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Hazer Group has further significant upside potential: State One Stockbroking

State One has maintained its speculative buy (higher risk) recommendation with a target price of 45 cents.
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Hazer Group’s various projects are well advanced

Hazer Group Ltd (ASX:HZR) is adopting a multi-prong approach to commercialising its proprietary Hazer Process – the conversion, at moderate temperature and pressure, of natural gas and similar methane feedstocks into hydrogen and graphite, using iron ore as a process catalyst.

On May 31 2019, Hazer announced that it had entered a MOU with Western Australian State Government-owned Water Corporation to explore the development of a 100 tonnes per annum hydrogen production plant at the Woodman Point Wastewater Treatment Plant.

 

Following is an extract from State One Stockbroking’s research update on Hazer Group:

An important step for the Commercial Demonstration Plant (CDP) Project

If negotiations with Water Corporation are successful, HZR will have secured (1) a physical location for its CDP and (2) a gas source (biogas) to produce 100tpa of hydrogen (and some 375tpa of graphite by-product).

WA’s largest wastewater treatment plant is presently looking to increase its waste water treatment capacity by ~30% to cater for projected regional population growth. Bearing in mind current, and indeed future, treatment plant upgrades, we believe that an important item in progressing the MOU will be finding a suitable location for the CDP. However, with a footprint of < 400m2 (i.e., less than 2 tennis courts), we believe that finding “room” for the CDP should not be a significant hurdle.

Although the bulk of biogas produced by the wastewater treatment process at Woodman Point is used to power onsite CHP reciprocating engines to produce electricity for internal use, a portion of the biogas is flared off (to waste).

We understand that the treatment plant produces significantly more waste biogas than the CDP’s required feedstock of two million m3 per annum. Thus, the Hazer Process offers the treatment plant operators an important avenue for carbon abatement and reducing the facility’s total greenhouse gas (methane, CO2) emissions.  An additional incentive for the treatment plant operator could be potential income - even if nominal - from the sale of waste biogas to HZR.

We believe that HZR is currently in discussions with several potential hydrogen buyers including local bus fleet operators; we believe plans at this stage are for the graphite by-product to be sold into the spot market. During the March 2019 quarter HZR completed the FEED study for the CDP. Securing funding for the estimated A$15m capex is clearly the next significant step.

We note with interest that the Australian Government Renewable Energy Agency (ARENA) is actively investing in new renewable energy technologies including “green hydrogen” projects; recent projects funded by ARENA includes 50% of the A$15m Jemena Power-to-Gas (P2G) facility in NSW in 2018, and 50% of the A$7.4m Toyota Ecopark Hydrogen Demonstration project in Victoria in March 2019.
According to ARENA’s website, as at 31 January 2019 ARENA had total funds of A$379m available to commit to new projects, and expects that all funds will be fully committed by mid-2020.

We suggest that HZR’s CDP plant has a good chance of securing funding (A$7.5m or 50% of capex) from this government-funded body.

Risk-adjusted SOTP target price: A$0.45ps (unchanged)

Our estimated risk-weighted SOTP equity value for HZR is A$43m, equivalent to A$0.45ps (@ 97m shares). We maintain a Speculative Buy (Higher Risk) recommendation. We see further significant upside potential as the group’s various projects (PTR and FBR) are advanced, and as our deep risk discount to these projects are unwound.

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