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No Bounce for ASX Geothermal Stocks due to Resource Exploration Rebate

May 12, 2010

Geothermal energy in Australia is perceived to be a promising source of future baseload emissions-free electricity.  Up-front costs and perceived technology and exploration risks are viewed as being major barriers to getting the players in the sector to the point of maturity and production. 

The risks mean that the Renewable Energy Target is not sufficient in stimulating investment into geothermal.  As such, the Australian Government has been active in the deployment of measures to encourage the fledgling sector.  This has included significant largesse through the allocation of grant funding.  Now, the sector has been targeted for a tax benefit.

However, a review of ASX-listed Geothermal companies reveals that none have demonstrated a discernable share-price bounce due to the recently announced Resource Exploration Rebate – a tax rebate advantage specifically designed to target emerging geothermal companies.

The measure was announced in response to the Henry tax review, and flagged along with the Australian Government-announced Renewable Energy Future Fund.

The measure will take effect, according to the Government, from July next year.

Expenditure can be deducted, or added to tax losses for offset against future taxable income. 

The benefits are described here.

For ASX microcaps, one might expect a targeted tax benefit to result in company announcements of the material impacts, with flow-on impacts on share prices.

However, our research shows that none of ASX: GDY, GHT, GRK, GER, HRL, KEN, PAX, PTR, or TEY have made announcements to the ASX explaining the possible benefits to the respective companies, their shareholders, or their cash-flow prospects related to, or resulting from, the new measure.

While large minerals groups may seek to acquire junior minerals exploration companies so as to book those tax losses against income, thus avoiding the minerals super profits tax announced by the Government, there are no such profitable majors in the world of geothermal in Australia.  However, minerals and hydrocarbons groups may seek diversification through such investment.

Either the market has already priced the impact into ASX geothermal share prices with no explanation required  and the measure is perceived to have little tangible benefit, or the Geothermal companies themselves do not perceive the measure to have discernable benefit so have made no announcements…… 

….or the third option is that the measure will have substantial benefits – but neither the companies nor the market have figured it out yet!

In any case, the response from companies and investors is clearly underwhelming.

It will be interesting to see what, if any, the effect of the Resource Exploration Rebate will be for these companies.

Note:  An updated and expanded version of this article was published in EcoInvestor Magazine (June 2010 Edition), available for free here.

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