Highlights of the quarter:
- Signed an exclusive, three way agreement with Gaz de France and De Dietrich for the French residential market
- Established site for volume manufacturing facility on Nuon industrial park in North Rhine Westphalia region of Germany
- Continued to make system improvements to increase efficiency, reduce size and optimise balance of plant components of fuel cell units
- Net operating cash outflow of A$4.8 million / £1.9 million (Q1: A$3.0 million / £1.2 million)
- Net cash and financial assets at 31 December 2006 of A$75 million / £30 million

Since the quarter end:
# Secured a site in Merseyside, UK, for the production of ceramic powders Brendan Dow, Managing Director of Ceramic Fuel Cells, said:

“The quarter ended 31 December saw significant progress towards the achievement of our business plan and further validation of our approach. The signing of an exclusive, three-way agreement with Gaz de France and boiler manufacturer De Dietrich addresses one of our key target markets and demonstrates our ability to meet our strategic objectives on schedule. With the announcement of the proposed development of a fuel cell foundry also in the quarter, we are on track to deliver commercial volume units to customers in 2009. We look forward to further positive developments in 2007.”

Financial Review

Net operating cash outflow for the second quarter was A$4.8 million, slightly higher than the previous quarter, largely due to higher product development costs of building field trial units. Expenditure in the quarter also included early costs from the Heinsberg fuel cell foundry project.

Capital expenditure was similar to the prior quarter and is expected to increase in coming quarters as the Company upgrades its Melbourne plant and commissions its UK powder plant.

Total cash and financial assets at the end of the quarter was A$75 million.

Operational Review

Product development agreement with Gaz de France and De Dietrich

In December, the Company signed an exclusive, three-way agreement with Gaz de France, Europe’s leading distributor of natural gas, and De Dietrich Thermique, the largest provider of gas heating systems to the French market, to develop a fully integrated m-CHP for the French residential market, which is a major addressable market for the Company’s technology.

EWE partnership

Work has continued under the Letter of Intent (LOI) signed with EWE in July 2005 on a project to commercialise fuel cell based micro-CHP systems for the German residential market.

In June 2006, EWE signed a contract for ten NetGen units, in addition to the two field trial units commissioned in January 2006. Two of these NetGen units will be powered by CFCL’s all-ceramic fuel cell stacks and eight will use metal-ceramic stacks. The first NetGen unit has been delivered and the second is planned to be delivered and commissioned in this quarter. During the first half of 2007 CFCL will build the other eight units – based largely on the existing NetGen units, with some modifications to suit the metal ceramic stacks and improved core balance of plant. The delivery schedule for these eight NetGenTM units will extend into the second half of 2007.

CHP field trials continuing

The Company is continuing the programme of field trials with customers to test the Company’s units and fuel cell stacks in real-world conditions. A significant focus of the early trials was the reliability of the units and the control, safety and electronics systems, all of which met the Company’s high performance standards. With regards to electrical output, some of the electricity generated has been exported to the grid. The testing of power output levels and the reliability of the all-ceramic stacks has led to some key improvements which are now incorporated in the new metal-ceramic cell technology. Field trials provide important data and experience of CFCL’s products in use, enabling CFCL to continue to make technological improvements.

Fuel Cell Foundry

In December, CFCL announced its intention to develop a large-scale manufacturing facility at the Oberbruch industrial park in Heinsberg, Germany, which is owned and managed by Nuon, a leading Dutch energy company. The government of the State of North Rhine-Westphalia is supporting the project with funding of €3.2 million.

Work on the volume manufacturing plant will run in two phases. CFCL has signed a lease for the existing building for phase 1, and secured an option to buy the ‘greenfield’ land for phase 2. Since the agreement was signed, work has begun to obtain environmental approvals and to prepare the existing building.

The Company will continue to update shareholders on progress during the year.

Powder plant

Since the quarter end, the Company has secured a site on an industrial park in Bromborough, Merseyside, UK, for the development of a ceramic powder plant. The Company has ordered equipment and is currently reviewing tenders from installation contractors, with equipment installation due in March, commissioning in the second calendar quarter and first powders available for use by September 2007.

One of the objectives set out at the Company’s flotation on Aim in March 2006 was to build a plant to make high quality ceramic powders as a key input for the Company’s fuel cells, using the Company’s proprietary processes. To validate the design and to reduce the installation and scale up risk of the plant, the Company built a demonstration plant in Melbourne which has successfully produced zirconia powder to the correct specifications.

To lead the development of the plant the Company has appointed Mr Phil Wilkinson as operations manager of the UK plant. Mr Wilkinson has significant experience in managing the production of high temperature ceramic fibres. For 20 years he was part of the Thermal Ceramics group at Morgan Crucible, working at the company’s ceramic fibre manufacturing and converting facility in the UK. At Ceramic Fuel Cells, Mr Wilkinson will report to Chief Operations Officer John Rajoo.

Melbourne facility

The Company is currently upgrading its manufacturing plant and expanding its capacity at Noble Park, Melbourne, to make the new metal-ceramic fuel cells and balance of plant components. These upgrades will allow the Company to test and validate the manufacturing processes to be used in the fuel cell foundry in Germany prior to full-scale installation.

Some of the equipment being upgraded includes a new continuous furnace, laser cutting equipment, QC equipment suitable for continuous operation, furnaces for metal coatings and automated dispensing equipment for advanced seals. Upgrade works are scheduled to complete by the end of March 2007.

Commercial Performance and Cost

Since the Company announced the new anode supported cells in September 2006, test results for single cells are promising and confirm that the cells perform according to our design and specification. Test results have shown stable operation and power output, with degradation rates of less than 3% per 1,000 hours on a test of more than 4,000 hours, and improved rates of less than 1% per 1,000 hours on a later test of more than 1,500 hours.

The Company has made and tested a metal-ceramic stack comprising 24 layer sets (ie a metal window frame housing 4 ceramic cells). The Company plans to make two to three 1kW metal-ceramic stacks per week from April 2007. These initial stacks will comprise 54 layer sets, with stack dimensions of 200mm long by 170mm wide by 140mm high, for a volume of 4.8 litres – about 20% lower than the Company’s 1kW all-ceramic stacks. The Company’s modeling indicates that significant reductions in the height of the final 1kW stack are possible, to 18 layer sets, or a volume of just over 2 litres.

The Company has also optimised the balance of plant components, with initial positive test results, validating the significant efficiency gains and design goals. The new 1kW stacks and balance of plant components will be integrated into NetGen units to be delivered to customers during the calendar 2007 year.