Prospects for Ballard and ERC Fuel Cells

Subject: UFTO Note: Prospects for Ballard and ERC Fuel Cells
Date: Mon, 02 Sep 1996

UFTO NOTE: Stock Price Prospects for Ballard and ERC, Fuel Cell Developers

KIIS STRATEGY FOR START UPS: KEEP IT INSOLVENT, STUPID! By Robert Metz (Originally published Aug 26 in `Money Talks,` an interactive investment magazine at

Summary: Two developmental fuel cell firms that could hit home runs or go broke depending on the success of their technologies. For high share price: lose money, sell more stock: your investment banker will tout your stock.

There is an old joke about a company that loses money on every sale but makes it up in volume. Here’s a variation on that joke involving fuel cells:

Fuel cells are like batteries with this difference: when a battery runs down, you recharge it by pumping in more electricity. A fuel cell combines hydrogen and oxygen to make electricity. The exhaust: pure water, son! But fuel cells, which make electricity without combustion, are larger, less powerful and vastly more costly than internal combustion engines.

The joke: Ballard Power loses millions building fuel cells for vehicles. As a result, Ballard must raise cash through repeated equity offerings. Contrast Ballard with Energy Research Corp. which develops its non- polluting fuel cells for electric utilities. Its utility clients seek a clean means of producing electricity that will replace their dirty, coal-burning plants.

Like Ballard, Energy Research is developmental. Yet an ER cell does supply power to homes in Santa Clara. And ER earns a little money, too.

The punch line: Burnaby, Canada-based Ballard (BLDPF, Nasdq) is the preferred investment. Don’t laugh! Ballard Power has achieved a market capitalization seven times that of Energy Research (ERCC, Nasdq).

Why? Canadian bankers are almost constantly touting Ballard. They earn fees for selling each Ballard equity offering to the investing public. All this `sponsorship` as it’s called on Wall Street, creates a high share price.

They say that mutual funds are not bought, they are sold, no-load mutual funds to the contrary notwithstanding. This is true of shares in developmental firms, too. Brokers dazzle, talking of millions of family cars traveling the highways of the world powered by non-polluting fuel cells.

Get this! Energy Research needs no outside capital. So it isn’t touted. Keep in mind that my source on these two companies is admittedly long ERCC and short BLFPF. He asked me not to disclose his name. Ballard, with whom he talks, obviously would not take his calls if he were named.

Let’s look directly at the numbers. Energy Research has 4 million shares outstanding. When at 13, the shares were worth $52 million. Ballard has 15.2 million common shares out and 1.5 million warrants to buy shares at a low price. With the stock at 21, BLFPF’s market cap is roughly $340 million. Those are the key numbers for innovative developmental firms. Such companies tend either to soar or go broke. It’s either/or, as a rule.

There are other reasons why traders prefer Ballard, not the least of which is glamour. Imagine a vehicle that uses hydrogen as fuel and which dribbles onto the pavement nothing more toxic than water vapor. Is there such a vehicle? Yes, G.M. and Daimler Benz have both purchased fuel cells from Ballard. Honda and Volkswagon are also pursuing fuel cells. Ballard’s ebullient CEO, Firoz Rasul, insists the technology is ready. He says his company is banking on environmental regulations to spur demand for its fuel cells. But he admits that the the final call is the car makers’.

The public got a glimpse of Ballard’s technology in June. Daimler-Benz showed the press a working prototype powered by Ballard’s fuel cells. Except for bulky rooftop hydrogen tanks, the system fit under the hood and seats of a Vito `minivan` from Daimler’s Mercedes-Benz automobile unit.

The cell has few moving parts, no sparks or fumes. Methanol can be used to fuel the cells. Whoops! It must first be converted into hydrogen through a process that releases carbon dioxide. Is this for you? The last vehicle Germany sent us with hydrogen on board was the Hindenburg.

When is the fuel cell coming to a highway near you? Mercedes’ Chief Executive, Helmut Werner, is optimistic that fuel cell technology will find a permanent place in his company’s product line up. He crows that the work is going faster than he expected, but his on-the-road target is 12 years out. If you paid for a Mercedes Benz vehicle with Ballard Fuel Cell, it’d cost you, say, $500,000. That same sum would buy about five Rolls Royce cars.

Cost is the rub with Energy Research as well. ERCC’s fuel cells, like those of Ballard, are custom built. Both must be mass producd if the cost is to sink to a level that makes these fuel cells both practical and affordable.

It’s been a long journey just getting this far. The fuel cell was thought up in the 1830s. The fuel cell is a vastly more efficient than rival power means. Utilities produce electricity by burning coal, oil, and natural gas. The heat produced is used to super heat water, turning it to steam which turns the vanes in a turbine which spins a generator and produces electicity.

There is energy loss every step of the way. Utility power plants may extract only 25 percent of a given fuel’s energy potential. `Co-generate` the heat the process throws off and get a total of 30 percent of the energy.

Energy Research’s Santa Clara fuel cell can use kerosene, gasoline or methane, any hydrocarbon at all, to recover 50 percent of the fuel’s energy. Using the heat for co-generation may squeeze out 80 percent of potential.

Fuel cells offer far more efficiency than any other practical process. Yet fuel cells remain prohibitively expensive for most uses. Do note that NASA has used fuel cells to power manned space programs for decades.

As my source views it, Energy Research with its unglamorous partners, some 30 of the nation’s largest utilities, is more likely to win the brass ring. Keep in mind both companies are betting heavily on fuel cells. Either one or both could score. But shares of either one or both could go to zero.

Keep this in mind: there is no infrastructure to support an automobile that burns hydrogen. Gas stations don’t stock the alternative methane, either. Utilities, by contrast, have access to fuels suitable for fuel cells.

Wait! If ERCC misses the bullseye with fuel cells, it does have another arrow: batteries. So the stock may be worth more than current price. The fan says ER’s nickel zinc battery will zap nickel cadmium and nickel metal hydride batteries. Or so its `conservative` management avers. ER is supposedly negotiating with two companies to commercialize the nickel zinc battery. The first of two deals could be done in a month, the fan says.

ER could become multi billion dollar company either with its fuel cells or with its batteries. My source, who, you’ll must keep in mind, is long ERCC and short BLFPF, says ER is `a triple digit stock if it hits with both.`

But, he adds, `If we knew for sure either or both technologies would work ERCC would already be in triple digits. Maybe neither will work and the stock will go to zero.` But it seems to him ER’s goals are realistic since a 30 utility `Fuel Cell Commercialization Group` is working with ERCC.

| *** UFTO *** Edward Beardsworth * Consultant |
| 951 Lincoln Ave. tel 415-328-5670 |
| Palo Alto CA 94301-3041 fax 415-328-5675 |

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