Let's Do It Again

Shipping out metal plates and submersing them in water to produce Hydrogen is an expensive way of producing Hydrogen, and an extravagant way of producing energy. Sooner or later, investors will figure this out. So the next step is to focus on the value of the oxides or hydroxides also produced in this reaction. Before going over the recent announcements from AEC, take a quick review of the Hydrogenerate claims that Alternate Energy Corporation is recycling.

In 2002-08, Hydrogenerate announced that their process produced Hydrogen at a cost of 6 cents per cubic foot, which is not so great. In 2003-09 they announced that recycling could reduce the cost by 25%. Just before Hydrogenerate stopped financial reporting, they issued a press release claiming that they had even sold some of their "by-product".

AEC does one better than rehash Hydrogenerate's story. With their unique combination of hyperbole and innumeracy, AEC is now making claims indicating that Hydrogen represents much less than 1% of the value of their process, with most of the value coming from converting metal into "valuable" rust. One wonders why management attention is so focused on the tangential Hydrogen issue. If their latest announcements are correct, 99% of the value of their process comes from a material they haven't even named!

This is a long post since I'll include the entire press release and a quote from the SB-2. Any bolding is my emphasis.

2006-01-18 Press release

Alternate Energy Corp. Announces Upgraded Business Model
Wednesday, January 18, 2006
Opens Up a Billion Dollar Worldwide Market of Opportunity BURLINGTON, ONTARIO--(CCNMatthews - Jan. 18, 2006) - Alternate Energy Corporation (AEC) (OTCBB:ARGY) on November 14, 2005 announced that it had filed a provisional patent on a new production process by which it can economically produce pure hydrogen and commercially saleable commodity chemical products that open up a billion dollar worldwide market to the Company.
These developments have resulted in AEC re-defining its business model, while positioning the Company to become a player in the production of pure hydrogen for a wide spectrum of commercial applications.

Over the past year, AEC has worked closely with a nationally recognized, independent chemical laboratory in Toronto, Ontario, Canada, to further refine its process. The revised formulation has improved hydrogen production significantly, with the added creation of valuable commodity chemicals. Since the commodity chemicals have a much higher market value/weight than the hydrogen itself, subsidization of the hydrogen's selling price via the sale of these chemicals can easily bring it more into line to compete directly with current gasoline prices. Long awaited by the automotive industry, AEC's solution could be society's closest answer to the hydrogen economy becoming a reality and make driving a hydrogen fueled automobile affordable. For example, AEC's solution could be an ideal candidate for the "Hydrogen Highway" in California, due to the overall low cost required to produce the required hydrogen fuel for future hydrogen powered cars - on the spot.

Prior to these recent developments, AEC had been focused on small, portable, on-demand hydrogen production systems which it continues to refine. These recent improvements to its process have resulted in the production of commercially saleable commodity chemical products. This has opened a large door for AEC - bulk hydrogen production at stationary customer sites, with the simultaneous production of chemical commodity products, recovered as a routine part of the production process.

Mr. Blaine Froats, Chairman & CEO of AEC, stated, "As reported earlier, we have recently filed a provisional patent with the U.S. Patent Office relating to significant improvements to our hydrogen production process that resulting in, not only increased hydrogen production capabilities and a more efficient production process, but also the ability to produce a number of broadly used chemical commodity products which have demand in existing multi-million dollar global markets."

Mr. Froats commented further, "These discoveries and developments have substantially impacted our business model, and have afforded us the ability to offset the cost of producing hydrogen to such an extent that we believe our prices can be very competitive in the bulk hydrogen market, while also moving into the commodity chemicals marketplace with certain products that are valued at market prices greatly exceeding the value of the hydrogen being produced."

AEC's research indicates that the market for bulk hydrogen gas is enormous, currently estimated at approximately US$3 billion globally. In an attempt to clarify for the shareholders what the impact of the Company's new business model might have going forward, the following example should be helpful. By locating just one stationary hydrogen production unit at the site of a food oil manufacturing facility, AEC could supply on-demand, high-quality hydrogen to the plant to satisfy the needs of their hydrogenation process and fuel for in-plant power generation, while also producing its commodity chemical products from the same facility. The Company would expect such an installed system to typically result in gross revenues to the Company of about $80 million, with gross profits exceeding $30 million at current market prices for the produced hydrogen and commodity chemicals.

AEC's commodity chemical "by-products" clearly meet industry standards after having been thoroughly analyzed by an independent laboratory for quality and purity. Mr. Froats went on to say "These recent developments at AEC have changed our outlook for the future of our company. While we initially were solely in the "hydrogen" business, the financial opportunity, as presented to us by these developments, has clearly opened up the commodity chemicals business to the Company. It is also interesting to note that these developments have caught the eye of a number of world class players in the hydrogen and chemicals businesses and could lead to AEC forming a number of large scale joint ventures in the near future."

From the 2006-01-19 SB-2/A

We believe that the by-product can be used by the pharmaceutical, food, and fertilizer industries worldwide. The by-product is produced in a liquid form and is later dried into a powder, which can be blown into plastic containers, sealed and shipped. For every 0.0893 Kg of hydrogen produced, 8.5 Kg of the by-product is produced. Throughout the entire process, everything is either sold or used again.
...
The worldwide bulk hydrogen market amounts to 45 billion Kilograms per year. This amounts to approximately $3.37 billion in sales in Canadian funds. The majority of the sales are generated from the following industries

The average price they are estimating for Hydrogen seems low. $3.37 billion Canadian for 45 billion kilograms is 7.5 cents Canadian per kilo. A kilo of Hydrogen has about as much energy as a gallon of gasoline. 7.5 cents is just too cheap. But why should AEC spend a lot of time validating the economics of the Hydrogen side of their business when the other figures they report show that it's a miniscule sideline.

The mass ratios presented are extreme. 8.5 kg of by-product for 0.0893 kg of Hydrogen is 95 / 1. That's awful. (More in another post.) I think this is a calculation error on their part, but it's their number, so I'll use it.

The values presented are also extreme. They say that the byproduct has a much higher market value/weight than the hydrogen itself. I think this is another calculation error on their part, but it's their claim, so I'll use it. Since the process produces, by weight, 95 times as much by-product as Hydrogen, the by-product must be worth much more than 95X as much than the corresponding Hydrogen produced. So the Hydrogen is worth much less than 1.0% of the economic output of this process. So, Hydrogen is a side-issue, and their main business is producing the by-product. What's that? They don't say, but we'll learn in May, when their patent application publishes. Anyway, AEC's main business is producing "by-product", and they haven't said what the "by-product" is. Why don't they want to say what business it is they are in?