withdrawal of such policies or introduction of a policy which impacts the geothermal industry can affect the company‟s prospects  Forecast Risk. Although the company has reasonably assessed the profitability from its Copahue project including capital outlay, maintenance expenses etc, there is possibility that the actual costs can be substantially greater than the forecast costs, which may considerably affect the profitability of the company  Operating Risks. The company may be exposed to several risks such as operational and technical difficulties encountered in mining including difficulties in commissioning and operating plant and equipment; mechanical failure or plant breakdown; adverse weather conditions; industrial and environmental accidents; industrial disputes; and unexpected shortages or increases in the cost of consumables, spare parts, plant and equipment 22.6 60 70 80 90 100 110 120 130 140 9% 17.37 20.11 22.81 27.51 32.22 36.93 41.68 47.07 52.52 10% 15.89 18.40 20.87 25.15 29.44 33.74 38.08 43.02 48.03 11% 14.56 16.85 19.11 23.02 26.94 30.86 34.82 39.35 43.96 12% 13.35 15.45 17.52 21.09 24.67 28.25 31.87 36.04 40.29 13% 12.25 14.17 16.08 19.34 22.61 25.89 29.20 33.04 36.95 14% 11.25 13.02 14.77 17.75 20.75 23.75 26.78 30.32 33.93 15% 10.35 11.97 13.58 16.31 19.06 21.80 24.58 27.85 31.18 16% 9.52 11.02 12.49 15.00 17.52 20.04 22.59 25.60 28.68 17% 8.77 10.15 11.51 13.81 16.12 18.43 20.77 23.56 26.40 Pricing $/MWh CostofEquity Pricing/MWh 22.6 60 70 80 90 100 110 120 130 140 80 9.69 10.72 11.76 12.79 13.83 14.84 15.86 17.44 19.18 90 10.05 11.22 12.38 13.55 14.69 15.83 17.61 19.58 21.54 100 10.42 11.71 13.01 14.29 15.56 17.36 19.54 21.72 23.91 110 10.78 12.21 13.63 15.03 16.66 19.06 21.46 23.87 26.27 120 11.15 12.70 14.24 15.76 18.15 20.77 23.39 26.01 28.63 130 11.52 13.20 14.85 16.80 19.64 22.47 25.31 28.15 31.31 140 11.88 13.69 15.46 18.07 21.12 24.18 27.24 30.49 34.13 150 12.25 14.17 16.08 19.34 22.61 25.89 29.20 33.04 36.95 160 12.61 14.66 17.11 20.61 24.10 27.59 31.42 35.60 39.77 Capacity(inMW)
  • 24. 24 Earth Heat Resources Limited Management and Board of Directors Dr. Raymond Shaw, Chairman Dr. Raymond Shaw is a geologist and geophysicist with more than 30 years of experience in the resources and energy sector, including the oil, gas and coal industries. He commenced his professional career as a petroleum explorationist with Shell Development Australia in Perth prior to working for various consulting groups, including the Swiss international consulting firm Petroconsultants SA, for which he served as its resident director based in Singapore responsible for its Far East operations. He has provided consultancy to industry, government and international aid agencies on a variety of resource projects throughout Australia and Asia including the World Bank, Asia Development Bank and AusAID. Dr. Shaw was the founding Managing Director of Great Artesian Oil and Gas Limited prior to its listing on the ASX in 2003 until April 2007. Mr. Torey Marshall, Managing Director Mr. Torey Marshall is a geologist with broad-based technical and business development experience in the minerals, petroleum and geothermal sectors. This has resulted in the successful execution of various exploration programs (some resulting in discoveries) in a number of different areas. Having worked extensively as an exploration geoscientist, his skills have been considerably expanded to include senior management experience of various private and public (unlisted) companies. As part of his consulting practice, he has developed strategies for, and acquired projects on behalf of a number of clients. He has assisted a number of private and public companies in building their businesses to enhance shareholders‟ value such as Phoenix Oil and Gas Limited; Australian Oil Company Limited; Red Gum Resources Limited; Great Artesian Oil and Gas Limited; and QGC Limited. He is a director of Red Gum Resources Limited and Polymetalic Exploration Pyt Limited. Mr. Alexander Rose-Innes, Executive Director Mr. Alexander Rose-Innes, a portfolio manager for long/short equities and global macro funds, has extensive experience in the equity capital markets of Australia. With a strategic focus on the resources sectors of the ASX, JSE and FTSE markets, Alexander has a deep knowledge of African politics and business including a wide variety of contacts through his macroeconomic research that guides investment decisions. Appointed in July 2010, he will be responsible for Business Development and Finance. Alexander is currently employed as a Macroeconomic Analyst and Portfolio Manager with Coldstream Investment Holdings where he maintains a balanced portfolio of equities, derivatives, bonds and commodities. Previous experience includes Invicta Holdings Pvt Limited in South Africa and Publishing and Broadcasting Limited. Mr. Norman J Zillman, Non-Executive Director Mr Normal Zillman has held positions of Exploration Manager and subsequently Deputy General Manager of Crusader Limited; General Manager Exploration and Production of Claremont Petroleum NL and Beach; and manager of the Petroleum Branch of the Queensland Department of Mines and Energy and State Mining Engineer for Petroleum. He has also held the position of Regional Manager of Northern Queensland for the Department of Mines and Energy based in Charters Towers where he supervised all aspects of mineral exploration and mining activities in that region. He has held a wide variety of public company positions including foundation Managing Director of Queensland Gas Company Limited; foundation Chairman of Great Artesian Oil and Gas Limited; Chairman of China Yunnan Copper Limited; Director of Planet Gas Limited; non-executive Chairman of Blue Energy Limited; and non-executive Chairman of Hot Rocks Limited. Mr Zillman is a member of the Australasian Institute of Mining and Metallurgy and the Petroleum Exploration Society of Australia.
  • 25. 25 Earth Heat Resources Limited Mr. David Sutton, Independent Non-Executive Director Mr. David Sutton has many years of experience as a director of companies in stock broking and investment banking under his belt. He is a director of Dayton Way Financial Pvt Limited as well as two listed companies, Sinovus Mining Limited and Imperial Corporation Limited. He is a former director of Martin Place Securities Pvt Limited. Mr. Stephen Pearce, Non-Executive Director Mr. Pearce is a practicing lawyer who specializes in corporate and securities work in Vancouver, British Columbia. Stephen serves as a director and/or officer of the following mainly resource-related public companies: Neodym Technologies Inc. (NEX–V) (Director, Corporate Secretary); Sable Resources Limited (TSX–V) (Director, Corporate Secretary); Flying A Petroleum Limited (TSX-V); Sunorca Development Corp. (CSNX); and Golden Goliath Resources Limited (TSX–V) (Director, Corporate Secretary). Stephen has a law degree from the University of British Columbia and economics degree from York University.
  • 26. 26 Earth Heat Resources Limited Disclaimer Some of the information in this report relates to future events or future business and financial performance. Such statements constitute forward-looking information within the meaning of the Private Securities Litigation Act of 1995. Such statements can be only predictions and the actual events or results may differ from those discussed due to, among other things, the risks described in „Earth Heat Resources Limited' company reports. The content of this report with respect to Earth Heat Resources Limited has been compiled primarily from information available to the public released by Earth Heat Resources Limited through news releases and ASX filings on the Australian Stock Exchange. Earth Heat Resources Limited is solely responsible for the accuracy of that information. Information as to other companies has been prepared from publicly available information and has not been independently verified by Earth Heat Resources Limited or RB Milestone Group (RBMG). Certain summaries of scientific activities and outcomes have been condensed to aid the reader in gaining a general understanding. For more complete information about Earth Heat Resources Limited, the reader is directed to the Company's website at www.earthheat.com.au. This report is published solely for information purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any state. Past performance does not guarantee future performance. This report is not to be copied, transmitted, displayed, distributed (for compensation or otherwise), or altered in any way without RBMG's prior written consent. RBMG is not compensated for any analytical research and evaluation services that are performed for Earth Heat Resources Limited but RBMG has received cash compensation (under twenty thousand US dollars) in exchange for other segregated services.