Enormous potential for thrill-seeking investors.
Apparently, of all the freshwater present on Earth, less than 0.01% is readily available. Meanwhile, wave power has the potential to meet anywhere between 50% and 200% of the world's energy consumption.
So any technology that is simultaneously able to harness the power of the oceans whilst producing desalinated water from sea water with no emissions -- and which is hidden from sight on the seabed -- sounds too good to be true.
Then being able to buy into that dream, at a discount price, is the icing on the cake.
That is, nevertheless, the investment opportunity seemingly offered by AIM-listed Renewable Energy Holdings (LSE: REH).
Too good to be true?
But there's danger here. We've all read about (and perhaps invested in) "no-brainer" technologies via AIM-listed companies. Some come off, most don't.
One minute the investment case seems unassailable, the next there are cash flow problems, or superior technologies that supersede the company's in question -- or it simply doesn't work as well as anticipated.
So forewarned is forearmed. An investment in Renewable Energy Holdings is a risky one and is mainly a punt on the exciting power of "CETO" underwater wave technology, which is apparently capable of producing zero-emission power as well as desalinated water. More on that later.
The riskiness of this investment is well illustrated by the share price action.
During the seven months since I last wrote about the company when the price was at what was then a new low of 18.5p, it has been to the sea floor and back, touching bottom at 7.75p just three weeks ago, before catching a wave back to 19.5p as I write. The current price values the green power group at a little over £13.5m.
German wind cleared
But the company isn't only about its investment in CETO. REH is also involved with wind farms in Wales and Poland, having sold its German wind assets.
With the first half results it made a pre-tax loss of £1.1m, and said it was in discussions with various debt providers to fund the Polish project. Seemingly frustrated by the share price action, the Board had decided to buy back some of its shares -- a decision which was reversed on Thursday, in light of the rise in price.
The same day we read that the CEO spent almost £140,000 of his own cash buying the company's shares at 19p.
REH reported a net tangible asset value of over twice its market capitalisation, with cash of £980k, and said it had completed the disposal of its German wind assets for €39.8m (pre-debt repayment and expenses) after the period end.
Now the interesting bit
The real excitement, though, comes from the company's retained stake in CETO.
The IP in CETO was sold off last September to Australia's ASX-listed Carnegie Wave Energy in return for 29% of that company, to raise cash for REH, place the IP and build capability under one roof, and to enable REH to concentrate on wind power.
The Carnegie stake is currently worth around £13.3m (just over 19p per share) at the bid price.
Here's how it works. The CETO system is anchored to the ocean floor, so is out of sight. Submerged buoys are tethered to seabed pumps that in turn pressurise water that is delivered ashore via a pipeline to drive hydroelectric turbines, generating zero-emission electricity. The high-pressure water can also be used to supply a desalination plant.
The reason the technology is so exciting is fairly obvious. Carnegie's annual report points out a few very interesting facts in addition to those quoted in the opening paragraph, including:
- Approximately 60% of the world's population lives within 60 kilometres of a coast.
- There is currently over $10bn worth of investment in desalination projects in Australia alone, and the global market is forecast to be in excess of $50bn annually by 2020.
- 10% of Australia's near-shore wave resource could power 50% of the country's electricity consumption.
- There is enormous growing global demand for freshwater, and a lack of options to obtain it.
- Most current approaches to seawater desalination are very energy intensive.
Carnegie employs a full-time intellectual property manager, ensuring that all novel aspects of the CETO technology are appropriately protected. The intellectual property portfolio currently consists of seven patent families that are at various stages of the patenting process, and one trademark portfolio.
The company reckons it has a "global project pipeline of opportunities in Australia, North America and Europe".
Testing times
Whether Carnegie will be commercially successful depends on a real test. The design for the first full scale commercial CETO unit is complete, and this week REH/Carnegie announced the contract for the vessel to install the commercial scale CETO 3 unit of the Perth coast.
Whatever way you look at it, it's potentially transformational stuff for the world and two of its main problems, it would seem.
Then again, we've heard it all before. Tread carefully!
David owns shares in REH.
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