Eco Investor August 2015

Pre-Revenue Securities

Geodynamics Buys Biogas Business

Geodynamics has made its long awaited move into a post-geothermal energy business and has chosen biogas. The company has made a takeover bid for Quantum Power Ltd, a company which it says is a market leader in the Australian biogas market.

An unlisted public company based in Yatala, Queensland, Quantum Power develops renewable biogas energy systems for the agri-business and food manufacturing sector such as dairy, pig, chicken and other livestock producers and food processors such as abattoirs. It develops, owns and operates anaerobic digestion systems and biogas fueled power stations that generate electricity and co-generated heat, and sells the electricity from the biogas.

The deal preserves Geodynamics' high environmental credentials and also its capital as the offer is scrip based. Under the off-market takeover bid agreement, Geodynamics is offering four and a half shares for every Quantum share. The Quantum board has unanimously recommended the offer in the absence of a better offer, and major shareholders with 56 per cent of Quantum intend to accept. However, the offer needs 90 per cent acceptance to succeed.

If the deal proceeds, Quantum's shareholders will hold 23 per cent of the enlarged Geodynamics.

The transaction values Quantum Power at about $8 million or 27 cents per Quantum share and Geodynamics at a net tangible asset backing of 6 cents per share. Geodynamics has provided Quantum with a working capital loan of $1 million at 7 per cent interest and repayable in 12 months.

Geodynamics said the biogas energy market is a growing and attractive segment of the clean technology and renewable energy sector, and Quantum Power has a pipeline of attractive immediate short-term projects and medium and longer term opportunities.

The merger with Geodynamics will allow Quantum to accelerate the delivery of its projects, and to pursue larger projects. Geodynamics will contribute its financial, project management and engineering capabilities.

Geodynamics has been looking for a new business for over nine months and looked at clean energy supply including solar PV, energy efficiency, energy storage, distribution and micro-grids, some clean industrial process technologies and services, and other investment opportunities.

It identified the supply of distributed energy to the agri-business and food manufacturing sector through biogas as an attractive market. "As environmental controls and cost of power have increased, the use of anaerobic digestion technology to reduce environmental emissions and produce biogas for power generation is increasingly attractive to manufacturers. In particular, primary food production and agricultural industries stand to benefit from the improved management of their waste streams, which can be combined with the simultaneous sustainable, lower cost production of onsite power," it said.

In addition, the biogas sector was made more attractive by the Emission Reductions Fund and the recent resolution of the Renewable Energy Target.

Managing director, Geoff Ward, said "Quantum has a track record of delivering successful bio-energy projects to the agriculture sector in Australia. We believe that by combining our balance sheet and large scale project management and delivery skills together with Quantum's industry knowledge we will be well positioned to deliver existing project opportunities and pursue further larger bio-energy opportunities in Quantum's pipeline."

Quantum has two business models - it will build, own and operate a system and sell the client electricity under a long term contract at a discount to the grid cost; and it has a turnkey solution where the client can purchase and operate the completed system.

Mr Ward said the proposed acquisition is an exciting step towards Geodynamics becoming a diversified clean energy and technology company. However, the deal did little for Geodynamics' share price. This has been close to its historic lows and the announcement of the deal saw the share price dip to an all time low of 3.2 cents.

Perhaps this was partly due to the initial lack of financial information about Quantum Energy, but the Target's Statement that came out in early August confirmed that Quantum is an early stage company in an emerging sector.

No doubt Geodynamics' shareholders would have prefered an acquisition that is profitable; but no so. Quantum has revenue but has not yet achieved profitability although it is close. In 2014-15 its revenue was $2.4 million and it made a loss of $0.8 million. And its net assets are only $68,525.

So with this acquisition Geodynamics will start to have operating revenue, but it remains a speculative stock.

What Quantum does have is immediate business prospects. Mr Ward said "Quantum has delivered more biogas projects than any other company in Australia, and is the only company in Australia to deliver projects spanning meat rendering, abattoirs, pig production, layer chickens and dairy processing."

Quantum has installed seven projects so far and its web site says it recently won its 10th project. Located at Goulburn, NSW, this is to generate up to 1 MW of renewable energy by converting the organics in a wet waste stream from the Southern Meats sheep processing facility into biogas that will help power the plant.

Importantly, Quantum also has a pipeline of 44 potential projects. That beats the timeframe on Geodynamics' geothermal energy projects, which are some years away.

With Geodynamics retaining its cash, it is continuing to look for new acquisitions to complement and build on this one. But it was not clear if that means more biogas or something else.

Meanwhile, with the proposed acquisition of Quantum, Geodynamics will reduce the number of non-executive directors to three. Andrew Stock, Michel Marier and Bob Davies have offered to step down as directors and these resignations will come into effect on completion of the August board meeting. Keith Spence will continue as non-executive chairman, as will non-executive directors, Dr Jack Hamilton, George Miltenyi and Geoff Ward as managing director. On the offer becoming unconditional, Quantum's executive chairman Richard Brimblecombe will join the Geodynamics board.

Mr Ward said the next six months are about working to merge the two entities and continuing to deliver Quantum's projects. (ASX: GDY)





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