drone shot of the geothermal plant Insheim
International 08. Feb 2022

Vulcan Energy Plans to Sell Geothermal Heating

Vulcan’s CEO Dr Francis Wedin recently spoke with Alan Kohler on the Eureka Report podcast.

We are sharing the transcript, with their permission.

Vulcan Energy Plans to Sell Geothermal Heating

Francis Wedin, the CEO and founder of Vulcan Energy Resources, tells Alan about the company’s plans to start selling geothermal heat as well as power to drive the lithium extraction plant in Germany.

By Alan Kohler

Francis Wedin is the CEO and founder of Vulcan Energy Resources, which is the locally listed company that is developing a lithium and geothermal energy project in Germany, not far from Frankfurt. It’s developing as time goes on, but primarily it’s a lithium business. They’ve got a half a dozen binding offtake agreements with car companies and recently, LG, the battery maker. But since I last spoke to Francis Wedin a year ago, they’ve now decided to start selling heat as well as power from the geothermal energy. The geothermal energy will drive the lithium extraction plant and they’ll also have surplus energy to sell into the German grid. They were just proposing to sell electricity but now they’re going to sell heat as well, which is piped by some sort of fluid – Francis doesn’t know what it is, but it’s some sort of fluid that gets piped around and heats everyone’s homes up. They’re starting to talk to local councils in Germany about doing that as well.

It’s a two-phase thing. They propose to have a definitive feasibility study in the second half of this year and then have the project up and running by 2024. They’ve got tonnes of money in the bank; 134 million euros and that will get them through the next couple of years, but obviously it’s going to be an expensive build because they’re building three projects in one: a lithium project, a heat project and a power project. It’s going to be an expensive build but according to Francis Wedin, will be well and truly worth it.

Here he is, CEO of Vulcan Energy Resources, Francis Wedin.

Francis, perhaps we can just cover off on the cash situation to being with. You’ve got 134 million euros in the bank at the end of December. How far do you expect that cash to get you?

Yeah, thanks, Alan. We also have an additional 10 million in investments as well, so in effect it’s about 145 million euros. We do expect that to take us to completion of definitive feasibility study and beyond, so effectively to FID end and project financing which we’ve signed up with BNP Paribas to run that process with us, the bankability study and the project financing for Phase 1, thereafter. The cash should see us well into that process.

And would your next capital raising be for project financing?

That’s the idea, yeah, we’re always on the lookout for sort of strategic opportunities. You know, in September last year we raised 200 million with Goldman Sachs and Canaccord as a means of moving on some strategic opportunities in our project area, at our zero carbon lithium project. That led to the acquisition of an operational geothermal plant and also some onshore rigs which we saw as necessary for execution of the project. If we see a strategic opportunity that we think merits a capital raise, we would certainly have a look at that, but otherwise, yes, the existing cash should see us through with our current development plans.

What do you mean by strategic opportunity?

Well, we’re always on the lookout for ways of growing the project. Since we last spoke, we’ve signed up Volkswagen, Renault, Stellantis which is the largest automotive company that no one’s ever heard of because it basically covers Fiat, Chrysler, Peugeot, Citroen, Opal and Vauxhall. It’s a newly-formed large automotive group. Also, LG which is the second-largest battery producer in the world and Umicore, which is a large cathode producer in Europe. Effectively we’re three times oversubscribed in terms of demand for our zero carbon lithium product.

These are all firm offtake agreements, aren’t they?

That’s correct. They’re all binding offtake agreements. We’ve effectively sold out our first five years of production, so 2025 to 2030. What this is telling us, we have sort of three times this amount in over demand, if you like, from these customers and from others. That’s telling us that if we can do so, we need to look at ways of expanding the project. We’re always on the eye out for, I guess, M&A opportunities and ways we can strategically sort of grow and accelerate the project.

Are there other businesses that own adjacent deposits? I mean, is it possible to use M&A to expand the project?

It is. I mean, there are other operational geothermal plants in the area in addition to our own. We’re now an operational renewable energy business as a first step towards becoming an integrated, renewable energy and zero carbon lithium company, so there are other opportunities around there. And also, eventually, I suppose, we want to take our knowledge and our IP global, so we are looking at global opportunities for geothermal plants that would have the potential to produce zero carbon lithium.

Well, in fact, just while we’re on that subject, you’ve got something going on in Italy, just up the road from Rome, in fact, haven’t you?

That’s right, yeah. It is early stage, but Italy is actually the birthplace of geothermal energy. It has the oldest geothermal plants in the world. And as you pointed out, just up the road from Rome, there’s an interesting volcanic system, which is very hot and has some very high lithium grades from some drilling from the 70s, so we’ve picked up a licence there and we’ll be assessing the potential there.

Okay. Back to Germany, so where is the project at, at the moment?

The zero carbon lithium project is currently in definitive feasibility study stage. We expect to get that finished in the second half of the year. Effectively, what we’re doing is we’re transitioning from well, we’ve become, as I said, a renewable energy producer, albeit a small one in the grand scheme of things in terms of where we want to get to, and really we’re transitioning the company…

Does that mean you’re going to sell the heat as well as the lithium?

That’s correct. We can sell heat or power, geothermal can do both. Currently we’re selling power. Going forward we favour selling heat because heat’s really the elephant to the room in terms of decarbonisation in Germany and Europe. There’s a very strong demand for renewable heat and it’s actually more profitable.

How do you sell heat?

You have a heat exchanger and then you basically sell it into a heating grid for space heating. It can also be used for industrial uses, but you need a heating grid for that to happen. We’re developing multiple projects across the Upper Rhine Valley, so where there are heating grids available, we’ll sell heat, where they aren’t available, we’ll sell power.

What is a heating grid?

Well, it’s basically a secondary fluid that you heat up. Obviously, you don’t pump the actual geothermal brine around the town, but you heat up a secondary fluid that is used for industrial or space eating uses.

So that’s piped. What’s the fluid, is it not water?

I don’t actually know the details of that. I’m not the geothermal expert in the company, but no, it’s not…

But anyway, whatever the fluid is, the hot fluid piped around to houses, does it?

That’s correct, yeah.

Which then goes into their heaters?

That’s correct. And you can also sell, I mean, if you are close to an industrial area, you can sell steam as well, which obviously is used for industrial uses as well.

Right, and so are you saying that this is going to be your first business?

Well, on the energy side, it’s certainly our preference to sell heat instead of power. As I said, because we see that as being the preferred source going forwards, and there’s a strong sort of focus from the German government to use geothermal to decarbonise heating. That’s really an enabler for our project development. And then that will hopefully help to enable the lithium side of the business, which is, you know, in terms of revenue, a much larger part of what we’re trying to do, particularly with lithium prices as they are. The heat for us, is sort of an enabler and the advantage of that being that the benefit really flows directly to local populations. If you sell power, it sort of just disappears into the grid. If you sell heat, you know, local populations can see, tangible renewable energy benefits flowing in.

How hot is it? I mean, can you cook with it or is it just heating?

It comes up depending on where you are, obviously we’re developing multiple project areas, but on average about 165 degrees centigrade, where we are in the Upper Rhine Valley. You know, anywhere between 150 and 210 degrees.

Well, that’ll cook an egg.

That’ll cook an egg, yeah. We need some heat to run our lithium extraction process because the whole point of this, really is we exclude fossil fuels from our process. We use a portion of that renewable heat to drive our lithium extraction and beneficiation process. But then there’s excess heat and power that can be produced and are sold into the grid. The idea is we’re a carbon negative process, so we produce more renewable energy than we can consume which if we can pull it off, will be a world first.

I take it you’ve only got binding offtake agreements for the lithium, rather than the heat and the power?

That’s correct. That’s going to be next for us. We’re in discussions with local city utilities. Actually, for the power you don’t need, so we’re currently selling power into the grid. You don’t need an offtake agreement. Under the German renewable energy law, the grid has to buy it basically, for 25.2 euro cents per kilowatt hour, so you get a fixed feed in tariff. The heat, you need bilateral offtake agreements and we’re in discussions with local utilities to start executing that. I’d expect that to happen over the next few months.

Who would build the pipes?

Well, sometimes there’s existing networks that you can tap into, but we would work together with the local councils to do that.

Right, okay, so a definitive feasibility study later this year.

That’s correct.

And then, what’s the timeline like after that?

Well, we’re aiming for first production of our zero carbon lithium by 2024. After we finish the definitive, also known as the bankable feasibility study, as I said, project financing with BNP Paribas. We expect to get some sort of green financing because we think the green credentials of the projects are very strong. So hopefully that gets some basis points off the borrowing cost. We would then look at construction and then obviously getting into production and scaling up from there, 2024 and beyond. Really, we have sort of a phased scale up approach because the project lends itself quite well to being sort of scale up in a modular fashion. The aim is to really scale up and grow with the European market as it grows.

Have you done a non-definitive feasibility study?

We did, just before we last spoke actually, a year ago, we did a pre-feasibility study, which was sort of the first time we spoke about the financial metrics of the project which we think are pretty attractive, so that was just over a year ago, now, we really are…

Take us through that again, for those who didn’t pick up that interview.

Sure. Effectively it’s looked at renewable energy, in this case power. We didn’t actually look at the heat last time just to keep it simple. And so there would be sales of the geothermal power from multiple geothermal wells across our projects in the Upper Rhine Valley in Southwest Germany. And then, as I said, building the lithium extraction plants; so using sorption to extract the lithium from the brine, using the heat from the geothermal to drive that extraction and then concentration process. And then using lithium electrolysis, which is similar to chlor-alkali to produce a lithium hydroxide product, and that uses green power. So zero fossil fuels to power the process. Then we split the figures between the lithium and the energy business and post-tax the lithium business gave an NPV of about EU1.9 billion and the energy business about EU0.5 billion.

On the energy side, it’s more like an infrastructure type return, so around about 13 per cent IRR post tax. On the lithium side of the business, more of a sort of resources type return, so closer to 30 per cent IRR post tax and this was with much more conservative lithium pricing, I think, than the many sort of other studies out there. This was published a year ago and we used a 14,950 lithium hydroxide price. Current lithium price is over $US50,000 a tonne on spot prices. Now we will continue to be conservative with our lithium pricing forecast, but probably in the next definitive feasibility study there’s scope to, I guess, increase our assumptions for lithium pricing.

Take us through your cost profile and how it compares with other lithium producers?

In terms of capex, we’re quite high because we’re developing a renewable energy business, a lithium extraction business, and a lithium processing business, which in a normal course of events would be three separate companies. We’re aiming to be fully integrated, so that makes the capex quite high. But we’re not sort of shying away from that, so I think that’s very achievable to fund. Phase 1, according to our prefeasibility study was about EU700 million and Phase 2, about 1.1 billion obviously subject to change in the DFS. The opex for the company, however, is extremely low, according to our forecast. Because the process that we use uses renewable heat, it’s able to use this process called sorption, which is a physicochemical process and so doesn’t use really much in the way of reagents and reagents are the biggest cost really for South American lithium producers from so called salars.

So that means that we don’t have much reagent cost. We also don’t have a feedstock cost. In hard rock lithium in Australia, for instance, one of your main costs is mining the product and concentrating it, so there’s a large cost for that feedstock, and we’re essentially treating a waste product, so the waste brine coming off the geothermal plant. That means that we should have a cost profile just over a $US3,000 tonne in terms of cash operating costs and that would make us certainly in the lowest quartile, perhaps one of the lowest cost operations in the world.

With a margin of about 95 per cent.

Yeah. Obviously, I mean, this was a year ago, so with the caveat that material costs are increasing. There will be some swings and roundabouts, on the DFS, but no, certainly it should be pretty compelling from the opex side.

When you’re thinking about the funding of the project, the capex of the project, are you thinking much equity, and I’m wondering also whether you’re likely to bring in a partner?

We have, I guess, a term sheet level partnership with a company called Nobian, which is the fourth largest chlor-alkali producer in Europe. Their chlor-alkali process is very similar to the lithium electrolysis process that we need to use to produce our lithium product. And they’re also located at the same chemical park where we also have a site at Höchst, just outside of Frankfurt, so there’s a lot of synergies there. I guess you know, the intention is to look at doing something at a project level for the chemical plant once we’ve completed the DFS with Nobian. Those types of strategic partners where there’s a strategic value add, we’d certainly be open to doing something at a project level. You know, that said, obviously you know, we don’t want to give away the farm with a deal like that, so the metrics would have to be compelling for us. But we’re certainly open to those kinds of agreements.

Should somebody who invests in your company now expect to be forking out a fair bit of money over the next couple of years to fund it themselves?

Well, it is certainly capital intensive. There’s no getting around that. We need to drill a lot of deep geothermal wells, which are not cheap. They’re probably EU6-8 million a well and we need to build multiple geothermal plants, multiple lithium extraction plants, and the chemical plant to process the lithium into lithium hydroxide. But I think in terms of equity and debt with the caveat that no one has really done this before, combined these two together, I think we’re expecting to do the drilling on equity and hopefully building the plants mostly on debt. I think, we’re obviously – and I’m a shareholder of the company myself – obviously we’re looking to try and minimise dilution where we can.

Germany is famously reliant on Russia for its energy, Russian gas and I think I think it’s like 50 per cent of Germany’s energy comes from Russian gas. The Russians over in Ukraine and the potential for war and possibly even, a cut-off or sanctions or even some sort of ending of Russian gas supplies to Germany and other European countries. What sort of difference is that making to the way people are thinking? The way you’re thinking about your project and the way others are thinking about it?

Well, it certainly doesn’t hurt in terms of what we’re doing and I guess the message of what we’re trying to bring across here. We bring two things, I think, to Germany and to Europe. One is, as you point out the strategic addition of renewable heating, which at the moment, you know, Europe and Germany’s going through an energy crisis and in particular, on the heating side. So where geothermal can be used there is a very strong push to develop geothermal projects not just from ourselves, you know, other sort of more infrastructure focused funds are certainly piling into geothermal. We’re seeing a strong push from the government, so that energy security is certainly something that we’re looking to provide. And obviously, decarbonisation as well is central to what we’re doing.

But also, for the German automotive industry, which is entirely reliant on imports of lithium chemicals into Europe at the moment, you know, 80 to 90 per cent of lithium hydroxide comes from China. And the lithium is the main irreplaceable ingredient of electric vehicle batteries, which are the engines of the vehicles of today in Europe. And the automotive industry is the largest industry in Germany and employs one in seven people. They don’t want to be reliant on, I guess, predominantly foreign sources for lithium chemicals production. On that side as well, I think we provide sort of a very strategic source of a very strategic product.

In fact, they’re planning to ban internal combustion engines over the next decade or two. Take us through the process that Europe and Germany are planning to go through with internal combustion engines?

Yes, I think it’s 2035, all new cars in Germany need to be electric by 2035. You know, some of the automakers are aiming to get there sooner than that. I mean really, we’re in 2022 already, that’s not far away. It’s going very rapidly towards becoming fully electric. We’re seeing some extremely large announcements from the likes of Volkswagen, Daimler Mercedes, BMW, in terms of the investment that’s going into electrifying their ranges. So it’s happening, and it’s happening very quickly. One thing that has been missed and which is why I think we’re seeing this spike in the lithium pricing now, is that for a resources project, you need sort of, five to seven years really to get these things up and running. It doesn’t happen overnight. It can’t respond that quickly.

There’s been under investment in the lithium market. And not only that, the automakers in Europe want to produce net zero carbon electric vehicles as produced and delivered to the customer. They recognise that actually making electric vehicles is quite carbon intensive at the moment. Now, they’re still a better idea than fossil fuel vehicles over the lifetime of the vehicle, that’s been shown in academic studies. But nonetheless, the battery is a very carbon intensive product because of the metals in the battery and lithium has an outsized carbon footprint, particularly from hard rock mining with processing in China. So that’s something that I guess the automotive industry is set the challenge to the raw materials industry to fix. They’re saying we want, you know, zero carbon or low carbon raw materials and that was very important in our offtake discussions, always sitting down with the sustainability person as well as the purchasing person. Yeah, hopefully we can be part of the solution with our zero carbon lithium project.

Germany is also proposing to end power generation from gas by 2040, isn’t it?

I think so, yeah, certainly I think they’re looking at think 50 per cent of heat in a zero carbon way by 2030. And yeah, ultimately, they’re aiming to ramp up their climate ambitions, which I think have been lagging over the last few years. But with the new federal coalition coming in, I think we’re going to see increasing focus on that going forwards.

Thanks very much, Francis, it’s been terrific talking to you. Thanks.

Thanks very much, Alan. Cheers. I appreciate it.

That was Dr Francis Wedin, CEO and founder of Vulcan Energy Resources.