Call out firstly for @Clio and @jcmleng for drawing attention to HZR plus @Jimmy the OG on this forum and a huge amount of research and information compilation that has been shared. Very valuable for a technically challenging investment and company where you are dealing with innovation and game changing technology. Members should read their posts which cover comparative technologies, customers and general company information for references, it saved me a lot of time and effort in duplicating their great work particularly @jcmleng’s compiling of information across dozens of announcements.

The thesis in a sentence is that Hazer solves a massive problem faced by critical industry around emissions in a way that is at as economically as current high emission, but most economic processes as well as offering a solution to global supply concentration issues for graphite and in doing so is going to totally disrupt Hydrogen production globally, it is now commercially ready with credible industry validation and it’s success even at modest levels is not priced in.

What they Do

Hazer has a patented process for the conversion of methane/natural gas into Hydrogen which is low or zero emission compared to current high emission SMR processes and has a byproduct of Graphite which is now a strategic mineral due to China controlling 80% of the market. They do this at a similar cost to the current SMR process (without taking into account savings on carbon tax) and a fraction of the cost of current blue or green processes and are scaling via a licensing model and partnering with KBR, making them capital light and offering low growth limitations.

Are you Sure?

Hazer has built and operated for over a year a Commercial Demonstration Plant (CDP) proving viability, partnered KBR to support commercial roll out in Methane markets (direct access to 50% of the market) and has 5 customers in early engagement all of which are major companies and have done significant due diligence. Governments in respective jurisdictions have provided significant funding and political support for the projects to date. Hazer has now received it’s first revenues as part of the development process and has a pipeline of 50 prospects.

Risks/Red Flags:

·        The Hazer Process has a significant price advantage over blue and green Hydrogen and offers low emissions and similar economics to SMR. If this changes so does the thesis, the strength of the patents is a factor as exclusivity is assumed for Hazer.

·        Customer growth has to be steady and reassuring. If we go through 2026 without at least 2 new customers (on top of M Resources/Whyalla and Engie) out of the 50 strong pipeline then I question the commercial strength of the offering.

·        Business model or direction changes would require a reassessment. The current Licensing and Royalty approach plus go to market with KBM are fundamental strengths of the business model supporting the investment thesis.

Why Now

The CDP combined with the KBR partnership was a critical inflection point, dramatically amplifying the capacity of the company to commercialize the now proven technology and provide the logistical and technical support needed to scale. Despite the long development timelines, it only takes a handful of customers to commit to significantly underpin much higher values of the company than the market value. Timing this will be difficult, so the current price offers a great opportunity, but risk remains significant so a modest position is warranted, with a view of adding later with more certainty when the market fluctuates.

Price: The current price ($0.49) assumes very limited commercial application which is covered by customers who are already showing commitment or strong engagement (Bear case value). The issue is the time it will take for customer engagements to show profitability, and that is not likely to happen until around FY30. Hence a lot of faith in the future is going to need to be maintained over a long time before the cash lands, and fickle listed markets may have one or more periods of doubt up to that time. In short, the price is going to be wild, I have bough a half position so far and intend to buy more, but don’t want to rush because of the likely volatility.

Conclusion: Definitely risky as profitability is unproven and a way off, but there is a lot of support for the technology being a game changer and as a result there is a lot of upside at the current price Vs value even under modest assumptions. The pivot point will be growing contract wins, so far so good and there is a very healthy pipeline. Tail winds of government support due to environmental positives, strategic resource issues and good economics for customers make the technology compelling and justifiable.

I don’t know what the real value is, my valuation gives a large range with $1.54 weighted result but I see it as a high probability it is many multiples this if it fulfills the promise of disrupting the industry.

Disc: I own RL (recent buy)

This is a review of HZR’s assumptions for plant Cash Flows that a customer will generate and to outline what I have used for valuation modelling.

Initially the company provided an NPV value for an assumed average 50ktpa H2 US plant at ~A$115m but this was based on an 8% discount rate which is low. Below are the slides from presentations. Note that these also show the different phases of income for a customer for a plant which gives us the phasing and nominal value per period of income. It isn’t until year 6 that a plant is operational and generating significant royalties and licencing revenue.

Based on this I modelled it out to check against the company figures and came close enough to their figures, assuming 2% increase in income and a 70c FX rate:

However, for the purpose of my valuation I assumed 80% of the revenues as a margin of safety, plus I used a 75c FX rate as more representative of a long-term average given it’s a 20 year projection and also more conservative.

I used a 10% discount rate, which is what they seem to have switched to at the time of the Strawman interview in December, where Glenn said they are working on A$80-100m NPV at a 10% discount. If you take 100% of revenues at 75c and 10% discount you get A$90m (midpoint of A$80-100m) so I guess they are providing a range around this with a mid-point aligned to what I have used (but then I only take 80%)

For each customer I have used the bottom line in the above table to project their revenue (technically gross margin given this is cash flow, ie revenue net of costs). Each customer was phased with the start target date for the current customers below being the year they started “Post FID Construction”

For the Bear case I just did the top 4 customers. Base case had 10 customers reach the operational plant stage (dark blue) by FY35. Bull case had 16 customers. No other customers were added but revenue from FY40 was assumed to be into perpetuity for a terminal value.

See valuation for more details.

Disc: I own RL