July 03, 2015

Total Doubles Down On Amyris' Jet Fuel

Jim Lane amyris logo

In California, Amyris (AMRS) announced that it has agreed on key business terms with Total for restructuring its fuels joint venture to open the way for proceeding with commercialization of its jet fuel technology over the coming years. Following the restructuring, Total would own 75% of the joint venture with Amyris.

BD-Amyris-022615-2

In conjunction with this transaction, Amyris has also agreed on terms with Total and Temasek, another major stockholder of Amyris, under which, and as part of a plan to strengthen the balance sheet, these stockholders would exchange an aggregate of $138 million of convertible debt for Amyris common stock at a price of $2.30 per share, with an additional $37 million of outstanding convertible debt being restructured to eliminate Amyris’s repayment obligation at maturity and provide for mandatory conversion to Amyris common stock.

Customers, ASTM on board

In September 2014, KLM tipped that it intended to fly on Amyris-Total renewable jet fuel, as soon as it receives favorable advice from their independent Sustainability Advisory Board. Amyris noted that is producing commercial product “for our launch partners (which include GOL), and that a 10% blend of Amyris-Total jet fuel can reduce about 3% of the particulate matter from aircraft engine exhaust.”

Last November, news filtered out of California that ASTM has revised the D7566, the Standard Specification for Aviation Turbine Fuel Containing Synthesized Hydrocarbons to include the use of renewable farnesane as a blending component in jet fuels for commercial aviation.

With that news, Amyris and Total said that they will now prepare to market a drop-in jet fuel that contains up to 10% blends of renewable farnesane.

Reaction from The Street

Cowen & Company’s Jeffrey Osborne wrote:

This conversion has a tangible effect on the ownership stake that both Total and Temasek has in the company. According to Thomson the companies own a combined ~24 million shares, which is around 30% of current shares outstanding. With the creation of 60 million additional shares, the combined ownership of Total and Temasek would be 84 million, or 60% of AMRS’ post-converted outstanding shares. We see this as confirmation that both companies see strong long-term potential for Amyris.

The reduction of convertible debt also improves Amyris’ balance sheet. Total debt, including a current portion of $18 million, was $242.5 million as of March 31, 2015. Upon the conversion of $175 million in debt the company will have reduced its total debt by 72% to $67.5 million. This should give Amyris greater flexibility as the commercialization of its various products continues to gain traction.

We see both of these updates as signaling a strong fundamental change in the company’s financial standing, as well as a solid validation of the viability of its jet fuel bioproduct. The terms of the restructuring are subject to standard closing procedures, including any approvals from the board or other internal requirements, as well as regulatory approvals.

Raymond James’ Pavel Molchanov wrote:

In aggregate, [it’s] $175 million of debt relief, equating to 72% of the company’s total debt burden as of 1Q15. If only Greece was able to get a deal like that! Naturally, there is no free lunch, and Amyris is giving up some future project economics. Specifically, Total will own 75% of the fuels joint venture with Amyris, up from the previously envisioned 50/50 split. But since this JV does not entail any meaningful revenue now, or even for the foreseeable future, Amyris gets the full deleveraging benefit upfront, with reduced JV economics only out in the distant future.

* In conjunction with this, Total has confirmed that it will proceed with commercialization of jet fuel under the JV. There is no real detail yet as far as the timetable, capital investment plans, or what the target economics might look like – all of those remain important question marks that will need to be addressed by management in due course. But it’s still a surprising move on the part of Total – surprisingly bullish, that is – considering the context of the oil and gas industry’s current period of austerity…Nonetheless, as a practical matter, we wouldn’t expect any production scale-up until around 2020, so it’s far too early for us to change estimates.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

July 02, 2015

Ten Clean Energy Stocks For 2015: Riding The Storm

Tom Konrad CFA

The first half of 2015 saw a mild advance in the broad market, but concerns about rising interest rates and the ongoing Greek debt drama sent income stocks, clean energy, and most non-US currencies down decisively.  My Ten Clean Energy Stocks for 2015 model portfolio has heavy exposure to not only clean energy, but income stocks (6 out of 10) and foreign stocks (4 out of 10.)  Despite this the stormy market for all three, the portfolio delivered admirably.

The model portfolio ended the second quarter up 9.7%, compared to its broad market benchmark, which was up only 4.4%.  Its clean energy benchmark is a 40/60 blend of its growth oriented benchmark and its income-oriented benchmark, matching the 4/6 ratio of growth and income stocks in the portfolio.  These two benchmarks are discussed below.  The blended benchmark fell 5.1%. 

For the month of June, the portfolio gained 3.1%, compared to only 0.8% for the broad market IWM and a 6.2% decline of the blended benchmark.

Value/Growth and Income Sub-Portfolio Performance

The four stock value and growth sub-portfolio reversed most of its previous losses in June,  up 7.4% for the month to end the first half down only 0.4% for the year.  Its benchmark, the Powershares Wilderhill Clean Energy ETF (NASD: PBW), fell 3.8% for the month but remains in the black with a 2.3% gain for the first half.

The six stock income sub-portfolio inched up another 0.3% on top of its already impressive gains, ending up 16.4% year to date, despite rising interest rates.  The income benchmark fared much worse.  This benchmark was The Global Utilities Index Fund, JXI for the first 5 months, replaced by the more clean-energy oriented Global X YieldCo Index ETF (NASD:YLCO) when that began trading at the end of May.  It dropping 5.3% for the month for a loss of 7.7% year to date, despite the fact that YLCO fared better than JXI in June.

The chart below (click for larger version) gives details of individual stock performance, followed by a discussion of the month's news for each stock.

10 for 15 Performance
Chart

The low and high targets given below are my estimates of the range within which I expected each stock to finish 2015 when I compiled the list at the end of 2014.

Income Stocks

1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
12/31/2014 Price: $14.23.  Annual Dividend: $1.04.  Beta: 0.81.  Low Target: $13.50.  High Target: $17. 
6/30/2015 Price: $20.05. YTD Dividend: $0.52  YTD Total Return: 44.6%.

Sustainable infrastructure financier and Real Estate Investment Trust Hannon Armstrong started the month strong, and I hope some of my readers took the opportunity and followed my lead by taking some gains as it briefly rose above $21.  At that point, Bank of America broke it's long climb by lowering its rating to Neutral based on valuation.  This is in-line with my own assessment: I like Hannon Armstrong for the long term, but, because of its much higher price than when it began the year, no longer feel that it deserves to be such a large part of my managed portfolios.

2. General Cable Corp. (NYSE:BGC)
12/31/2014 Price: $14.90.  Annual Dividend: $0.72.  Beta: 1.54.  Low Target: $10.  High Target: $30. 
6/30/2015 Price: $19.73. YTD Dividend: $0.18  YTD Total Return: 33.6%.

International manufacturer of electrical and fiber optic cable General Cable Corp. rose strongly on the news that it had sold the rest of its Asia Pacific operations for $205 million.  This was a significant step in its ongoing reorganization, which has the goals of simplifying its geographic portfolio, reducing debt, and improving profitability.

3. TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/2014 Price: C$11.48.  Annual Dividend: C$0.84.   Low Target: C$10.  High Target: C$15. 
6/30/2015 Price: C$12.36. YTD Dividend: C$0.39  YTD Total C$ Return: 11.1%. YTD Total US$ Return: 3.3%.

Unlike most of the other income picks, Yieldco TransAlta Renewables fell 2% in June, deepening the undervaluation which made me predict it would rise in the last update.  The decline was likely in sympathy with the larger, interest rate related, decline of Yieldcos and utilities in general (down 5.3% and 7.7%, as discussed above.)

4. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF).
12/31/2014 Price: C$3.20. 
Annual Dividend C$0.30.  Low Target: C$3.  High Target: C$5.  
6/30/2015 Price: C$2.99. YTD Dividend: C$0.15  YTD Total C$ Return: -1.9%.  YTD Total US$ Return: -8.8%.

Canadian power producer and developer (Yieldco) Capstone Infrastructure also declined 2.3% despite my prediction for this stock.  As with TransAlta Renewables, I believe the decline was industry related, not specific to Capstone.  In fact, the company announce progress with its wind projects in Ontario, where it received a final Renewable Energy Approval from the Ontario Ministry of the Environment and Climate Change for the 10-megawatt Snowy Ridge Wind Park.

New Flyer Industries (TSX:NFI, OTC:NFYEF)
.

12/31/2014 Price: C$13.48.  Annual Dividend: C$0.62.  Low Target: C$10.  High Target: C$20. 
6/30/2015 Price: C$15.48.  YTD Dividend: C$0.30  YTD Total C$ Return: 17.1%.  YTD Total US$ Return: 8.8%.

Leading North American bus manufacturer New Flyer got a very favorable write-up at Seeking Alpha, including speculation that its Brazillian partner, Marco Polo, might acquire the 80% of the company it does not already own in a buy-out.  I'm a little skeptical about such buy-out speculation- I think both companies seem to be benefiting well from the alliance as it is, but I agree that New Flyer remains an inexpensive company with a dominant position in the North American bus industry, which continues to rebound from a long slump. 

6. Accell Group (XAMS:ACCEL, OTC:ACGPF).
12/31/2014 Price: €13.60. 
Annual Dividend: €0.61.  Low Target: 12.  High Target: €20.
6/30/2015 Price: €16.65. YTD Dividend: 0.61  YTD Total Return: 26.9%.  YTD Total US$ Return: 16.8%.

Despite Greek wobbles, bicycle manufacturer Accell Group, which makes most of its sales in Europe, maintained its balance with the stock up 2% for the month and 17% for the first half.  The company is a leader in e-bikes, and introduced its own "mid-motor" (i.e. near the pedals so that the motor can take advantage of the bike's gears) with hardware supplied by Yamaha.  Mid-motors are a premium option, offering better balance, efficiency, and handling than the more common hub motors, but are more complex and come with a higher price tag.

Value Stocks

7. Future Fuel Corp. (NYSE:FF)
12/31/2014 Price: $13.02.  Annual Dividend: $0.24.   Beta 0.36.  Low Target: $10.  High Target: $20.
6/30/2015 Price: $12.87 YTD Dividend: $0.12.  YTD Total Return: -0.2%.

Alone among my three predictions for stocks to perform well in June, biodiesel producer FutureFuel did not disappoint.  The company gained 8% for the month on the EPA's proposed biomass-based diesel volumes for 2014-2017, which were announced on the last trading day of May.  I predicted that the targets, which were good news for biodiesel producers, would continue to propel the stock upward in early May.  That turned out to be the case, and the stock stayed above $13 for most of the month before giving back some of its gains in the recent market turmoil. 

8. Power REIT (NYSE:PW).
12/31/2014 Price: $8.35
Annual Dividend: $0.  Beta: 0.52.  Low Target: $5.  High Target: $20.
6/30/2015 Price: $5.80. YTD Total Return: -30.5%.

Solar and rail Real Estate Investment Trust Power REIT's stock fell briefly below $5, a price at which I think it represents a good buy despite the negative summary judgement in March. 

The two remaining issues in the lessee's civil case against it will go to trial in August.

The lessees, Norfolk Southern (NSC) and Wheelling and Lake Erie (WLE) claim that Power REIT and its CEO, David Lesser, acted fraudulently when Power REIT was created and the Pittsburgh and West Virginia (P&WV) (which owns the leased property) became its subsidiary through a reverse merger.  They are claiming damages in the amount of approximately $3 million based on interest on funds withheld by third parties, which NSC and WLE claim is due to Lesser's actions.  It seems to me that if interest is owed, it would be by the third parties.  But, given my track record predicting the court's rulings, readers should form their own opinions.

9. Ameresco, Inc. (NASD:AMRC).
12/31/2014 Price: $7.00
Annual Dividend: $0.  Beta: 1.36.  Low Target: $6.  High Target: $16.
6/30/2015 Price: $7.65. YTD Total Return: 9.3%.

Energy service contractor Ameresco released the usual press releases about new contracts.  Given the timing of the rally, my best guess is that the company attracted the interest of one or more institutional investors by presenting at ROTH London Cleantech Day.

Growth Stock

10. MiX Telematics Limited (NASD:MIXT).
12/31/2014 Price: $
6.50Annual Dividend: $0.  Beta:  0.78.  Low Target: $5.  High Target: $20.
6/30/2015 Price: $7.77. YTD Dividend: $0.  YTD Total South African Rand Return: 26.3%.  YTD Total US$ Return: 19.8%.

Vehicle and fleet management software-as-a-service provider MiX Telematics published its annual report, which seems to have boosted the stock slightly.  The annual report does not contain information which was not included in its annual results, published at the end of May, but could have drawn the attention of investors to its long term progress.  As I discussed last month, the annual results were very encouraging, and MiX continued to trade at a fraction of the valuation of its developed-market peers.

The Annual General Meeting was also set for September 11th.

Predictions

Last month, I predicted TransAlta Renewables, Capstone Infrastructure, and FutureFuel would advance in June.  The sharp decline in utility and Yieldco stocks prevented the advance and led to a small decline in the first two, but FutureFuel advanced strongly, pulling the average gain to 1.1% for the three stocks.  Over the past four months, I've managed to pick 7 out of 9 monthly winners, my average pick has advanced each month. 

While I'm satisfied with both my overall track record and my monthly picks, I don't encourage readers to trade based on my monthly hunches: Transaction costs would probably cost more than my market timing would help.  That said, for readers new to the list, these monthly picks have so far proven to be among the best stocks to buy if you have new money to invest.

Since the monthly picks have so far seemed useful, I'll continue my predictions.  Although it did not work out last month, I'll be sticking with Capstone and TransAlta Renewables.  Despite rising interest rates, both are trading at excellent valuations.  Also, I feel the rapid decline of income stocks over the last couple months is due for a pause or even a small rebound.

Disclosure: Long HASI, CSE/MCQPF, ACCEL/ACGPF, NFI/NFYEF, AMRC, MIXT, PW, PW-PA, FF, BGC, RNW/TRSWF, REGI.  I am the co-manager of the GAGEIP strategy.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 01, 2015

Chinese Solar Turmoil Brings Crowdfunding and Internet Interlopers

Doug Young 

Bottom line: Yingli’s use of crowd-funding to finance a small project and the bargain sale price of a small polysilicon maker reflect continuing struggles at second-tier solar companies and the need for more consolidation.Yingli logo

Two solar energy stories are showing how overcapacity continues to haunt the sector 2 years after it began to emerge from a major downturn. The first involves a desperate-looking fund-raising plan from the struggling Yingli (NYSE: YGE), which is trying to use crowd funding to pay for a new solar plant. The other news involves another slightly bizarre investment in the space, with Internet titan Tencent (HKEx: 700) and real estate giant Evergrande (HKEx: 3333) paying a bargain price for Mascotte (HKEx: 136), a money-losing Taiwanese maker of polysilicon, the main ingredient used to make solar panels.

Both of these deals look strange for different reasons that reflect the lingering state of turmoil in a solar panel sector plagued by excess capacity. Many of the weakest players have closed or been purchased over the last 2 years, with names like Suntech and LDK disappearing as independent companies. But a relatively large field of second-tier players like Yingli still remain in business and probably need to either close or get acquired before the industry can truly return to health.

Let’s start with Yingli, which proudly proclaims in its latest announcement that it is bringing solar financing to the masses by giving average people the chance to invest in a small new solar power plant. (company announcement) The plant is based in Yingli’s home province of Hebei, hinting that it used its local connections to get the project build. The plant has a modest capacity of 4 megawatts, and was funded with the sale of 20 million yuan ($3.2 million) in bonds.

Two Chinese companies provided the project’s original financing, but now it appears they want to sell their stake to average consumers via an online platform that resembles the popular crowd-funding model. The fact that these big investors are looking to sell their stake to unsophisticated consumers shows their own lack of confidence in the project, and the overall move really looks like desperation.

Yingli is the weakest of China’s major solar panel makers to survive the downturn so far, and this kind of move shows just how shaky its finances are. The company shocked investors in May when it said it was in danger of going out of business, even though it later said its statement was misinterpreted. (previous post) This kind of move to raise money through crowd-funding certainly won’t help to restore confidence in the company, and it’s still possible we could see Yingli ultimately fail this year or next.

Next there’s the other deal that has seen Tencent and Evergrande take a majority 75 percent stake of Mascotte for HK$750 million ($100 million). (company announcement; English article) The purchase price represents a whopping 97 percent discount to Mascotte’s last stock price before the announcement, which actually came last week.

A quick look at Mascotte’s latest financial statement, which was released after announcement of the Tencent and Evergrande investment, shows why the company so desperately needed the new money. Mascotte lost HK$129 million last year, which was actually an improvement over the $547 million it lost the previous year. Still, so many losses over consecutive years meant the company was probably out of funds and unable to find anyone to lend it new money to continue its operations.

The involvement of Tencent in this transaction looks a bit strange, as the company has never invested in this kind of new energy deal before. But that said, big tech names like Apple (Nasdaq: AAPL) and fast-rising online video firm LeTV (Shenzhen: 300104) seem to be suddenly piling into the space, perhaps as a form of public relations to show their commitment to environmental protection. Such investments have so far been quite small, and in this case Tencent won’t feel too much pain if Mascotte fails, which looks like a strong possibility over the next year or two.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

June 30, 2015

Leather Without The Cow

Flokser launches Artificial Leather based on DuPont Tate & Lyle, BioAmber ingredients

Jim Lane

In Canada, BioAmber (BIOA) announced that the Flokser Group has successfully developed an innovative artificial leather fabric using bio-based materials supplied by DuPont (DD) Tate & Lyle Bio Products and BioAmber.

Flokser has launched this new synthetic leather fabric under its SERTEX brand. The novel fabric comprises a polyester polyol made from BioAmber’s Bio-SA bio-based succinic acid and DuPont Tate & Lyle Bio Products’ Susterra bio-based 1,3-propanediol.

Flokser’s artificial leather fabric has 70% renewable content and delivers improved performance. It provides better scratch resistance and has softer touch than current synthetic leather fabrics made with petroleum derived chemicals. The global addressable market opportunity for these bio-based polyester polyols in artificial leather is estimated to be 330 million pounds per year (150,000 metric tons); a 165 million pound market for bio-succinic acid and a 165 million pound market for bio-1,3-propanediol.

The background on biobased artificial leather

Historically, artificial leather has been popular with cows, but not always with consumers or environmentalists. Brands abound, including Biothane, Birkibu, Birko-Flor, Clarino, Kydex, Lorica, Naugahyde, Rexine, Vegetan, and Fabrikoid. Most include petroleum-based ingredients such as polyamide, acrylic, and polyvinyl chlordie.

Back in May 2014, BioAmber CEO Jean-François Huc tipped the new work then underway on artificial leather, stating: Huc comments: “Over the past year we worked with a number of innovative companies that validated our Bio-SA in several new applications. For example, in artificial leather they demonstrated that the polyester polyol made with Bio-SA offers better aesthetics including softer touch than the polyols made with adipic acid. This market reportedly consumes 150,000 tonnes of adipic acid annually.

Back in December 2013, Green Dot announced developed a compostable synthetic leather made with the company’s Terratek Flex bioplastic. The new synthetic leather combines the look and feel of high quality leather with a lighter environmental footprint compared to traditional leather tanning or synthetic leather manufacturing. The material can be returned to nature if placed in a composting environment when its useful life is over. Initial trials have been completed with manufacturing partners in the U.S.. The new synthetic leather can be made in a wide range of colors, textures and thicknesses with a variety of naturally biodegradable backings.

In June 2012, Suzanne Lee has developed a “vegetable leather” fabric made using bacteria, green tea, sugar and yeast. The material can be cut, dried, molded and sewn. The product has a life expectancy of five years, at which point it will rot and harden, but not to worry, as it can be composted with a standard home garden composting system.

Reaction from the stakeholders

“We have been working over the years on sustainability and have made remarkable steps, including producing first in Turkey phthalate free artificial leather polyurethane systems. We strive to work with global best in class companies to shape the future. Working with BioAmber and DuPont Tate & Lyle has helped us to generate fresh ideas and develop new products that offer a unique combination of performance and sustainability for our industry,” said Ekin Tükek, Flokser Group board member.

“This new eco-friendly artificial leather fabric from Flokser demonstrates the performance that bio-based materials can offer in technically challenging applications. The artificial leather made with our Bio-SA™ and DuPont Tate & Lyle’s Susterra® outperforms standard products, bringing better abrasion resistance and softer touch,” said Babette Pettersen, BioAmber’s Chief Commercial Officer.

“We are pleased with this new product launch in a major industrial segment of the polyurethane market, and we believe that working with Flokser, an industry leader, will drive market adoption. This new artificial leather fabric is a unique product, combining renewable content with the highest standards of performance and quality”, said Steve Hurff, VP Marketing and Sales, DuPont Tate & Lyle Bio Products.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

June 29, 2015

Ocean Power Technologies Bobs Into The Big Apple

by Debra Fiakas CFA

Mid-June 2015, Ocean Power Technologies (OPTT:  Nasdaq) announced final permits had been secured to deploy one of its power buoys off the coast southeast of New York City.  The company has lost no time in laying down mooring lines for the buoy.  The next step is to watch the skies for the best weather conditions to deploy the buoy.  Over the next year, Ocean Power will collect data the power buoy’s performance.
Ocean+Power+Buoy[1].jpg
Ocean Power Technologies is a developer of ocean wave energy technology.  The company has been working on its ‘power buoy’ for over fifteen years for off-grid as well as integrated network electricity generation.  The company’s website provides a concise description of how the power buoy works, using a mechanical system to drive electrical generators using wave motion.  Two different designs provide size and capacity alternatives.

In the twelve months ending January 2015, Ocean Power generated $4.0 million in total revenue with its power buoy technology.  That revenue level is not adequate to support development and other operating costs.  The net loss was $13.1 million.

For any company not yet generating profits, the first question has to be about the adequacy of cash resources to support operations until sales begin to ramp.  Operations used $13.2 million in cash during the twelve-month period ending January 2015.  With another $19.2 million in cash in the bank, it would appear Ocean Power has some time to keep working on its power buoys.  That said, we note that activity has been suspended under the company’s contract with Mitsui Engineering & Shipbuilding for the purposes of gathering and evaluating data needed in the next step of the project.  Work is expected to resume yet in 2015, but with a reduction in revenue in the quarter ending April 2015, it is not likely the company can report growth in sales over the prior fiscal year.
PowerBuoy[1].jpg
Investment in developmental stage companies like Ocean Power is fraught with risk.  What if the technology does not work?  What if management cannot develop a good strategy to commercialize its technology?  On and on it goes with problems and pitfalls.  With that practical view in mind, I note that Ocean Power has been making progress with each passing quarter, with management blocking and tackling each obstacle as it comes along.

OPTT looks over sold according to one of my favorite technical indicators, the Commodity Channel Index.  Granted this micro-cap stocks trades with so little volume technical indicators can be less than robust.  Earlier this year, the company has notified by Nasdaq that continued listing is in jeopardy if the price is not brought up above $1.00.  Unfortunately, the current price of OPTT is still just over two bits.  Nonetheless, at the current price level the stock is more an option on management’s ability to move the ball forward.  For investors with a tolerance for risk, a two-bit option on Ocean Power’s technology and management team could be an interesting play on renewable energy from the ocean.
 

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. OPTT is included in the Ocean Group of Crystal Equity Research’s Electric Earth Index.

June 26, 2015

Commodity Energy Vs. Technology Energy: This Changes Everything

by Garvin Jabusch

We now live in a global economy with two fundamentally different types of energy: commodity-based in the form of fossil fuels and uranium, and technology-based, represented primarily by solar and wind. That observation is interesting as far as it goes, but what does it mean? The term renewable (as it pertains to energy) gets used so often that it is easy to forget what it really entails. For starters, tech-based renewables become less expensive over time, as demand for them drives scale, innovation, and improves cost structures in implementation (think about the last couple of computers you’ve purchased). This is precisely the opposite of how we have traditionally thought about energy and, how it’s priced. With commodity-based energy like coal and oil, energy costs go up over time as demand increases (population and economic growth necessitates this) and the cheaper-to-acquire sources are used up. The contrast between the old and new means of acquiring energy is nothing less than revolutionary, as it means that economic growth need no longer choke itself off as a consequence of its own success. Since the fuels for technology-based energy (sunshine and wind) are free, it means we're entering into a fundamentally new economic era wherein traditional measurement of energy costs will no longer apply.

We currently measure energy in units of power from the supply side: gallons, barrels, BTUs, kilowatt hours, and so on. However, if power generation is no longer slave to a commodity resource with its accompanying supply and pricing dynamics, perhaps it’s time to change how we measure it.

Given the amount of power the world economy uses in a day, compared to the available wind and solar power naturally provided in a day, the potential power that can be harnessed is basically infinite for human purposes. To illustrate this, imagine the time in history when everyone thought there was infinite coal and oil in the ground, but we just didn’t have very many wells or mines to get it out. This was, as far as anyone then could see, the situation at the dawn of the 20th century, when oil rushes and coal booms around the globe redrew borders, sparked decades-long wars, and reshaped human existence on the planet. The future of human productivity was at stake, and people rushed to capitalize on that, similar to how investments are beginning to flow today towards the great transition of our own time - the switch to electrification through renewables.

Of course, there are some crucial differences between the renewable energy future we see today and the beginning of the fossil fuel era that shaped the last century. For one thing, oil and coal turned out to be nowhere near infinite: in fact, the more we use, the more we need, and the harder (read: more expensive) it becomes to get. A similar argument is sometimes made (poorly) about sun and wind: the best spots for wind and solar will be utilized first to maximize investment, and over time more marginal areas will have to be utilized. For instance, Hawaii and California, both very sunny places, are moving quickly on utility-scale solar. Similarly, flat and windy Texas is a world leader in installed generating capacity for wind turbines. However, unlike oil, the amount of sun that falls on less sunny places, like Vermont, is still consistent and never diminishes. The same is true for more and less windy places. To cap all of that off, the amount of wind and sun that occur even in the darkest and least windy places is still in excess, given sufficient deployment of renewables, of current power needs. 

So, what happens now as the equivalent of unlimited barrels and gallons, falling from the sky for free, are increasingly captured and put to productive economic use? Will we remain fixated on measurement only from the supply side? Could we even if we wanted to? Can one put a meter on sunlight? Perhaps a more relevant measure now would be to assess the ability of that energy to do productive work, or in economic terms, to turn material into products and to provide services. Much as supply measurements are used today, this more descriptive production measure would be applied the same to, say, the energy needed by a company like Patagonia to turn plastic bottles into high quality fleece clothing, and the power to operate your television.

Essentially the question becomes: how much of the energy we pour into the economy is productive and how much is wasted? According to economists, notably John A. “Skip” Laitner, about 15% of it becomes economically useful while the remaining 85% dissipates unrequited (here is Laitner’s 2013 paper; free registration required).

Green Alpha’s Next EconomyTM thesis is that our collective and per capita economic activities must ultimately have only a de minimus impact on the economy’s underlying ecosystems, all while we maintain and improve standards of living. In that light, any accounting of global economic activity that suggests we are only getting 15% of the productive energy we generate is, to put it mildly, kind of a big deal. It means that the ability of our economy to grow and to run in a way that won’t overtop earth’s carrying capacity is badly hampered relative to what could be. “You can imagine what a huge array of costs that imposes on the economy and that set of costs just clamps down and makes it harder to provide economic activity and to provide jobs that we need,” as Laitner put it on a recent podcast.

If energy is increasingly coming from a cost-negligible source, and the lifetime of the technology we use to capture it is long enough to easily amortize its capital expenditure, it is time to start focusing on what we do with it, and how. There will, before long, be such an abundance of renewable energy available that we need to start asking how it can best be deployed to maximize economic gains. Measuring where energy goes, and what is done with it when it gets there, will become more important than where it comes from. Laitner has reached a similar conclusion: he believes that our abysmally low rate of converting energy to productive work is a systemic weakness. As he has blogged, “if we miss the big gains in energy and exergy efficiency, focusing instead on investments in costlier and more hazardous new energy resources, we run the risk of a continued weakening of the economy.” (Italics added.)

Energy efficiency and resource productivity are opposite sides of a coin. We need efficiency to do more with less: less material inputs, less person-hours, less water, etc. Doing more with less is key to providing jobs and transitioning to an indefinitely sustainable economy. As the world electrifies, economies will increasingly revolve around renewables to power the factories, shipping, computers and consumers who require those goods and services. What matters now is measuring energy’s ability to functionally provide for society, as opposed to the price per of input on the supply side. Put another way, the 85% of energy we generate and pay for that is wasted is an enormous basket of costs that slows the potential growth of the global economy in all of its manifestations (e.g. job growth).

Growth in global economic productivity is well understood to be slowing. The Organization for Economic Cooperation and Development (OECD) has recently given the global economy a "barely passing grade of B-." The World Bank and others have agreed that global productivity growth this year may decline to 1-1.2%. McKinsey & Company agrees, and reports that the problem is more long-term and systemic: “unless we can dramatically improve productivity, the next half century will look very different. The rapid expansion of the past five decades will be seen as an aberration of history, and the world economy will slide back toward its relatively sluggish long-term growth rate.” 

The primary reason for slow productivity gains is the inefficient use of resources, largely energy, but also water, phosphorus, land and human labor, among many others. Structurally, in terms of our institutional understanding of how to address this, the problem is that we don’t track the right kind of data to measure the effective use of energy in the economy. The conversion of energy to productivity is the numerator in the ratio of human endeavor to global economic growth. We collect energy’s supply side information, but we don’t track how much of that ends up being productive. This is odd, because that’s really the core of understanding economic activity. Moreover, the data we do have doesn’t inform us how individual inputs can help optimize the economic activity that would, in turn, drive sustainability as well as productivity. Knowing how many BTUs we’ve sold doesn’t get us very far; again, it’s not the supply so much as the effective use of energy that runs the world.

What’s required to make best use of the emerging abundance of renewable energy is a transparent flow of rich information to measure, evaluate and direct energy in a way that optimizes use and increases productivity. To get the world thinking outside of a supply-side orientation is a big change, and will require lots of new tools and education. Perhaps the emphasis on the supply-side aspect of energy has been a consequence of the historical commodity nature of the fuels themselves. Since they have been dangerous, dirty, difficult to extract and move around the globe, those responsible have expected commensurate (perhaps outsized) recompense. Increasingly however, energy harvested from renewable sources is freeing the world from those economic handcuffs; you no longer need a multi-billion dollar coal plant to power your house or drive your car. More systematic observation, automation and intelligence in our entire array of systems and devices, with real time measurement driven by machine-to-machine and Internet-of-things technologies, all optimized by algorithms, can now accelerate this revolution.

But present supply side thinking can’t inform any of this because measuring inputs isn’t the same as measuring outcomes. Fundamentally, increasing growth, jobs and standards of living are all about reducing costs of energy, material, services and capital. As with most aspects of holistic Next Economics we have to solve for multiple objectives. So, the transition away from supply-side measurement to outcomes optimization will require a paradigm shift. Understanding what we need as a society and how to line up resources in a way to achieve those outcomes is the critical issue. And incremental improvements to legacy metrics will not cut it.

At Green Alpha Advisors we strive to rethink what we’re doing in our own business of portfolio and asset management in a way that reflects the requirement of the global economic system to evolve to align our energy, material resources and capital with our economic best interests and desires for prosperity. The old, inherited paradigms that only allow us to think in terms of incremental improvements do not help us understand the functional and structural problems associated with unutilized energy, material and capital. As Greentech Media journalist Katherine Tweed recapped from a paper from Laitner, “If we want to understand how to wring more efficiency out of our energy usage, we need to redefine energy use in the first place.”

An economy-wide 15% productive energy use rate is only good news if you’re on the supply side selling all those barrels; the wasted 85% is easy money in that case. But what happens as renewables become the globe’s dominant source of energy and there are far fewer barrels to sell? Laitner’s work seems to be agnostic regarding where energy comes from, emphasizing instead the need to redefine our old ideas about how to measure its impacts and outcomes. For Green Alpha, the fact that the world is increasingly making energy from cheap tech instead of from expensive commodities means it is finally in a position to begin recapturing the lost 85% and realizing a far more sustainable, regenerative and prosperous global economy.

We can now design an economy where a far greater fraction of our energy is put to productive use improving standards of living, accelerating progress and reducing impact on climate and resources. But before we can do that we have to reimagine how we think about energy in the first place. No one can sell a photon, so perhaps it’s time to stop running the world of energy from the supply side, using supply side metrics and talking to each other with outdated language.

Garvin Jabusch is cofounder and chief investment officer of Green Alpha®Advisors, LLC. He is co-manager of the Shelton Green Alpha Fund (NEXTX), of the Green Alpha Next Economy Index, of the Sierra Club Green Alpha Portfolio, and of the Green Alpha Global Equity Income Portfolio. He also authors the Sierra Club's economics blog, "Green Alpha's Next Economy."

This material is for informational purposes only and is not an offer to sell or the solicitation of any offer to buy any security. Performance data quoted represent past performance, which does not guarantee future results. All returns are total returns net of fees.

To obtain a prospectus for the Shelton Green Alpha Fund (NEXTX), visit www.sheltoncap.com or call (800) 955-9988. A prospectus should be read carefully before investing.  Shelton Funds are distributed by RFS Partners, a member of FINRA and affiliate of Shelton Capital Management. 

Green Alpha is a registered trademark of Green Alpha Advisors, LLC.  SIERRA CLUB is a registered trademark of the Sierra Club. 

June 25, 2015

2020 Solar Investment Outlook

If you Hate Money, Don't Invest in Solar!

It took the solar industry forty years to reach a cumulative global capacity of 100 gigawatts …

By 2020, more than 100 gigawatts will be installed in a single year!

According to a new report from the good folks over at Greentech Media, the solar industry will install a mind-blowing 135 gigawatts of solar PV projects all across the globe in less than five years. This will push the cumulative market to nearly 700 gigawatts - or about the size of all the electrical generating capacity in Europe today.

And consider the following estimates:

  • 55 gigawatts in 2015. This represents 36% y/y growth.
  • Emerging markets will account for 17% of growth of the next 5 years. Historically, they’ve accounted for only about one percent.
  • By 2020, 45% of total solar PV demand will come from just three countries - China, Japan and the U.S.
    
Admittedly, I still see China as a potential wild card based on the fact that if China’s economy implodes - which is not only possible, but probable - there will be significant solar market contraction as China is not only a major producer, but consumer, too.

This is why, as I’ve explained before, I’m trying to limit our exposure to China solar stocks.

On the flip side, however, U.S. solar manufacturers and developers can only continue to get stronger. If you want exposure to the solar space, Sunpower (NASDAQ: SPWR), First Solar (NASDAQ: FSLR), or SunEdison (NYSE: SUNE) should definitely be a part of your portfolio.

All three, by the way, should also get a very nice bump if a select group of lawmakers in California get their way.

No Subsidies Needed

The California Senate recently passed a new bill that, if signed into law, would require the Golden State to get 50 percent of its electricity from renewables by 2030.

It wasn’t long ago when California upped its renewable energy mandate from 20 percent by 2020 to 33% by 2020. Now here we are today looking at the possibility of a 50% renewable energy portfolio.

On the surface, it seems quite aggressive. And in all fairness, right now, it is. But in another few years, costs will fall so low, solar will actually be the most cost competitive source of electricity in California. And that’s without subsidies.

Of course, it seems like every day the need for additional subsidies dwindles, anyway.

Solar superstar and founder of SunEdison, Jigar Shah, has been quite vocal on this issue, insisting that if we phase out the solar tax credits and other solar subsidies in mature markets, the result will be more robust growth.

Check it out …

As the Founder of the largest solar services provider, SunEdison, I had a hand in putting in place subsidies so that we could reduce costs through scale in local markets. This strategy has resulted in an average system cost reduction of over 50% since 2008.

But today, solar subsidies in maturing markets like the United States are actually holding us back, not propelling us forward. In fact, Germany has hit an all time high for solar capacity with 30-gigawatts peak (GWp) of solar power installed. Germany has done this by installing solar at far cheaper prices than we are in the United States. That is because solar subsidies are manipulated by investors like me to maximize our returns. The truth is that installers in the United States can, and do, install solar at roughly the same cost as German installers – save for some increased soft costs. If we want to reach higher growth, we need to phase out the solar tax credits and other solar subsidies in mature markets and watch the price of solar fall.

And just the other day, First Solar CEO, Jim Hughes, actually called the expiration of the solar investment tax credit “irrelevant,” saying …

Within 18 months, we will overcome the cost delta resulting from the drop [of the ITC] from 30 percent to 10 percent. It actually opens up new markets, in our opinion, because you'll see an increased interest in utility generation once the distortion of the ITC is behind us.

Hughes also made an important point that I’ve been making for years …

The growth in corporates interested in direct acquisition of photovoltaic power is not driven by climate change concerns -- it's driven by economics. When you look at data centers, when you look at electricity-intensive industries, they are all interested in locking in a significant cost as a fixed cost rather than a commodity-priced variable cost -- and that's driving a whole lot of procurement on a global basis.

Indeed!

So here we are, looking at a global market that’s growing incredibly rapidly, and even in the absence of direct subsidies, will continue to break records.

When it comes to energy investing, there is simply no greater growth opportunity than solar.

 signature

Jeff Siegel is Editor of Energy and Capital, where this article was first published.

June 24, 2015

With Oil Price Drop, Ceres Looks To Food

by Debra Fiakas CFA

Last week Brazilian agriculture technology developer Ceres (CERE:  Nasdaq) made formal plans to shift its focus to seed traits and the food and feed markets and away from energy.  Ceres is not abandoning biofuels as such, but with oil prices at historic low levels, it is not economic enough to justify working capital not to mention new investments.   The company is restructuring operations and reducing personnel in both its U.S. and Brazilian operations.  Ceres management estimates the changes will save between $6 million and $8 million next year.

The question investors need to ask now is whether the shift in priorities can change the value of Ceres.

The company has a strong balance sheet with no debt and $4.8 million in cash and $9.9 million in marketable securities.  The cash and financial assets will come in handy over the months as Ceres tries to reinvent its business model.  Ceres has yet to post a profit on its various agricultural technologies.  Consequently, the company has required considerable investment in working capital.  Over the last year alone Ceres has used $23.9 million in cash to support operations.  Assuming the anticipated savings develops as planned, it is possible that Ceres might need another $16 million to $18 million to keep the wheels turning.  Still it looks like the company could be $2 million to $4 million short.

Thus the first hiccup in creating value is the potential need to raise capital.  That means either increased leverage or issuing additional equity securities.  For a company that is not generating profits or cash, debt can be troublesome.  For most investors, the dilution from new stock is anathema to creating value.

To be fair, Ceres has been making progress with its crop traits.  In March 2014, the company announced plans to accelerate development of its sugarcane traits after initial field trials found better than expected growth and biomass even under drought conditions.  The next stage of field research is expected to be completed by June 2016.  If the company is able to keep pace with the planned schedule, the sugarcane traits should be ready for commercial market introduction in 2018.

The company has made some progress that could bring in revenue in the near-term.  Ceres has licensed its homegrown bioinformatics software platform to HZPC Holland BV, a seed potato developer.  The license will allow HZPC to access DNA databases.  One software license is not material.  However, in my view, the fact that Ceres commercialized a technology that it has originally developed only for in-house purposes, is a plus for Ceres.  It is just the kind of creative management that is needed during adverse market conditions like those presented by weak price conditions in the energy market.

It does not look like there are any significant revenue and earnings generators in the wings.  The single revenue estimate that is published by Thomson Reuters for Ceres suggests revenue could ramp dramatically in the fiscal year ending August 2016.  That that analyst thinks there will be profits, he or she is keeping it a secret as they have not published an earnings estimate.    Of course, this estimate could be predicated on the old biofuel-centric business model.  Yet, I see little change in the potential for revenue and earnings in a ‘food and feed’ business model.

So if investors must wait for earnings to create value, the stock represents an option human or capital assets.  While I might like management’s style, Ceres stock price seems a bit steep for an option on management.  Its crop products, sorghum, sugarcane and switchgrass seem better suited to the energy market than to feed hungry mouths.  Thus the stock seems a bit overpriced as an option on the intellectual property if its application is to be limited to ‘food and feed.’

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

June 23, 2015

Graphene: It Is All In The Strategy

by Debra Fiakas CFA

In the recent series of articles on graphene we have found a number of companies working on more efficient production processes and as well as applications for this exceptional material.  So beguiling graphene is  -  conductive, strong and pliable.  Scientists and investors alike have thought certainly graphene can provide that all-important ingredient that enhances value and creates profits.  In this post we look at two more companies that claim real progress in commercializing graphene materials. 

Based in the UK, Applied Graphene Materials (AGM:  LON; APGMF:  OTC) reported no sales in 2014 and a net loss of GBP1.9 million (US$2.9 million).  However, management is confident these circumstances will not last.  Applied claimed sending dozens of samples to prospective customers during 2014, and that initial feedback has been ‘encouraging.’  The team is so confident they have moved forward with plans for adding production capacity.  Applied is targeting three separate markets:  advanced composites, functional fluids and coatings.

Applied’s strategy to commercialize graphene seems to differ from most of the other graphene developers.  Instead of creating an entirely new product, Applied is focused on enhancing existing industrial materials by adding a small portion of graphene.  The company’s engineers cite graphene’s mechanical, barrier and lubricating properties as valuable in increasing impermeability, reducing wear and tear, or increasing efficiency.  In my view, this is an interesting strategy. Potentially, even at low-volume, high-cost production rates, a graphene producer could make a profit by offering higher priced graphene material supplies to a customer that will find the increase in performance worth the investment.

Canada-based graphene developer, Grafoid, Inc., has recorded significant revenue in recent months, although it is not entirely clear it the sales are from its graphene material branded as MesoGraf.  Although privately held, Grafoid’s most significant investor, Focus Graphite (FMS:  V; FCSMF:  OTC), reported that Grafoid had recorded sales of CND$1.9 million (US$1.5 million) in the twelve months ending March 2015, resulting in a loss of CND$8.9 million (US$7.2 million).

Grafoid’s market strategy is hitched to a series of acquisitions to integrate forward into the supply chain that would use the company’s graphene materials.  A year ago Grafoid paid US$1.3 million for ALCERECO,  an advanced materials technology developer that provides its customers with specialty ceramics and aluminum-scandium materials.  ALCERECO brings considerable engineering capability to Grafoid, including practical knowledge of manufacturing and materials production.   In September 2014, Grafoid bought a 75% position in Braille Battery, Inc., a developer of lithium ion batteries.  No details of the purchase price or Braille Battery sales or profits have been disclosed.  More recently in April 2015, Grafoid announced plans to acquire Ames Rubber Corporation based in the U.S.  Ames supplies materials for coatings, gaskets, moldings and other ‘rubbery’ products.  Grafoid’s CEO characterized the deal as the company’s ‘springboard’ into the rubber and plastics market.  Although the Ames deal is still pending, Grafoid has forged ahead with yet a fourth acquisition of MuAnalysis, Inc., a provider of testing and analytical services to industry, manufacturing and life sciences companies.  It is no surprise that deal terms were not disclosed.

Integrating all of these operations into the Grafoid fold presents something of a challenge.  It may have already taken its toll on Grafoid’s parent and 18% owner, Focus Graphite.  Grafoid’s chief executive officer, Gary Economo, is also the top executive at Focus Graphite.  In early June 2015, Focus Graphite announced the resignation of its chief operating officer due to a ‘divergence of vision.’  Economo has taken over as interim COO for Focus Graphite.

Some investors might consider shares in Focus Graphite an alternative to a direct investment in Grafoid.  However, it might be wise to let the recent drama at Focus Graphite play out, before taking a stake in what would only be an indirect position in graphene and a significant exposure to Focus Graphite’s yet unproductive graphite mining operations.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

June 22, 2015

The Pope and the Climates of Justice

by Jake Raden

Pope Francis’s encyclical on global warming and environmental degradation, Laudato Si, identifies our disruptive effects on our climate as social justice and spiritual issues. “Those who possess more resources and economic or political power seem mostly to be concerned with masking the problems or concealing their symptoms,” he writes, lamenting that those with privilege lack a “sense of responsibility for our fellow men and women upon which all civil society is founded.”

Mapping the Impacts of
Climate Change_CenterforGlobalDevelopment

(Image Courtesy of: http://www.cgdev.org/page/mapping-impacts-climate-change)

The image above is from the Center for Global Development and it’s one in a series that ranks the negative impact of climate change by country. The darker red colors are where currently measurable consequences are the worst. Notice that the richest countries in the world, with the exception of China and India, the largest polluters, are all relatively safe. To quote the New York Times:

“Catholic theologians say the overarching theme of the encyclical is ‘integral ecology,’ which links care for the environment with a notion already well developed in Catholic teaching — that economic development, to be morally good and just, must take into account the need of human beings for things such as freedom, education and meaningful work.”

Anyone who does not refuse consensus science understands that climate change is real, and reliably and statistically caused in whole or in part by the emission of greenhouse gases, most notably carbon dioxide and anthropogenic methane. On the other hand, you have climate deniers who can be grouped into two camps: the truly ignorant, and the feigned ignorant. The feigned ignorant tend to be the people, governments, and organizations which stand to lose the most both personally and professionally from admitting the true causes and ramifications of climate change. This group isn’t probably worth any time or effort, as they will simply be swept away as the world changes, if they continue to refuse to change with it.

It is the truly ignorant that we must come to terms with if we hope to have a chance. In the United States, public education has been faltering and deteriorating since the 1970s. Wages have stagnated, and the number of truly poor people has exploded. It’s not hard to find young (or middle-aged) people who are the product of safe and fulfilling middle class upbringings who understand climate change, the fossil fuel economy, and support changes to the global economy that would avert and reverse climate change. The problem is, those demographic groups are an extremely small minority of the entire planet.  They are mostly white, mostly western, and even in their own countries not always the majority. Why?

Because: inequality. Inequality is the new cause celebre in the West, as the existing middle class that re-built Europe after WW2, and turned the United States into the world’s greatest superpower begins to notice itself wasting away, and mobilizes to save itself. A new gilded age has quietly and subtly transformed Europe and the United States, and engorged itself on the former prosperity of the middle class.

The point is that climate change is no longer an intellectual issue. The science is clear, and it is decisive. Secondarily to climate change itself, pollution kills or harms millions of people a year. Even if in the longer term rising global temperatures posed no risk, we’re poisoning our air, water and food at ever accelerating rates. Eventually, given business as usual, even the rich people will have to eat GMOs, Round-Up, and breathe asphyxiating particulate matter in their air. The causes of climate change and ecological destruction on a global scale are all largely the result of a small cabal of industries that support and in return are vigorously supported by central and peripheral governments.

So if climate change is not an intellectual issue, what is it? If we borrow from the social sciences, like public health and sociology, we can see that it’s really all about inequality. Poor people live shorter lives, are beset by more illnesses, and generally enjoy their time on Earth (objectively, as measured by researchers) less than the non-poor. Many studies have investigated the ramifications of poverty on the mind and decision making, as well as the ability of the brain to grow and develop normally under such conditions. It turns out, it can’t. One study pinned the cost of poverty at around 13 IQ points over time. The stress, anxiety, and increased health related setbacks that the poor face simply take over any dreams or aspirations most poor people have of leading healthy, educated, informed lives. When you’re running to school dodging bullets, it does not leave a lot of time to think about whether or not cars should be electric or internal combustion and fossil fueled.

People who are poor, poorly educated, and stressed out just trying to live one day to the next are both more at risk from climate change (in the especially at risk countries in the map above), and also unfairly left out of the global consensus on how we should treat the environment and how we should power our economies. Whether it’s a lack of access to high quality education to make informed decisions, or simply a lack of material resources to make environmentally aware life and lifestyle choices, the poor are systematically tied to the carbon economy, with no intellectual or material resources with which to combat it, or change their station. Additionally, all of the worst impacts of climate change like food insecurity, increased infectious disease (unclean water), increased chronic disease (asthma, cancers, etc.), disproportionately affect those who lack the resources to insulate themselves from them.

The science is clear on climate change, but only those privileged enough to have access wealth, education, and therefore decision making power over their own lives are in a position to care, much less do anything about it. See the chart below for a global accounting of environmental concern plotted against average per capita GDP (Franzen and Meyer, 2009)

Fig3

As investment managers, we at Green Alpha write and talk a lot about the economic benefits of investing in the solutions to our greatest systemic risks. Pope Francis’s humanist take on the crisis has given us a chance to reflect anew on why the transition to indefinite sustainability matters for everyone, not just those who can own mutual funds. 

Jake Raden, MPH, is Vice President of Research and Data Systems at Green Alpha Advisors, LLC

This material is for informational purposes only and is not an offer to sell or the solicitation of any offer to buy any security. Performance data quoted represent past performance, which does not guarantee future results. All returns are total returns net of fees.

To obtain a prospectus for the Shelton Green Alpha Fund (NEXTX), visit www.sheltoncap.com or call (800) 955-9988. A prospectus should be read carefully before investing.  Shelton Funds are distributed by RFS Partners, a member of FINRA and affiliate of Shelton Capital Management. 

Green Alpha is a registered trademark of Green Alpha Advisors, LLC.  SIERRA CLUB is a registered trademark of the Sierra Club. 

June 20, 2015

MiX Telematics: Fleet Efficiency, Saftey And Security At An African Discount

by Jan Schalkwijk, CFA

In a recent article I wrote about the tech sector in Africa, I mentioned a South Africa company called MiX Telematics Ltd (NYSE:MIXT). There is a dearth of investable tech names in Africa and the worry is that investors would have to stretch to gain exposure to African tech. With this company, no stretching is necessary and it thus provides exposure to the African technology sector without comprising on value or quality.

MiX Telematics is a company that provides fleet and mobile asset management solutions, delivered through the Software-as-a-Service "SaaS" model. The company seeks to deliver its fleet operator customers improved efficiency, safety, and security. The core technology is real-time vehicle tracking and a software platform to record, interpret, and act on the data. This is what the company offers in a nutshell:

Efficiency: manage poor driver behavior, improve route efficiency and maximize vehicle utilization. The improved efficiency results in fuel savings, reduce wear & tear, faster delivery, and minimal vehicle downtime.

Safety: human error is to blame for 80% of motor vehicle accidents. The company's vehicle/driver tracking and monitoring system can record, analyze, and correct poor driver behavior, thus improving fleet safety. In South Africa, the company also has consumer solutions for insurance approval, roadside assistance, crash alert, and business mileage tracking.

Security: Vehicle tracking and monitoring allows for the recovery of stolen vehicles, the monitoring of precious cargo, and alerts to the driver of possible dangers or suspicious vehicle behavior. On the latter point, if for example your car is close to the South African border, MIXT will call you to make sure you are still in possession of your car and it is not on its unauthorized way out of the country.

The company has over 1,000 employees across offices in South Africa, Uganda, UAE, US, UK, Brazil, and Australia, managing over 0.5 million mobile assets and a network of 130 fleet partners. The company's shares trade on the Johannesburg Stock Exchange and on the NYSE since July 2013 through an IPO that raised the equivalent of 650 million South African rand (650 Rm) gross of fees.

Two thirds of the company's 2014 revenue of 1,272 Rm were subscription revenues, which produce an annuity-like stream of income. It is very much the strategy of the company to grow through increasing the number of subscriptions, rather than the off-the-shelf sale of hardware/software. Today, half of its revenue and 2/3s of its employees are Africa based. The percentage of revenue from Africa is likely to decline as the company's foothold in Brazil and the US expands.

While overall revenue was flat in 2014 in dollar terms (up 8% in rand terms), its revenue from subscriptions increased 8% in dollar terms, which will be a key metric to follow. As the mix shifts towards subscriptions, margins improve, which benefits the bottom line even if overall growth is slow. Using CY 2015 Street estimates, the company is trading at an Enterprise Value to Revenue multiple of 1.4x, this compares to 5.2x for the SaaS industry as a whole and 5.6x its closest competitor Fleetmatics (NYSE:FLTX) in the UK. Also - refreshing for a SaaS company - MIXT consistently generates free cash flow.

Even if the market does not narrow the valuation gap, there is a reasonable chance that a corporate buyer might step in. On June 18th US-based Novatel (NASDAQ:MIFI) announced it was buying Digicore, another (smaller) South African fleet-management and vehicle tracking firm, for $87 million in cash, or 4.40 rand per share. On June 1, prior to the announcement, shares were trading around 2.6 rand. MIXT would cost a little more to acquire, but it is digestible with a market cap of $250m.

On the business side, one of the key metrics to look at is renewal rates. There are other players in the space and therefore a declining renewal rate is an indicator of a deteriorating competitive position. The most recent figure for that metric is 90%, which shows that customers when evaluation SaaS solutions available, have a high rate of resigning with MIXT. This speaks to their technology being world class.

Does this company fit in an Africa fund? The answer is a resounding yes, in my view. If we are investing in the African domestic economies we should not limit our universe to African companies with local ambitions, but also consider Africa-domiciled companies with global ambitions. Such an investment can often prove rewarding, as it enables an investor to buy a world class company that's trading with an Africa discount. Moreover, you are banking on the growth of the African middle class in much the same way as when you are buying a bank or a consumer company, because companies like MIXT grow the middle class income that fuels banking and consumption.

Jan Schalkwijk, CFA has 18 years of experience in the investment industry. He is the founder and Chief Investment Manager of JPS Global Investments, an investment firm specializing in green investing on a global basis, and serves on the portfolio management team of Africa Capital Group, where he co-manages a sub-Saharan Africa strategy. From 1997 – 2005, Jan worked at Franklin Templeton Investments, where he was vice president of investment platforms. There, he was responsible for a book of business of $10 billion in assets under management and raised institutional assets in various sub-advised investment mandates that the firm offered, including domestic and international equity and fixed income.


June 19, 2015

How A Part-Time Uber Driver Can Buy A Tesla

By Jeff Siegel

“My next car will definitely be a Tesla,” (NASD:TSLA) my Uber driver said with great enthusiasm.

As he was driving me from the Hyatt in Newport Beach to John Wayne Airport, a Tesla P85D quietly flew passed us.

It was black, shiny, and clearly driven by an individual that was in a hurry. He must've been doing at least 90, and this 20-something part-time Uber drive could barely control his excitement.

While I certainly shared his enthusiasm, I was unsure of how a part-time Uber driver (I believe he was a college student driving for Uber to make some extra cash) would be able to afford an $80,000 car. But then I realized that by the time this guy gets a new car, he won't need $80,000 to buy a Tesla. He won't even need half that.

You see, Elon Musk's next big rollout — following the Model X all-electric SUV — will be the Tesla Model 3, which is set to debut next year with a $35,000 price tag. And rest assured, it won't lack much more than space compared to the Model S. In fact, I've heard it's basically just a smaller version of the Model S.

In any event, the $35,000 price tag on the Model 3 is the actual price — without any incentives included. Throw in the $7,500 federal tax credit, along with California's state tax credit of $2,500, and my Uber driver will be able to pick up a shiny new Tesla for $25,000.

Not a bad deal considering he'll save at least another $10,000 on gasoline during the first three years of ownership (and all Tesla Superchargers are free to Tesla owners). Figure that into the equation, and you're looking at a price tag of $15,000.

Of course, we can't forget that with a Tesla, there are no oil changes or smog checks either. And because it uses regenerative braking, the brake pads can last between three to five years longer than those on a typical internal combustion engine vehicle. Overall, over the course of three years, you're probably looking at another $1,500 in savings on maintenance.

That brings us down to $13,500 for a Tesla!

I believe the cheapest internal combustion vehicle you can buy today is the Nissan Versa, which will cost you about $12,800. But of course, when you figure in gas and maintenance costs, it quickly becomes much more expensive.

Just Kidding!

Okay, so admittedly, I went a bit over the top just now.

Yes, the new Tesla Model 3 will be priced very competitively. But when looking at pricing, I actually try to exclude any special tax incentives. If you figure those into the equation, you're not really getting an accurate read on pricing.

So if we take that same Model 3 and exclude the tax incentives but still include gas and maintenance savings (which are absolutely relevant), that puts us back up to $23,500.

Now, let me ask you this...

Would you pay $23,500 for what is basically a smaller version of the car in the image below?

teslamodelsk

Before you answer, keep in mind that you will still be limited in driving range.

Right now, I can drive my Prius from Washington, D.C. to Boston on a single tank of gas. In a Tesla Model 3, however, which will deliver 250 miles per charge, I'd only get as far as New York City.

I say “only” because I'm being a bit sarcastic.

Being able to drive from Washington, D.C. to New York City in an electric car — without having to stop to recharge — is pretty damn impressive. Especially if you get to do it in a Tesla.

Change is upon us

The reason I did these quick calculations was to illustrate that the two biggest obstacles to electric vehicle integration — price and range — are quickly being overcome. Hell, they're being torched!

Next year, we're going to see an electric car that will be competitively priced against similarly styled internal combustion vehicles and will provide nearly every daily commuter with enough “fuel” (i.e. battery power) to get to and from work or school.

Now imagine where we'll be by the end of the decade!

My engineering contacts tell me 300 miles per charge should be the standard by 2020, and according to UBS, electric car sales should soar after an “expected rapid decline in battery cost by more than 50%.”

With the dual threat of cost reductions and increased range, the highly disruptive breakthrough of electric vehicles is now in place where a major ramp-up is inevitable.

In fact, consider what was recently written at Oilprice.com in an article entitled, "Electric Vehicles to Become Mainstream in Short Period of Time."

Consider the ramping up of some of the most basic items that have conquered the American market over the past century. Refrigerators went from a luxury item to 60 percent household penetration during the Depression and World War II. Technologies we used to live without including PCs, the Internet, and cell phones have become an integral part of daily life.

specialevClick Image to Enlarge

We are about to find out if electric vehicles can make their mark and become mainstream. The launch sequence and liftoff phase (now barely underway) will soon reveal the extent of their fuel supply, i.e. How much interest will consumers have in EVs when a 200-mile-per-charge car costs less than $25,000? When a 60 kilowatt-hour (kWh) battery costs $9,000, there will be plenty of room in the budget to build a lightweight car around it.

At any price, the cost of ownership falls by 75 percent (not including cheaper insurance and maintenance); gasoline miles costing 12 cents each (at the current mileage standard with $3 per gallon) cannot compete with electric miles costing 3 cents or less.

My friend, if you're a regular reader of these pages, you know I've been bullish on electric vehicles since 2005 — back when hardly anyone knew a company called Tesla even existed.

And here we are today, with electric vehicles being nearly ubiquitous in terms of any discussion regarding the auto market. These days, Tesla models, Volts, LEAFs, and a handful of compliant electric cars are just as easy to find on a highway as roadkill — an ironic foreshadowing of what lies ahead for internal combustion.

There is no doubt that we are at the dawn of one of the biggest transitions we'll ever see in personal transportation. Ten years from now, I'll be surprised to see many internal combustion vehicles even being manufactured.

Hell, most kids born today will probably never even know what it's like to fill a gas tank, get an oil change, or smell exhaust.

Change is upon us, dear reader. Embrace it, enjoy the benefits of it, and — by all means — profit from it!

To a new way of life and a new generation of wealth...

 signature

Jeff Siegel is Editor of Energy and Capital, where this article was first published.

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