Sprott Research #2

Here is a copy of a Sprott securities research report

Recommendation : Speculative Buy
Target $15.00
Insight Dec 16, 1999
Sarah Hughes - Associate
(416) 943-6485
Special Situation

GLE:TSE

Global Thermoelectric ("Global") is developing SOFC systems for both the stationary (including home co-generation) and automotive market. Over the past few months, the Company has announced significant breakthroughs in its development processes, making strides towards a commercially viable product. On April 16, 1999, Global announced that it had received an initial purchase order from Delphi Automotive System for a solid oxide fuel cell system. Unlike many other fuel cell developers, Global also has two existing product lines unrelated to its SOFC development work. It is the world leader in the development, manufacturing and distribution of thermoelectric power generation equipment used in remote locations. The Company also produces crew compartment heaters for use in military vehicles; these heaters are currently supplied to the U.S. Military. We continue to recommend Global as a Speculative Buy with a target price of $15.00

1999 RECAP:

Throughout 1999 Global achieved a number of significant milestones in the development of its solid oxide fuel cell (SOFC) system. We have highlighted a few of them below:

1.   April 8, 1999: Global increased the power output of its cell by 100% (to 670 milliwatts per square cm), while operating at 800 C (down from 1000 C).

2.   July 22, 1999: Global announced that it successfully tested its SOFC running directly on natural gas, through the use of an integral reformer. The reformer is the size of your fist, and is estimated to cost approximately C$25.00. Given that 50% of all homes in the U.S. have access to natural gas, this milestone is quite significant.

3.   November 30, 1999: The Company raised $25 million through a special warrant financing, in order to build a pilot plant for the production of its SOFC systems. This will give it ample capacity to enter the remote market, in addition to satisfying the initial development needs of any future industry partners.

As a result of these initiatives, Global, a relative unknown in the fuel cell circle, sparked significant interest from a few industry giants in 1999. On April 16, 1999 Global announced that it had received a purchase order from Delphi Automotive, the largest automotive parts manufacturer in the world. We believe that Delphi will be supplying Global's SOFCs to BMW.

2000 SHOULD BE GLOBAL'S TIME TO SHINE:

Since acquiring its solid oxide fuel cell technology from Julich, Germany's largest R&D firm, Global has continued the development of these cells with a commercial focus. While 1999 was the time for Global to position itself in the fuel cell market, we believe that throughout the new year, Global will continue the rapid development of its SOFC system and in turn position itself to become a predominant player in the SOFC market.

The potential for SOFCs has in the past been masked by its lower temperature colleague, the proton exchange membrane fuel cell (PEM). The PEM technology is currently being developed by a number of large R&D firms, including Ballard Power Systems and Plug Power. However, over the past year the market's acceptance of SOFCs has increased and we believe that this trend will continue. As described in our initial report (June 18, 1999), there exists a number of massive potential markets for fuel cells. From the remote market to the larger home co-generation and automotive markets, it is widely believed that fuel cells have a large potential. Below we have provided an overview of how we believe SOFCs, and in turn Global, fits into these markets.

AUTOMOTIVE:

The potential entrance of fuel cells in the automotive market has received tremendous attention thanks to the contribution of Ballard Power Systems, the reported market leader in PEM technology. However most automotive manufacturers do not expect to have PEM powered cars ready for commercial production until at least 2004. Among the number of obstacles (including cost) yet to be overcome in the commercialization, the need for a pure hydrogen fuel infrastructure has been the biggest stumbling block. It is estimated that in order to provide a pure hydrogen infrastructure for fuel vehicles, at least $300 billion in capital investment will be needed. As a result of the high cost, many market analysts now believe that we will have to make due with our current gasoline infrastructure. According to Robert Dempsey of Texaco Energy Systems, "infrastructure costs could doom fuel cells in any motor vehicle application that does not use gasoline as a hydrogen feed stock."

It is possible for both PEMs and SOFCs to use "reformed" gasoline; however the reforming process between the two types of fuel cells is very different. While SOFCs use a single step reforming process, the PEM technology requires two steps, which increases both the complexity and the cost of the reformer. In general, when a hydrocarbon is reformed, the bond between the carbon and the hydrogen is broken. Although this process allows hydrogen to enter the fuel cells, it also produces carbon monoxide. With a PEM cell, one must reform this gas once again to extract the carbon monoxide from the gas stream, as carbon monoxide is poisonous to a PEM cell. The second step is difficult to perform and as a result very expensive. In terms of the SOFC, carbon monoxide can be used as a fuel, and Global has achieved acceptable power from a system running on 100% carbon monoxide. As a result of the relatively simple procedure, the gasoline reformer for a SOFC is expected to be quite small and relatively inexpensive.

We must highlight that SOFCs also have their limitations in the automotive market. At this time the systems slow start up time (as a result of the high operating temperature) restricts SOFCs from becoming the sole power source in a car. However, SOFCs can become an efficient source of power in a hybrid situation, as currently being developed by BMW and Delphi. As stated in the joint press release by BMW and Delphi, they will be producing a hybrid car using and efficient internal combustion engine and a solid oxide fuel cell, both running on gasoline. Currently, Global is supplying prototype SOFC systems to Delphi. Since the initial purchase order in April, we believe that Global has made a number of deliveries to Delphi, and we expect them to continue into 2000. Although SOFC hybrid is still in the development stage, if successful, solid oxide fuel cells, and in turn Global, could potentially become a large player in the automotive market.

HOME COGENERATION MARKET:

While most attention has been paid to Global's future potential in the automotive market, one cannot forget about the potential in the home co-generation market. This market could prove to be much larger, and come to fruition earlier than the automotive market. Whereas SOFC high operating temperature is seen as a technical challenge for the automotive market, it is a benefit in the home market. According to a Gas Research Institute study, which compares the functionality and efficiency of SOFCs and PEMs for the residential co-generation market. SOFCs have advantages that make them more attractive in residential systems. The study states that "SOFCs operate at higher electrical conversion efficiencies, do not require CO (carbon monoxide) removal..... and generate higher quality waste heat that can be better used for reforming, space heat, and domestic hot water applications." In addition, the solid-state of the SOFCs' components (i.e. there is no liquid in the electrolyte) allow for low-cost, high volume manufacturing.

Although Global has yet to partner with anyone in the industry, management has told us that they are currently talking to a number of potential industry partners. We believe that sometime within the new year, an announcement will be made in this regard.

THE REMOTE MARKET:

Although the market may not be as sexy (or large) as the automotive and residential markets, it represents a great stepping stone in Global's development process. In the commercial market, systems must be extremely cheap in order to be accepted ($0.50 to $1.00 per watt): however, remote players are willing to pay significant premiums for effective and, more importantly, reliable power ($5.00 to $10.00 per watt). Therefore, Global plans to enter this market first, while continuing to focus on decreasing the cost and the size of its commercial applications. The Company expects to have a prototype system out in the remote market by the end of 2000. With Global's existing distribution system into the remote market (through its thermoelectric generator business), we believe that given and acceptable product, the Company will be able to penetrate this market successfully.

DON'T FORGET ABOUT THE OTHER PRODUCTS...

Although most attention is focused on (an valuation is based on) the Company's SOFC development work, we cannot forget about the existing product lines: thermoelectric generators and military heaters. The Company recently announced a $19 million generator contract from India, in addition to a $8 million extension on its existing U.S. Military heater contract. We are looking for revenues to increase from $13 million in f1999 (the Company has a March year end) to $22 million in f2000 and $29 million in f2001. Although these business liners do not solely justify the current valuation, they do generate some cash for the Company's on-going SOFC research and development.

VALUATION AND RECOMMENDATION:

Although Global is an early stage Company, and therefore has a high degree of risk, we believe that Global has alot of opportunity ahead of it. From the Company's continuous development work with Delphi, and the potential entrance into the home co-generation market, to the expected launch of its first prototype in the remote market, we believe that 2000 will be an exciting time for both the Company and its investors. We continue to recommend Global as a Speculative Buy with a price target of $15.00.

PROJECTED FINANCIALS:

Global Thermoelectric ($000s)
Year Ending March 31	1998A	1999A	2000E	2001E	2002E	2003E	2004E
SALES	$14,722	$13,594	$22,161	$29,840	$39,911	$78,638	$113,858
Generators	-	11,525	13,546	19,640	21,211	16,333	14,046
Heaters	-	2,068	8,614	10,200	10,700	12,305	13,412
Fuel Cells	-	-	-	-	8,000	50,000	86,400
Cost of Sales	10,693	9,468	17,054	20,888	25,835	50,491	72,869
Gross Profit	4,029	4,126	5,107	8,952	14,076	28,146	40,989
	27%	30%	23%	30%	35%	36%	36%
EXPENSES
Marketing	981	1,350	2,058	2,835	3,991	6,291	7,970
Administration	1,270	1,082	1,522	2,984	4,191	7,077	9,336
Research &Develop.	135	-	140	360	1,000	1,500	2,200
Royalty on Fuel Cells	-	-	-	-	67	460	804
Interest on LTD	36	154	188	-	-	-	-
	2,422	2,586	3,909	6,179	9,248	15,328	20,310
Earn. Bef. Undernoted	$1,607	$1,540	$1,198	$2,773	$4,827	$12,818	$20,679
Depreciation	298	471	678	1,200	1,600	2,300	3,200
Amort of Def Dev Cost	197	153	442	600	2,600	4,225	5,975
(Gain)/Loss on Sls of Assets	(2)	(45)	-	-	-	-	-
Interest Inc./(Expense)	-	-	180	373	180	4	10
Foreign Exch. (Gain)/Loss	-	(273)	11	-	-	-	-
Income Bef. Tax	1,114	1,235	247	1,346	808	6,297	11,514
Income Tax	-	226	168	471	283	2,204	4,030
Net Income	$1,114	$1,009	$79	$875	$525	$4,093	$7,484
Shares Outstanding
Common	12,592	16,148	22,400	25,700	25,700	25,700	25,700
Fully Diluted			24,192	26,450	26,450	26,450	26,450
Earnings / share
Basic	$0.07	$0.05	$0.00	$0.03	$0.02	$0.16	$0.29
Fully Diluted			a/d	a/d	a/d	$0.16	$0.29