Trading Alert: AAER Inc. (TSE:AAE)
I took 2 long positions yesterday (1 in my normal trading account and the other in my retirement account) in an emerging Canadian integrator of megawatt-sized wind energy conversion systems (i.e turbines) called AAER Inc [TSE:AAE]. Besides turbine assembly, the company also provides a range of services to clients in the wind industry, ranging from assistance in project planning and financing to post-installation maintenance.
Now it must be said from the outset that is a very speculative play on North American wind and not suitable for all investors. I entered one of my positions at C$0.38 and the other at C$0.39.
What initially poked my interest in this stock was a Jan. 17 press release stating that a small wind turbine manufacturer had just signed a 10-year lease agreement to take over a former car factory in the Canadian province of Quebec. I looked into this further and found out that, a few months earlier (Nov. 22, 2006), AAER Inc. had signed a C$35 million contract to deliver and maintain, for a period of 6 years, 17 1.5 MW wind turbines to Katabatic Power Corp., a privately-held wind farm developer based in British Columbia. Katabatic is going to use the turbines for its Mt. Hays project, and has an option for a further 17 turbines in 2008.
AAER Inc. has only existed in its current form since Nov. 7, 2006. Before that date, it was known as Bolcar Energie, a publicly-listed capital pool company that had been established with the sole purpose of making an acquisition in the turbine manufacturing space. Although Bolcar filed its preliminary prospectus as far back as July 2003, AAER did not go public until May '06, following a qualifying transaction with Bolcar. On Nov. 7, after a reverse takeover, Bolcar was terminated and the company became officially known as AAER Inc.
AAER's most recent financial disclosure, available on SEDAR, sheds very little light on what the firm currently looks. Filed under the Bolcar name, the company reported a total loss of C$2,532,406 on revenues of C$7,491 for the 6-month period ended Sept. 30, 2006. For the previous fiscal year, ended on March 31, 2006, Bolcar reported a loss of C$1,665,136 on no revenue.
I didn't pay too much attention to Bolcar's numbers here as the firm had not begun operating when it last filed. Unlike certain sectors like fuel cells, wind is a proven business and the name of the game is not to burn through cash for years hoping for a blockbuster technology sometime in the future - new players in this sector should be able to generate sales and produce operating earnings rapidly, as the competition from well-established firms is stiff. So far, I like what I'm seeing from AAER.
What I liked
Here are the key elements that sold me on AAER:
A) Their board of directors features an impressive roster of well-connected individuals that could greatly help strategic partners (i.e. wind farm operators) land good contracts. Most notably, Ted Moses, one of the most influential First Nations people in Canada, could be key in securing the support of Aboriginal communities in several regions. Aboriginal communities will play a large part in the development of Canada's wind industry because of the land they now control, especially in the northern parts of many provinces.
B) Canada is slated to become one of the top markets globally for wind energy between now and 2015, with installed capacity forecasted to grow tenfold from its current 1,500 MW to around 14,000 MW. Within Canada, Quebec is expected (PDF document, go to p.6 for the executive summary in English) to be one of most aggressive jurisdictions with regards to developing wind energy, with installed capacity forecasted to grow from around 215 MW today to 4,000 MW by 2015. AAER is very well-positioned to benefit from the growth of the wind industry in Quebec, and has already demonstrated that it has the rest of Canada on its radar. AAER states that it's business target is North America as a whole. This brings me to...
C) I really like the fact that AAER is doing business with Katabatic. The Mt. Hays project really is the tip of the iceberg - the real meat lies with a project called Banks Island. As reported on Katabatic's website, "Fortis Bank rated the North Coast of British Columbia as the number one wind resource in the world. Banks Island was independently assessed by Helimax (as part of a 2002 study on BC Wind prospects) to have 2,780 MW available." Katabatic has found a financier of renown, Deutsche Bank, to help bankroll its Banks Island project. Banks Island would be developed with a view to exporting green power to the largest power market in North America, California. I have not come across any information indicating that AAER might get a piece of that action. However, its MW-scale turbines, adaptable for the tough conditions encountered in northern BC, would be a great fit for such a project...not to mention the fact that the 2 entities already have a business relationship.
D) The company just announced a private placement of 3,284,856 shares at C$0.35 per unit, as well as the issuance of 314,200 warrants entitling the holder to 1 common share and 1 common share purchase warrant at a price of C$0.60 for a period of 2 years. A little over a month ago, AAER entered into a share-for-debt agreement under the terms of which it issued 97,417 common shares at a price of C$0.3375 per share "in settlement of outstanding indebtedness aggregating C$32,878.09." I like the fact that these transactions took place at close to the price that I paid for my positions, and that there are investors out there willing to bet that the stock will trade over C$0.60 within 2 years (although we're admittedly talking about not very many shares).
A Word of Caution...
Now needless to repeat that this is a highly speculative investment that entails a number of risks. What's out in the public domain so far looks very good to me, but that doesn't say much since there really isn't much publicly-available information on AAER Inc. Nevertheless, as I stated before, I am quite bullish on wind in North America, and this could do quite well for me if I'm right. I'll report back on this trade in a few months.
Until then, happy alt energy investing!
DISCLOSURE: Charles Morand is long AAER.
DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.