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Ten Alternative Energy Speculations for 2008: Geothermal, Wind and Wave, and Thin Film Hype

This article is a continuation of my Ten Alternative Energy Speculations for 2008, with picks #8, 9, and10 published last Thursday.  If you haven't already, please read the introduction to that article before buying any of the stock picks that follow.  These companies are likely to be highly volatile, and large positions are not appropriate for many investors.   My least risky picks are part of that same article linked to above; the moderately risky picks are here.  This article contains the most speculative three picks.

#3 Nevada Geothermal Power (OTCBB:NGLPF or Toronto:NGP.V) US$1.29 or CAD$1.26

Geothermal first started catching investors' attention about six months ago.  I went into detail as to the reasons for its appeal, and the factors bringing it to investors' attention in this profile of Geothermal power in October.  

Since then, we have been given an added reason to appreciate Geothermal in the United States.  While the recent energy bill did not contain a national RPS, nor tax credits for renewables, it did give the geothermal community much of what they were asking for since it contained the "Advanced Geothermal Energy Research and Development Act of 2007." 

There are three ways to invest in geothermal power: through the technology, through existing plant operators, and through resource explorers and developers.  The provisions relating to Enhanced Geothermal Power and Co-production in oil fields should help technology and service providers such as Ormat (NYSE:ORA) and United Technologies (NYSE: UTX) over the long term, since they will help open up new opportunities for Geothermal.  Over the short term, which is what this article is about, I expect the "Industry-coupled drilling" provision will be most important, and help explorers and developers of conventional geothermal resources.

According to the Geothermal Energy Association, the Industry-coupled drilling provision "pairs the federal government with geothermal developers to reduce drilling risks and improve drilling precision."  Geothermal exploration and development is a very risky process, so government risk-sharing should greatly increase the value of Geothermal prospects by lowering the effective discount rate at which they are valued.  Coming as it does early in the development process, a reduction in risk could easily be worth more to a company which owns the rights to develop an undeveloped geothermal resource than the later boost to income that would come from a Production Tax Credit, even though the industry-coupled drilling provision is likely to cost the government far less than a Geothermal Production Tax Credit.

US-based geothermal developers are most likely to benefit from this provision.  These include US Geothermal (OTCBB: UGTH, GTH.TO), Sierra Geothermal (OTC: SRAGF, SRA.V),  Raser Technologies, (NYSEArca:RZ), and Nevada Geothermal (OTC BB: NGLPF.OB, NGP.V)).  US Geothermal and Raser Tech are up over 3x from their 52 week lows, while Sierra and Nevada Geothermal are each up about 2x, although the Nevada Geothermal share price was stagnant for the previous two years, while Sierra Geothermal has been following a steady uptrend.

Comparing these last two with the least recent appreciation, Sierra Geothermal has many more early stage projects, while Nevada Geothermal has just four high quality projects nearer to production.  In fact, Nevada Geothermal owns Sierra Geothermal's most advanced project (Pumpernickel), and Sierra's exploration and development efforts will earn them at most a 50% share of the project.   This is only Nevada Geothermal's second most advanced project, after their wholly owned Blue Mountain project which is on track to begin producing electricity in 2009, and for which they have already completed a Power Purchase Agreement and an interconnection agreement with local utilities. Nevada Geothermal is currently funding development of its projects with loans from the likes of Geothermal specialist Glitner Bank and Morgan Stanley, while Sierra Geothermal is financing its exploration needs with dilutive private placements.

Because of the relatively small recent run-up for Nevada Geothermal, its strong financial position, and ownership of a late-stage project (as well as sufficient promising projects to keep them busy with development for many years to come), I see the most potential for robust returns in Nevada Geothermal among geothermal developers.   

#2 Finavera Renewables (TSX:FVR or FNVRF.PK) CAD$0.335 or US$0.3371

I chose to include Finavera in my Top Ten Speculations for 2008 for my own reasons, but AltEnergyStocks.com Editor Charles Morand has been following the company longer and more closely than I have myself, so I asked him to profile it.  You can read what he has to say about Finavera Renewables here or simply scroll down to the next post.

#1 First Solar (Nasdaq:FSLR) $267

When I disclosed that I was short First Solar in the first installment of this series, I received an incredulous comment soon after the article was syndicated on Seeking Alpha: "OUCH!! You have a short position in FSLR? I hope it doesn't come back and bite you!"  I'm sure the commenter is not alone in his conviction that First Solar's rise will continue.  The fact that First Solar has risen so far so fast only because people like the commenter have been purchasing the shares like hotcakes all year.

Shorting is inherently more dangerous than being long, because in a long position you can not lose more than you initial investment.  Shorting a momentum stock, even when it is overvalued, can be especially risky, because momentum tends to be a self-fulfilling prophecy, with more investors becoming interested and driving the price up as they try to buy the stock.  For all those reasons, shorting First Solar deserves to be the #1 riskiest of my 10 speculations for 2008. 

Why did I decide to short at all?  What makes me think that 2008 will be the year that First Solar's bubble pops?

First Solar's valuation seems out of line because of an inherent limitation on their profitability.  Their solar panels are based on Cadmium-Telluride (CdTe) thin film technology, and Tellurium (Te) is one of the scarcest elements in the Earth's crust.  In 2006, First Solar's 60MW of production consumed 4% of the world's annual supply of the metal.  In 2008, analysts expect revenues of approximately 4x the 2006 number, meaning they will need approximately 16% of new annual Tellurium supplies.  PrimeStar Solar, a private company is using a recent infusion of capital from General Electric (NYSE:GE) to quickly begin production of their own CdTe modules.  They do not disclose the timing of production "for competitive reasons," but their hiring and equipment orders speak of an aggressive schedule; I expect they will begin production in 2008.  

With this much demand on short-term Tellurium supplies, we can expect continued price increases.  First Solar cannot set the price of their product in the market, because they will be in direct competition with conventional solar modules as will as thin film modules based on CIGS and amorphous silicon technologies.  With the failure of the US Congress to extend tax incentives for solar or to pass a renewable electricity standard, demand for solar panels may not continue to grow as robustly as it it has in recent years.  If anything, this should cause prices per watt to fall somewhat in 2008.

Ethanol producers were caught in a commodity squeeze this year by using 25% of the United States corn supply.  In contrast to First Solar, ethanol production has only been growing 20-25% a year, much slower than the demand for Tellurium from CdTe cells, and corn production was artificially sustained at an uneconomically high level before the advent of corn ethanol by farm subsidies.  Hence, I would expect a commodity squeeze for CdTe producers at a lower percentage of supply.  My 16% projection for 2008 does not seem out of line to trigger a commodity squeeze, which could cause First Solar to miss (or at least cease to beat) earnings estimates in the coming year.  Missing or just failing to exceed earnings estimates almost always leads to quick price drops for high multiple companies.  According to Yahoo!, First Solar's trailing P/E is about 195.

If First Solar produces 240MW of panels in 2008, and Te prices remain at $100/lb, as they were in 2006, Tellurium cost alone would be $87 million [NOTE 3/8/08: I received a comment that I had lost a decimal in this calculation, with actual Te cost being only $8.7 million... don't take this as gospel, make sure to double-check if this makes a difference in your investment decision.], compared to First Call average estimated Revenues of $800M, and $146M estimated earnings.  I don't know what Tellurium prices were used in those estimated earnings, although I expect it was over $100/lb.  Whatever those estimates were, a $200/lb underestimate would completely wipe out earnings for 2008, and, as the oil price has shown us, even moderate increases in demand for a commodity with inelastic supply can create massive price rises.  What will new demand for Te rising from 4% of supply to 16% of supply in two years do to the price?

UPDATE 1/2/08: Ken Zweibel, President of PrimeStar Solar and former head of NREL's thin film partnership program, got back to me today on a research question for this article, now that the holidays are over.   He couldn't tell me much for strategic reasons, but did say that he isn't skeptical of First Solar's valuation, and "There is more Te from nontraditional sources than people are aware of."  I believe he is referring to Te from oceanic ridges, which I don't believe can be extracted in significant quantity within the next couple years, although a Tellurium price rise like the one I anticipate would lead to mining of oceanic ridges in the medium to long term.  Nevertheless, Ken is responsible for much of what we know about CdTe technology, so his comments should not be taken lightly, and there may be other nontraditional sources which can ramp up production more quickly. 

The other reason to believe that First Solar's meteoric rise might halt in 2008 has to do with investor sentiment.  An unscientific survey of sentiment among Seeking Alpha bloggers (myself excluded) has turned negative (as far as I can tell, only Andrew Ling is still writing positively about the stock), and the Tellurium problem is getting wide attention.  How long will it take the mainstream press to latch on to the Tellurium story?  It's impossible to say, and another run like last quarter could easily squeeze out the shorts.  

Taking this all into account, my short position is only about 0.1% of my portfolio, more of an intellectual experiment than a real bet.  As Keynes said, "The market can remain irrational longer than you can remain solvent."   I wouldn't advise anyone to take a short position in FSLR so large that they could not sleep through another doubling of the stock price. 

If any play is for gamblers, this is it.  But cards are stacking up against First Solar.

Links: Picks #10,9,8; Picks #7,6,5,4. Pick #2 Finavera Renewables

DISCLOSURE: Tom Konrad and/or his clients have long positions in UGTH, SRA, RZ,  NGP,  ORA, UTX, FNV, GE, and a short position in FSLR.

DISCLAIMER: The information and trades provided 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.



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Comments

In wave energy stocks, check out Carnegie Corp in West Australia, or Renewable Energy Holdings in London. Price of CNM.AX has more than doubled in the last month.

What kind of a investment timeframe for these stocks, roughly?

FP: When I chose these stocks, I was looking for stocks I thought had a good chance of making a *large* move in 2008. So the timeframe is within the calendar year of 2008... we can judge my performance next New Year's day, compared to the priced for the stocks given in the article (these are the closing prices the last trading day before each article was published.) By that metric, an even weighted portfolio of the 10 picks is up 10.64% as I write, right before the close on Thursday (assuming no commissions.)

How much will they go up this year? These are high-beta stocks, so a lot depends on the market as a whole. If the S&P 500 is flat, I'd expect them to be up about 30% for the year. For every 1% increase in the S&P, add 2% to my expected target for the portfolio. (i.e. if the S&P falls 5%, expect a 20% return on these stocks, if the S&P gains 10%, expect a 50% return.)

Note that I am not at all confident about the above prediction... it's just my gut feel. The return could easily be 50% more or less. These sorts of predictions are inherently very chancy, which is why I seldom try.

Geothermal is definitely a good idea for alternative energy. But I am just not sure how soon will people come to realize it. Installing a system of geothermal air-conditioning for the winter and summer is still quite costly, but of course it is way much more economical than solar PV.

On the tellurium thing, you need to double check some of your calculations. So far tellurium cost is still a small part of FSLR cost. But the key is the availability. If they can not get the quatity they need for Malaysia factories, they will have to bid up price to get the wuantity they need. Other indistry users will also bid up price to ensure supply. The process will continue until there is demand destruction, i.e., some tellurium users be forced to give up tellurium altogether. FSLR is the most vulnerable in a demand destruction scenary.

As far as I know, there are indications that some CdTe solar players, some that hasn't even started commercial production yet, started to panic hoarding tellurium as early as early 2006. This is not speculation. This is confirmed from an old news piece I read.

Invest in tellurium metal ingots is definitely a good idea.

My arguments don't say that Te is a large % of FSLR costs... only that those costs have a good chance of increasing dramatically in 2008. Investing in tellurium is one option, but I'd rather invest in a company that's getting ready to mine ocean ridges... if I could only find one. I asked Ken Zweibel (of Primestar) about this (I think he knows just such a company), but he wasn't telling.

Speaking of Ken, everyone should read his Grand Solar Plan in Scientific American.... they don't take enough account of wind and demand shifting through time of use pricing, but it's a great outline for what we should be heading for.

Do you have any gut feeling about ordering these stocks in descending order of how good of a bet they are each?

FP- as for now, I'm liking the ones that have not risen as much... LSGP, EEEI, and CREE have already seen substantial gains since I reccommeneded them. FNVRF is looking especially good after friday because it's now down to $.22... I'm thinking about buying some more, myself, but since I already have a position, I'll probably wait and see if I can get some under $.20. The small drop in NGLPF is also making it look better... but don't expect this one to fall much farther.

I think the biggest potential gains are in FNVRF, but the safest bet is NGLPF (although none of them are "safe".)

I'm an older investor, seeking established companies participating in the eventual flowering of alternative energy.

I own ADM....

Thanks for you comments

Randy, you should take a look at our  Blue Chip Alternative Energy Stock List.

First Solar has more than its share of confused analysts and commentators. No where is that more glaring than the comments about Tellurium pricing, usage, and scarcity. This is not the equivalent of silicon shortage harming the margins of the polysilicon-based solar producers that some short sellers are hoping for. It's just not the case. More later.....

Tom:
Forget about mining ocean ridges. They contain only 0.89 ppm of tellurium. You should read how Ken Zweibel commented under my first tellurium article in Seeking Alpha. He suggested that there were abundant tellurium in outer space!!! Just hilarious! I have been reading SciFi's about mining ocean ridges ever since I was a kid. My kid will be reading the same SciFi stories without seeing them become reality.

Have you noticed recent platinum and palladium price run, and the rally in SWC and PAL?

JJ-
I wouldn't discount Ken's ocean mining ideas so swiftly, but I agree that they are years in the future. No matter what the highest density of Te we have yet sampled in an ocaean ridge, it's likely that much higher grade ores exist, because so much is unexplored.

That said, we still have to find that theoretical high grade ore, which will be a time-consuming process at best.

Re:Tellurium supply
Some low grade California coals have this element in ppm, rather than ppb amounts. Grinding to 250+mesh, run through a hydrocone to drop out the carbon content and you have tellurium in a ppm amount for futher processing.

Very interesting, John. Do you know if there are any companies planning on mining this?

reason I like Nevdada Geotheermal for the long haul is the 120MW line built from Blue Mountain almost prints expansion since the first plant is 49MW.........why build a 120MW transmission line if you dont plan on expanding the existing plant??

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