Tim Treadgold: Briefcase - Delays pay for Solco solar play

It’s not often that a business says thanks to government. Duncan Stone and his crew at solar energy specialist Solco are doing that – in stereo. First for slow decision making by bureaucrats in the Maldives which delayed the installation of a water purification system long enough to miss the tsunami which washed across the low-lying Indian Ocean island state, and now to Australian governments for forcing us to switch to solar hot water systems.

The original Maldives schedule called for two solar-powered water systems to be installed before Christmas with each producing 1,000 litres of bottled water a day. Once proved, an additional 20 of the Solarflow units which uses energy from the sun to distil brackish ground water, are earmarked for the Maldives. After that, the world.

The latest plan is to have the system operating in about a month (fingers crossed), and while this delay might be a blessing in disguise it is actually becoming a somewhat insignificant event in the life of Solco which has been undergoing a dramatic transformation.

Until late last year, Solco was listed on the stock exchange as Solar Energy Systems (ASX code: SES) and while highly-regarded as a significant “green business” player because of its application of solar energy in water pumping solutions it struggled to post profits.

Most followers of the local market, including Briefcase, missed the game-changing event in the life of SES, just as they missed the Christmas brush with disaster in the Maldives. In June last year SES acquired the Solco solar hot water business that had been 51 per cent owned by Schaffer Corporation, and the balance by management and other investors.

For a few months, as the $3.15 million deal was bedded down, the SES name was kept, masking the fact that everything was changing. In mid-December SES disappeared from the ASX and Solco (code: SOO) took over and the share price has climbed steadily from around 23 cents to 33 cents.

Not only is the re-badged Solco a substantially bigger business, but it has become a somewhat plain vanilla business which does not rely on environmental issues to deliver profits; it simply sells solar hot water systems to Australian homes, just like market leaders, SolaHart and Edwards, and has the solar-powered water business on the side.

Stone, naturally, argues that Solco has an advantage in the hot water game because his units are made of plastic while the rivals use steel. Briefcase reckons that argument is a bit thin, and certainly hasn’t worked in the past with Solco commanding a miniscule 3 per cent of the national solar hot water market.

However, where Stone does have a serious point to make is that government appears to be riding to the aid of Solco. Unlike the Maldives, where fast decisions are as rare as clean water, Australian governments are busy enforcing laws that make it compulsory for new houses to install solar hot water systems, and even offering generous financial incentives to encourage people to retrofit old houses.

Investors, who have patiently watched the original SES stick faithfully to its profitless roots, are now looking at a business that seems to have bridged the gap between environmental fairyland and a hard-nosed business using the sun to make profits and stay green.

A whiff of what might come was in a report late last year when Solco reported a maiden quarterly profit followed by a forecast from Stone that turnover in the current financial year will hit $8 million with $1 million sticking as pre-tax profit. In five years, as the hot water business dominates and the old SES rump of solar powered water production tonks along, turnover is forecast to hit $100 million and pre-tax profit come in at between $8 million to $12 million.

Those predictions probably fall into the courageous category, but there seems no doubt that Solco has done what few green businesses ever do, survive. It is now doing what even fewer do, make a profit - thanks first to government inaction in the Maldives, and government action in Australia.

Speaking of game changing events that slip past with no-one really noticing, there is a similar set of circumstances unfolding at Avoca Resources, a small mineral explorer that broke free of its parent three years ago to only get lost in the wilderness and a flood of lesser floats.

Avoca’s problem is that it was seen as dumping ground for surplus assets acquired by Ian Buchhorn’s Heron Resources, a company which has tried manfully (failed division) to launch a laterite nickel project.

Ten months ago everything changed when Avoca won a competitive tender to buy a 178 square kilometre block of highly-prospective ground at Higginsville, halfway between Kambalda and Norseman. In keeping with such momentous events, investors duly knocked 0.5 cents off Avoca’s share price, trimming it from 16 cents to 15.5cents.

A fresh look shows Avoca trading around 29 cents, almost double the post acquisition price, for a very simple reason. The Higginsville ground is returning extremely interesting drill results, which not only point to plenty of gold but which have geologists scratching their heads because it is unlike anything seen before in the region.

No resource or reserve estimates have been revealed but the style of mineralisation has been compared with that mined until a few years at Mt Charlotte, the last of the big underground mines at Kalgoorlie - not so rich, but thick.

In September, Avoca gave its first clue about what might lie at depth with drill intercepts from a structure dubbed Poseidon South Extended (PSE), including 11 metres assaying a very attractive 16.8 grams a tonne from a depth of 158 metres. The market liked that, pushing Avoca from 12 cents to 20 cents, before retreating back to 13 cents.

In mid-November, a second set of drill results was released, this time from a second structure called Trident and located about 70 metres from PSE. Best drill results this time included 54 metres assaying 3.5 grams a tonne (with a richer core of 12 metres at 11.4g/t) starting from a depth of 296 metres. These results pushed Avoca from 13 cents to around 23 cents, after touching a 12-month high of 25 cents.

Briefcase does not give share tips because it’s against the law. However, in the interests of an informed market it suggests that anyone interested dust off their eyeballs, visit www.avocaresources.com.au and make up their own mind about whether the company is on to something.

“Don’t assume that every sad-eyed woman has loved and lost - she may have got him.” Anonymous