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September 28, 2010

Ten Clean Energy Stocks for 2010: Third Quarter Update

Tom Konrad CFA

I like to think that one of the things that distinguishes me from the mass of investment bloggers and newsletter writers is that I write about my mistakes, as well as my great calls.  This is not just a service to readers, but a service to myself. 

Overconfidence and why I write about my mistakes

One of the most pernicious cognitive errors common among stock market investors arises from our wish to see ourselves as great investors.  One of the ways we accomplish that goal is to selectively and unconsciously self-edit our memories so that we can tell ourselves (and others) that we were correctly able to predict what was likely to happen.  While this may make us feel good, it has the pernicious effect of persuading ourselves and others that we're a lot better at investing than we really are.  Such overconfidence is particularly dangerous for an investor, because it leads us to put too much faith in our predictive abilities, and leads us to mistake our guesses for insights.
 Investors who mistake their guesses for insights often put too much money on them.  Betting too much is dangerous in two ways.  Most obviously, we lose money when those guesses are wrong.  When those guesses are right, we make money but end up even more overconfident than before.  That leads us to put even more money on the next guess.  If we keep on guessing right, our belief in our infallibility grows along with our fortune, until the odds catch up with us, and we go broke making one enormous bet a on guess we mistook for an infallible prediction.

At this point, most of my readers are probably patting themselves on the back for having avoided such dangerous overconfidence.  I'm a very lucky writer to have readers who are the product of millions of years of evolution favoring overconfidence, but who have mostly managed in various clever ways not to fall under the influence of that overconfidence when it comes to investing in the stock market.

Unfortunately, I am not made of such stern stuff, and I must resort to all sorts of ruses in order to remind myself that I'm far from infallible.  One such ruse is my discipline of writing every quarter about how my annual ten renewable energy and energy efficiency stock picks have been faring throughout the year. 

This quarter, I'm getting in touch with my humility.

Q3 Returns
In the three months since I last wrote about my Ten Clean Energy Stocks for 2010, the overall market has risen strongly.  My broad market benchmark, the Russell 3000 index has risen 5.9%, while my industry benchmark, the Powershares Wilderhill Clean Energy Index (PBW) has risen 9.3%.  In contrast, my ten stock picks have gained only 1.1% on average, while the alternative portfolio that substituted two ETFs, the Powershares Global Progressive Transport Portfolio (PTRP) and the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID), for six of the stocks did slightly better, gaining 5.2%.CHP weekly chart

C&D Technologies

In large part, my poor performance this quarter is explained by one stock on which I was quite decidedly wrong: C&D Technologies (CHP).

C&D's financing was tight at the end of last year when I recommended it, but I expected that they would have enough liquidity to meet their obligations without much improvement.  To make a long story short, quarterly results were not quite as good as I had hoped, and the declining stock price became a self-fulfilling prophecy, cumulating in a massively dilutive debt-for-equity swap that left stockholders owning only about 5% of the company.  The restructuring will greatly increase C&D's liquidity by removing $127 million of debt and the associated interest obligations.  This should leave the company in a much better position going forward.  But, since the debt swap valued CHP at about $0.25 per share according to my calculations, investors who bought it at the $1.40 stock price at which it was included in this list are unlikely to recoup their losses for quite a while.  On the other hand, investors who saw my September 15th comment that $0.21 seemed like a good price, as well as ones who bought with me at $0.30 the day before could see decent appreciation before the end of the year.

Portec Rail Products

As I mentioned in my recent article on Mass Transit supplier stocks (where I also discussed New Flyer Industries (NFI-UN.TO/NFYIF.PK)), L. B. Foster's (FSTR) friendly attempt to take over Portec Rail Products (PRPX) was extended to August 30 when FSTR increased the offer price to $11.80 per Portec share and agreed to pay $2 million to Portec if the deal does not go through.  Shareholders have tendered sufficient shares, but the deal is awaiting Department of Justice approval.  Foster management seems confident that they will get this approval before year-end.

First Group PLC

In a recent article on Rail and Mass Transit Operator companies, I concluded that I preferred Stagecoach Group, PLC (SGC.L) to FirstGroup PLC (FGP.L) because of their relatively low debt and strong liquidity.  I will continue to track FirstGroup in my year-end performance update, but if you're considering purchasing one of these now, my preference is Stagecoach.

performance chart
YTD Performance

As you can see from the chart above, my picks are down 8.0% for the stock portfolio and down 0.4% for the stock/ETF portfolio for the year.  These results fall between the mediocre +2% performance of the broad market and the dismal -14.4% performance of Clean energy sector benchmark, PBW.  In other words, nothing to brag about.

I'll continue my humility building exercises in a couple of weeks with my quarterly review of my ten gambles for 2010.


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.

September 26, 2010

ELBC 2010 – Automakers Discuss Their Battery Requirements For Stop-Start Systems

John Petersen

Last week I spent three days at the 11th European Lead Battery Conference in Istanbul where I learned that I've been far too conservative in earlier articles that discuss the likely impact of stop-start idle elimination systems on the battery sector. To put things in perspective, the 10th ELBC in 2008 had 500 participants and two papers on stop-start systems. The 11th ELBC in Istanbul had 700 participants and 15 papers on stop-start, including three from major automakers. The stop-start papers took a full day of the 2-1/2 day conference program.

The high-level overview is that almost every major automaker is aggressively implementing stop-start idle elimination systems across their main product lines. Most forecasts expect penetration rates of 20 million cars per year within five years and emerging consensus is that stop-start will be standard equipment on all internal combustion engines by 2020, if not sooner.

The logic is inescapable; turning the engine off when a vehicle is stopped reduces fuel consumption and toxic emissions without impacting performance. The estimated fuel savings range from 5% in government mandated tests and 10% under real world city-highway driving to almost 20% in congested city traffic. No matter which figure you choose, it's a very worthwhile target if implementation is widespread enough and cheap enough.

In his opening remarks, Ray Kubis, the president of Enersys' European unit, explained that current stop-start systems typically use two batteries instead of one, and use higher quality batteries. This increases the battery content of new vehicles to two or three times historic norms. While a couple hundred dollars of additional battery value has a minor impact on the price of a car, it's a huge opportunity for publicly traded lead-acid battery companies like Exide Technologies (XIDE) Johnson Controls (JCI) and Enersys (ENS) that can expect their OEM sales and margins to skyrocket over the next decade followed by sustained increases in replacement battery sales as the stop-start fleet ages. It's an even bigger opportunity for developers of other advanced energy storage technologies that are better suited to the harsh demands of stop-start vehicles.

In the first automaker's presentation, Andreas Stoermer of the BMW Group (BAMXY.PK) described a joint research effort between BMW, Ford Powertrain Research (F) and Moll Batterien that evaluated the technical requirements of stop-start systems and developed a universal testing protocol to accurately assess the impact of battery aging under real world stop-start operating conditions.

While theory of stop-start is both simple and rational, significant complexities arise from the need for a battery that can support accessory loads during engine-off periods, reliably restart the engine on demand and recharge as rapidly as possible to prepare for the next engine-off opportunity. To date, the European experience with stop-start systems has been less than stellar because the systems work great with new batteries, but rapidly lose functionality as the batteries age. In practice the frequency of engine-off events plunges during the first few months of driving. Based on this experience, automakers are rapidly coming to the realization that conventional lead-acid batteries are not robust enough to handle the demands of stop-start. They need something better.

The primary advantage of the BMW-Ford test protocol is that it's technology agnostic and can be used with any battery chemistry and any combination of energy storage devices. The protocol is designed to focus on dynamic charge acceptance, or the amount of time required for a battery system to recover from the last engine-off event. The specific steps in the test protocol include:
  • A 60 second discharge at 50 Amps to simulate accessory loads during engine-off periods;
  • A one second discharge at 300 Amps to simulate the engine restart load;
  • A seven second rest period to avoid recharging the battery while the vehicle is accelerating; and
  • Measurement of the time needed to bring the system back to an 80% state of charge in preparation for the next engine-off opportunity.
The most fascinating part of the protocol is that the engine restart load is only 9% of the total energy associated with an engine-off event and the yeoman's work is carrying the accessory load without interruption.

While BMW-Ford test protocol seems simple, it's brutally punishing for battery systems because it focuses on maximizing the number of engine-off events in order to maximize fuel savings. There's no escaping the fact that turning the engine off eight to ten times during a commute saves more fuel than turning it off two or three times.

BMW is apparently working with appropriate agencies to have the BMW-Ford test protocol adopted as the EU's official standard for measuring the CO2 emissions reductions of stop-start vehicles. It is clearly more accurate than current EU standards that require a 20 minute test of a new vehicle with a fully charged battery. It also offers a more accurate long-term prediction of the fuel economy end-users will experience their daily driving.

In the second automaker's presentation, Dr. Ed Buiel of Axion Power International (AXPW.OB) summarized the results of a recently completed joint testing effort by Axion and BMW that used the BMW-Ford protocol to evaluate the long-term cycling performance of four types of lead-acid batteries including:
  • A high quality valve regulated absorbed glass mat lead-acid battery;
  • A high quality AGM battery with high surface area carbon additives;
  • A high quality AGM battery with conductive carbon additives; and
  • Axion's lead-carbon PbC battery.
The performance graphs for the first three types of batteries were nothing short of tragic because their dynamic charge acceptance plummeted within weeks after the batteries were put in service. The only battery to survive a five-year simulation with no appreciable performance degradation was Axion's PbC.

A couple weeks ago I published a set of battery performance graphs that Axion presented at the 2009 Asian Battery Conference in Macau. At ELBC I learned that those graphs were interim results from the Axion-BMW testing program that was using the BMW-Ford test protocol. I haven't received my electronic copy of the ELBC proceedings yet, but think two key graphs from Axion's 2009 presentation in Macau bear repeating.

The following graph shows the rapid deterioration of a high quality AGM battery as the number of engine-off events increases. The blue line shows the maximum charging current the battery was able to accept as it aged. The black line shows the amount of time the battery needed to recover in preparation for the next engine-off event. The only visual differences between this graph and the full testing cycle graph presented at the ELBC are an increase in the number of cycles completed and a gradual flattening of the dynamic charge acceptance curves.

8.26.10 VRLA.png

The next graph shows that Axion's PbC battery does not suffer any negative effects from sustained rapid cycling, is able to accept much higher charging currents and has a predictably short recovery time. In an application like stop-start where maximizing the number of engine-off events will maximize system efficiency, the differences are critically important. Once again, the only visual difference between this graph and the full testing cycle graph presented at the ELBC is an increase in the number of cycles completed.

8.26.10 PbC.png

I was happy when I found Axion’s 2009 presentation on the Internet. I was even more pleased to learn that the 2009 graphs were interim results from a long-term testing relationship with BMW that was using a test protocol developed by BMW and Ford. I was delighted to see final graphs at the ELBC that tracked the performance of the PbC through a full five-year cycle life instead of the shorter test period presented in Macau. When I get my electronic copy of the ELBC proceedings, I'll prepare an update to this article with graphs for the four battery types.

In the third automaker's presentation, representatives from Renault explained the validation and test procedures that battery manufacturers would have to complete before their products could be considered for use in Renault vehicles. The first stage for all batteries is six months of validation testing followed by at least a year of rigorous performance testing. In their discussion of stop-start systems, Renault made it very clear that flooded lead-acid batteries would not work. While the Renault presentation held out some hope for AGM batteries, the results of the Axion-BMW tests make it pretty clear that AGM will not be an attractive long-term solution.

Based on everything I learned at ELBC, it's clear that widespread commercialization of stop-start systems will require advanced energy storage products that are far more robust than conventional AGM batteries and can stand up to rapid shallow cycling. There is little question that Axion's PbC is the current lead-dog in the race because it's already completed over a year of testing with BMW and is the only device that has demonstrated the ability to survive the BMW-Ford test protocol. It still faces a variety of industrial engineering and scale up challenges, but at least for now the PbC appears to be the best emerging technology option.

Other possible contenders for a big share of the stop-start market include the Ultrabattery developed by CSIRO, NiMH batteries, lithium-ion batteries and multiple-device systems like the battery-supercapacitor product that's being developed by Maxwell Technologies (MXWL) and Continental AG. The big challenge for NiMH and lithium-ion battery systems will be establishing comparable shallow cycling capacity with no performance deterioration at a competitive system cost. The big challenge for multiple-device systems will be overcoming rapid deterioration of the AGM battery that will carry the engine-off accessory load and ultimately be a gating limitation on system recovery time. I wish them all the best of luck because a vibrant market requires several credible competitors and it would be difficult for a small company like Axion to scale up production rapidly enough to satisfy the expected demand from automakers worldwide.

The next year to eighteen months will be very interesting times in the stop-start market. I expect 2011 to be an active year of testing and large-scale fleet demonstrations for competing energy storage products. By this time next year I expect automakers to announce their final design specifications for commercial rollout of stop-start systems beginning with their 2013 model year vehicles. Ultimately I think stop-start vehicles will be introduced with a variety of storage systems that will then have to prove their merit over time. After seven years of hard work, it's wonderful to know that Axion will be running in the derby and can claim to be a pre-race favorite because of the work it's already completed with BMW.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

September 24, 2010

Cleantech Stimulus Still Not Stimulating

David Gold

The stimulus bill along with the $31B cleantech element focused on grants and loan guarantees through the Department of Energy was passed into law over 18 months ago.  About a year ago I wrote about how the cleantech stimulus was not very stimulating to our economy. I suggested at that time that the goals of stimulus and of long-term investment are largely incompatible, and the evidence is bearing that out.  At the time, I felt like a bit of an outcast for having such a critical view and yet being an ardent supporter of clean technologies and the need to wean our nation off fossil fuels. On the anniversary of my first post on this topic it seems appropriate to take a fresh look at where things stand.

While stimulus supporters and the press love to focus on the selection of award winners for grants and loans, funds appropriated but sitting in the U.S. Treasury have zero potential to stimulate the economy irrespective of whether a winner has been selected.  As of September 10, 2010 and about 19 months after the stimulus became law, according to the Obama Administration’s Recovery Act web site, recovery.gov, the Department of Energy had paid out just over 23% of the $31B of funds appropriated to the department for various cleantech activities under the stimulus bill.  At that rate it will take roughly six years for all funds to be dispersed. According to DOE’s more detailed numbers, in the past 12 months, the department has awarded (i.e. selected winners) for about $14B in grants.  Less than 10% of that amount has actually been disbursed to date.  In addition, there are over 730 awards representing $1.2B that were made in 2009 for which no funds have been paid out at all.  Many of these likely still are trying to get their contracts in place, an often-arduous process that can take many months.

In the Smart Grid segment of stimulus, where stimulus actually slowed spending because utilities stopped work to wait and see whether they would win a grant, less than 8% of the over $4B appropriated has been paid out.   People in the utility industry who have received grants have told me about calls from DOE staff “virtually begging them” (in the words of one source) to spend money against the grants that have been awarded more quickly.  In other words, the government seems more concerned about optics of getting the money spent than having it spent wisely.

As stated on recovery.gov, the goal of the Recovery Act was to “… jumpstart our economy, save and create millions of jobs, and put a down payment on addressing long-neglected challenges so that our country can thrive in the 21st century.”  It’s amusing that the recently released Administration Report on the Recovery Act emphasized that its focus would be only on “the ‘Reinvestment’ part of the Recovery Act” and completely avoids any comment on the stimulus’ impact on the economy or jobs.  Seems like quite a testament to failure of the recovery spending to provide stimulus in any meaningful way.  

If the focus of the cleantech “stimulus” was really on reinvestment, then the government would be careful and diligent about naming grant/loan winners rather than rushing to make awards as fast as possible (which is motivated by stimulus).  Yet, while money has been slow to flow from DOE, award winners have been selected for virtually all of the $31B from the recovery program.  As I said earlier this year in a Cleantech Forum debate with DOE Renewable Energy Grants Advisor Sanjay Wagle, the government is simply incapable of both getting grant/loan money out the door quickly and spending it wisely.  I still maintain that programs like Cash for Clunkers and energy efficiency tax credits (whether you agree with the specific policy or not) have a rapid positive impact on the economy.  The evidence on the government’s own recovery site seems to bear that out:  by comparison, 77% of all tax-related stimulus benefits (only some of this cleantech-related) have been paid out to recipients in the form of reduced tax obligations.   While one can debate the degree of impact those funds may have, funds awarded but not transferred from the federal treasury have no chance of stimulating the economy. 

Much of the press focus on the cleantech stimulus has been on the Advanced Research Projects Agency – Energy (ARPA-E) funding into early stage cleantech technologies with “game changing” potential.  The government has long played a role in funding early stage research and such a program has worthy goals.  Yet, ARPA-E represents only about 1.3% of DOE’s stimulus funding with most other funding going to much less disruptive grant/loan programs in which the government is trying to play business person and has a notoriously bad track record of doing so.  And ARPA-E’s appropriation for 2011 is likely to be less than 2010 with the House number passed at a 50% reduction.   

The unfortunate reality is that by using the stimulus bill as a vehicle for pushing funds through the slow and ineffectual government bureaucracy rather than focusing on stimulative policies that would have had greater impact on the economy, the Administration may very well have lost the opportunity to enact macro-economic policies affecting the cost structure for energy that could have had much more far-reaching and long-term positive impacts on the goal of reducing our consumption of fossil fuels. I believe time will bear out that many of the grant/loan awards made in such a hurry will turn out to be a waste of money.

Conversely, the macroeconomics of energy are certain to change as finite fossil fuels continue to be consumed… it is only a question of over what time period. It is that reality which is driving the private sector investments that must be the backbone of any sustainable change in our energy economy.  Careful federal policy around carbon-based fuels could have provided greater visibility into the time frame and degree of increase in the market cost of fossil fuels even if there was a very slow phase in of such a policy to avoid collapsing the economy.  The result would have been greater clarity of when (and shorter time horizons for when) clean technologies could become cost competitive.  This would have resulted in a corresponding increase in investment by the private sector in building those businesses to profit from the impending change.  And that would have been extremely stimulative to our economy without needing to borrow a penny to fund it. 

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com). This article was first published on his blog, www.greengoldblog.com.

September 23, 2010

Will Rare Earths Cripple the Green Economy? Part 3

Eamon Keane

This is Part Three of a three part series based on a rare earth elements (REE) review which is available for download at slideshare, where references can be viewed.
Part 1 is an introduction to REEs. Part 2 analyzes REE consumption and refining and Part 3 looks at how REEs might affect the green economy.

There have been several forecasts made for future demand. Approximate data was derived from Byron Capital Market’s own estimate [18] and the data contained in Oakdene Hollins’ May 2010 report “Lanthanide Resources and Alternatives” for others [34]. Figure 15 displays these demand forecasts in the context of historic demand, using global mine production as a proxy.

Figure 15: Forecast Global REE Demand 2010-2014
global forecast

From Figure 15 it can be observed that while the range of projections is 160-200kt/year, if demand follows its historic pattern, it would only reach 140kt/year. Faster demand growth is expected principally due to the requirements of the “green economy”.

Based on their respective assumptions about which mines became operational, and those mines’ constituents, Figure 16 shows the respective surpluses and deficits forecast.

Figure 16: Surpluses and Deficits by Element in 2014
surplus and deficit
Terbium and dysprosium are displayed on their own in Figure 17 for clarity.

Figure 17: Surplus and Deficit for Dysprosium and Terbium in 2014
terbium dysprosium

From Figure 16, it can be seen that one element about which hands need not be wrung is cerium. This is good news for, from Figure 9, glass additives, automotive catalysts and polishing powder. In all but Lynas’ conjecture, lanthanum will be fine also. This is reassuring for NiMH batteries, mischmetal for flint and ceramics.

But what about those pesky elements terbium and dysprosium? GWMG, for example, forecasts a deficit of 800 tonnes for dysprosium, or half what is consumed currently. IMCOA projects a deficit of 200 tonnes of terbium, or 67% of 2010 demand. Will they strangle the green economy in its crib?

6.     Will the shortfall strangle the green economy?
6.1.          Dysprosium
Dysprosium is essential to give neodymium magnets resistance to demagnetisation at high (120-180°C) service temperatures. The seminal 1984 paper announcing neo magnets was recently republished [40]. Figure 18 shows the demagnetisation curve contained in [40]. The effect of dysprosium is to weaken the magnet slightly (y axis), but to increase its intrinsic coercivity significantly (x axis). In enclosed spaces where it is difficult to cool – such as motors in cars – this is very important. However there is still uncertainty as to the mechanism by which dysprosium imparts this higher intrinsic coercivity [48], and a greater understanding may allow for reduced use of dysprosium.

Figure 18: Demagnetisation Curve With and Without Dysprosium
Demagnetisation curve with and without dysprosium
6.2.          Rare Earths and Wind
Vestas, which had a 36% market share of the European 2010 H1 offshore installations [49], is stated by the New York Times to use dysprosium in its upcoming direct drive model [50]. However this is likely a design oversight, because in an excellent article at renewable energy world [51], it is stated of wind generators:“operating temperatures inside the generator rotor must be limited to a maximum of 80°C in order to retain magnetic properties”. Dysprosium will boost this range to 120-180°C, and thus the article implies that other operators do not require dysprosium, indicating that Vestas can adapt.

Direct drive generators increase the reliability of turbines as they reduce the number of parts by up to 50% [52]. This is very useful for offshore turbines where maintenance is costly and there are narrow weather windows for servicing. Whether Permanent Magnet Generators (PMGs) increase power efficiency is debatable. Adolfo Robello of Indgar’s study comparing traditional DFIGs with the permanent magnet variety concluded [51]: “The study was performed for a client and results clearly indicated that the DFIG combination showed superior total efficiency performance over the entire speed range.” Nevertheless, PMGs as an engineering solution are very elegant and more compact than their counterparts. The Chief Technology Officer of Siemens thinks they are “the future” [52]. However wind companies are all fully aware of supply issues, and are reluctant to move to China as they would be forced to partner with a Chinese company.

There are many figures quoted regarding how much neodymium a wind turbine contains. I am going to go with what renewable energy world [51] says:

“Industry sources quote, for instance, that the 60 kW fast speed electric motor fitted in a Toyota Prius hybrid vehicle contains at least 0.5 kg of NdFeB magnet material. For a PM-type generator fitted in a 5 MW direct drive wind turbine, these same sources quote a figure of up to 200 kg of NdFeB per MW power rating, around one tonne per machine. This is a much higher quantity compared to the relatively light and compact fast speed systems.”

Two-hundred kg NdFeB per MW translates into approximately 70kg Nd2O3/MW, or 70 tonnes per GW. Up until now, very few turbines have used permanent magnets, with demand of only 3 or 4 tonnes [17], suggesting present demand of less than 100MW per year. Figure 19 shows the historical and projected wind turbine additions [53, 54]. In 2014, if half the wind turbines were PMG, a requirement of 2.1kt/yr of neodymium oxide would be required (70*30). From Figure 9, this is 10% of current neodymium production capacity. Wind turbine demand for neodymium is highly unlikely to have a 50% market share by 2014, as it takes time to build factories and road test the technology. 20% may be a realistic figure, which only entails a requirement of about 1kt/yr. Furthermore, there is always a backstop technology – the traditional DFIG – which can, and I argue will, step in should any shortfall in neodymium appear.

Figure 19: Annual Wind Additions
wind additions

6.3.          Rare Earths and Hybrid/Electric Cars
From the quote above [51], electric vehicles require “at least 0.5kg NdFeB” for a 60kW motor. Using 0.6kg NdFeB for a 60kW motor, this translates to a requirement of 10g NdFeB/kW, or 3.5gNd2O3/kW. The limiting material here will be dysprosium, which is added at about 5% by weight [55]. Hence this translates to a requirement of 0.5g Dy2O3 /kW (600*0.05/60). 2009 production capacity of 1.6kt dysprosium would hence allow for approximately 3.2billion kW of motor (1.6*1000*1000*1000/0.5). A million cars, at an average 70kW motor, require 0.07bn kW, or 2% of dysprosium supply. Figure 20 shows the historical sales of hybrid electric vehicles [56]. In 2014, electric sales of 3.5m vehicles may require 7% of dysprosium production capacity.

Figure 20: Historical and Projected Electric Drivetrain Sales
electric car additions
Furthermore, Hitachi, on September 10th 2010, announced they have developed an alternative motor with ferrite which “works at almost the same performance level - but with power consumption running at 10 percent lower” [57].  It still has to be scaled up to the 50kW size, but in time it will. Additionally, there is the same technology that was used in the EV-1 and is used in the Tesla Roadster [58] -  the humble AC motor.

6.4.          Rare Earths and Energy Efficient Lighting
In fluorescent light bulbs, the red, green and blue phosphors contain rare earths. The red phosphor is almost entirely yttrium and europium. The green phosphor contains approximately 10% terbium, while the blue phosphor contains less than 5% europium [6]. The DOE has introduced a standard for fluorescent lightbulbs. Its analysis shows that at most 11% of global terbium, europium and yttrium supply would be required to meet the standard in the United States in 2012 [6].

This is a significant amount, in the region of 30 tonnes terbium and 30 tonnes europium, which will clearly be in short supply if Figure 17 is correct. A more detailed analysis of what sector has the greatest utility for a short supply is required. From Figure 9, it can be seen that fluorescent lamps account for half of phosphor REE demand, with the rest being screens. It thus seems very likely that energy efficient lighting will have to curtail its projected rapid growth, at least until a mine with high enough terbium and europium is found. Neo Materials’ CEO suggests they have found just such a mine, with “very high concentrates of terbium and dysprosium” [59].

7. Conclusion
A brief survey of the rare earth landscape was undertaken. Following this it is shown that concern over rare earths limiting the development of wind and electric vehicles is overdone because there are clear alternatives to neodymium magnets. A shortfall of terbium and europium, however, may slow adoption of energy efficient lighting.

Comments and corrections are welcome. 
References are available here.

September 22, 2010

Will Rare Earths Cripple the Green Economy? Part 2

Eamon Keane Rare Earths 2 Eamon Keane

This is Part Two of a three part series based on a rare earth elements (REE) review which is available for download at slideshare, where references can be viewed.  Part 1 is an introduction to REEs. Part 2 analyzes REE consumption and refining and Part 3 looks at how REEs might affect the green economy

So where do all those REEs go? Figure 8 shows the estimated flows for 2008 [15]. Although Chinese consumption is shown as 60%, this is only for the raw elements. Some of the downstream products will still be exported to the west. Japanese industry is a large consumer of REEs, and so they are almost beside themselves over the REE situation [41].

Figure 8: 2008 Estimated Rare Earth Flows
2008 flows
Figure 9 presents a chart I made showing the estimated 2010 global production capacity for each element (from Byron Capital Market’s John Hykawy [18]), together with the rare earth usage demand sectors projected by Lynas for 2010 [15]. You'll have to click to enlarge, a direct link to the photobucket version is here. Christian Hocquard, an economist at BRGM, put together an excellent and comprehensive presentation on rare earths in May 2010 [15]. The breakdown by application for magnets and phosphors comes from that presentation.

Figure 9: Indicative rare earth flows for 2010
2010 Estimated Rare Earth Flows
Figure 10 shows the data in brackets on the right hand side of Figure 9 in a more readable fashion [15].

Figure 10: REE Composition by End Use
by end use

Figure 11 shows the breakdown of ores for most elements for currently producing mines and the assays for mines which are mostly still fishing for capital [18, 39].

Figure 11: Approximate Percentage Content of Current and Prospective Ores
Approximate percentage content
You may have to squint a bit to see the components of dysprosium, terbium and europium. They are shown more clearly in Figure 12.

Figure 12: Europium, Terbium & Dysprosium Content of Current and Prospective Ores
dysprsoium, terbium

Looking at Figures 9-12, a couple of observations are evident:

·         If the demand for magnets were to double, from the current 31.9kt to 63.8kt, and a 5% dysprosium content is assumed, additional dysprosium demand of 1.6kt would be required. The ore with the highest dysprosium content is Dubbo, at 2%. Therefore, in order to satisfy demand, the other 98% must be mined also. In the case of Dubbo, this would release onto the market: 16kt lanthanum, 30kt cerium and 11kt neodymium. Hence a market for an additional 50% of cerium would have to be found. Based on the prices in Figure 9, while dysprosium provides 13% of the mine’s revenue, cerium provides 31%. So, for the mine to be viable, either growth in the use of cerium is required or else the price of dysprosium must appreciate. For example, if the price of dysprosium triples to $900/kg, then the share of dysprosium in overall revenue increases to 31%.
·         If the demand for phosphors doubles, from the current 8.1kt to 16.2kt, and a 4.6% terbium content is assumed, additional terbium demand of 373 tonnes would be required. The only mine with any appreciable amounts of terbium is Nechalacho, at 1.8%. Nechalacho only plans to produce 5kt [18]. Hence this would provide 90 tonnes of terbium per year (5,000*0.018). The breakdown of revenue is better for the specific ore at Nechalacho. This is shown in Figure 13. That still leaves 283 tonnes of terbium required (373-90). The next highest terbium mine content is Dubbo, at 0.3%. For Dubbo to output 0.283kt of terbium, a market for a stonking 94kt of other rare earths is required, or about 75% of 2009 demand.

Figure 13: Nechalacho Revenue Breakdown at September 2010 Prices
nechalacho revenue

4.     Refining
Bertram Boltwood, 1905 [45]:

“In point of respectability your radium family will be a Sunday school compared with the rare earth elements, whose chemical behaviour is simply outrageous. It is absolutely demoralizing to have anything to do with them”

Refining (or reduction in mining lingo) is very important. Figure 11 shows the composition for 14 different ore compositions. Each one requires an individual, detailed flow sheet, their own reagents and refining processes. An investor could do well to read the book “Extractive Metallurgy of the Rare Earths” [11]. This is not your father’s extractive metallurgy. Whereas with gold, for example, you might just add a bit of borax and soda and out it comes, rare earths are much more troublesome. I won’t bore you with the details. Figure 14 shows an example flow sheet. It is dirty, requires lots of water, heaps of chemicals and is very capital intensive. Capital intensive processes can be prone to cost overruns and delays, which should be borne in mind for any companies with mine-to-market strategies.

Figure 14: Kvanefjeld Flow Sheet [20]

Continued in Part III. References are available here.

September 21, 2010

Will Rare Earths Cripple the Green Economy? Part 1

Eamon Keane Rare Earth Elements Eamon Keane

This is Part One of a three part series based on a rare earth elements (REE) review which is available for download at slideshare, where references can be viewed. Part 1 is an introduction to REEs. Part 2 analyzes REE consumption and refining and Part 3 looks at how REEs might affect the green economy

Rare earths captured the popular imagination a year or two ago. Since then a bonfire of reports, presentations and analyses have been published, with many generating more consulting fees than light [1-45]. Figure 1 shows the uptrend in google entries for “rare earth elements”, and obviously if it doesn’t exist on google, it is irrelevant.

Figure 1: Google results for “rare earth elements”
Google Search

The rare earth story is compelling. By near unanimous consent, the narrative is that REEs are “essential” [38], “indispensible” [30], or “crucial” [37] to every aspect of the green economy from wind turbines to electric vehicles to energy efficient lighting. Further spice is added by those who see REEs as the “New Great Game” [2]. Many military components require REEs from the M1A2 Abrams tank’s samarium cobalt magnet for navigation to the DDG-51 Hybrid Electric Drive Ship Program’s reliance on neodymium magnets for electric assist propulsion [10]. And China controls the supply. This leads to much hand-wringing, some based on mercantilist sentiment, others geo-strategic, and yet more on envy of China’s autocratic regime.

Figure 2: Top 6 Rare Earth Elements [46]    Figure 3: Game Over for Whom? [47]
Rare earth elementsRare Earth - I just want to celebrate

2.     Rare Earth Backrgound
A proviso is required for any figures shown here. Rare earth statistics are always “estimated”, the data is sketchy (not least because some comes from China), and so most data comes with a +-15% band. Figure 4 shows the regions where supply currently comes from [31, 33].

Figure 4: Currently Producing Regions of the World (i.e. Not America)
Map of production
Figure 5 shows a picture from Google Earth of the mine at Baiyun-Obo [9]. The surrounding area has become poisoned, as the ever reliable Daily Mail reports [5]:

“I was the first Western journalist to set foot inside the mine….. the new-found wealth has come at an appalling environmental price, turning the town and the surrounding areas into a poisoned, arid wasteland littered with unregulated refineries where the rare-earths are extracted from rocks…The land is scarred with toxic runoffs from the refining process and pock-marked with craters and trenches left by the huge trucks that transport the rocks across ice and mud. Rusting machinery lies scattered along the valley floor, giving it the appearance of a war zone.”

China has used this environmental damage as a pretext for stricter export quotas. Production quotas for environmental reasons might be entertained by the WTO, however export quotas are not. In previous years, as a result of the cheaper costs of Chinese REE production, and due to China flooding the market, other REE operators shut down. This is shown in Figure 6 (two data sets were fused: 1986-2002 from [11] and 2002-2009 from [44]).

Figure 7 shows Chinese production along with the declining export quotas. A figure for 2010 expected demand from the west is also shown [39, 42]. It is important to stress that the Chinese export quota is just for the upstream metals. Downstream, processed materials such as Neodymium-Iron-Boron magnets can still be exported. This is part of an effort to encourage foreign manufacturers to locate in China. As Figure 7 shows, however, this year there may be a shortfall in demand for raw REEs in the West. This will be met, at least in part, by drawing down stockpiles [12]. Additionally, some enterprising Chinese may smuggle some out of the country.

Figure 5: Baiyun-Obo, the Black Heart of the Green Economy?

Figure 6: Global REE Production 1986-2009
Global REE Production

Figure 7: Rest of World Demand for RE Salts, Oxides & Metals
china export limit

Continued in Part II..  References are available here.

Alice In EVland; Six Impossible Things

John Petersen

Many of my regular readers know I'm a working securities lawyer, a humble scrivener who writes reams of deathless prose that private companies use to raise money from investors, and public companies file with the SEC in the form of registration and proxy statements, and annual, quarterly and current reports. I've spent a couple years as an oil company executive and a few more as board chairman of an advanced lead-acid battery technology developer. The balance of my 30-year career has been devoted to natural resource and technology-based businesses that needed somebody elses' money to pursue their plans and had to pass through a gatekeeper like me to get it.

It's a fascinating job because I need to develop an encyclopedic understanding of a client's business, operations, technology and industry before I can begin to offer sound advice on important business, financial and tactical decisions. In The Devil's Advocate, Al Paccino described a law degree as "the ultimate backstage pass." The movie line may be a slight exaggeration, but like most of my brethren I've learned that ambitions, optimism and bold plans are universal, failure is more common than success, and mediocrity is more common than excellence.

Along the way I've developed a kind of sixth sense for business models that will or will not work. While I haven't seen every fatal error a businessman can make, I can spot most of the common ones in my sleep. While part of me hates to tell an bright-eyed entrepreneur that his business model can't fly, I'd rather ride my bicycle for free than get paid for working on a deal that violates my "life is too short" rule.

I started blogging a couple years ago because of a love hate relationship with my own profession; one that always informs but often fails to communicate because full and fair disclosure of all material facts in compliance with the rules can never do a good job of explaining a business strategy and integrating the facts in a way that maximizes comprehension. My goal was to share my knowledge of the energy storage sector and help contemplative investors understand where the sector is going as cleantech, the sixth industrial revolution, unfolds.

Over the last year I've gotten bogged down in a series of absurd arguments with philosophically committed EVangelists who obviously slept through Economics 101, another violation of my life is too short rule. Since one of my favorite financial writers, John Mauldin, has recently had a lot of fun with the following quote from Lewis Carrol's Through the Looking Glass,

Alice laughed. "There's no use trying," she said, "one can't believe impossible things."

"I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for half-an-hour a day. Why, sometimes I've believed as many as six impossible things before breakfast."

I'm going to borrow John's theme and identify six impossible things about electric vehicles that most investors choose to ignore or simply don't understand.

Impossible Thing #1 – Zero Emissions

The gold standard of vehicle electrification is the Prius from Toyota Motors (TM). With an admirable ten-year history of user satisfaction, a base price of $21,000 and a design that maximizes fuel efficiency by using a 1.3 kWh NiMH battery for hybrid drive functions, the Prius delivers a combined city/highway fuel economy rating of 48 mpg, which is twice the 2011 model year combined fleet CAFE standard of 24.1 mpg.

According to Toyota, the 2011 Prius has tailpipe emissions of 143 grams of CO2 per mile, which is 3 grams per mile LESS than an electric car plugged into the average US utility. While a simple comparison based on average emissions shows that the Prius has a slight edge over every EV, the reality is even bleaker because EVs with theoretically be charged at night and most off-peak power comes from coal fired generators, while about half of daytime power comes from natural gas. I've never seen a study that analyzes the CO2 emissions differential between peak and off-peak power, but I'll give long odds that an EV charged with off-peak power is considerably dirtier than a Prius.

Impossible Thing #2 – Consistent Marginal Returns

Like all things in life, electric vehicles are subject to the law of diminishing marginal returns, which states that the first unit of a variable input yields the greatest benefit and each additional unit yields a progressively smaller incremental benefit. Frankly, I can't imagine a better proof of that economic law than a quick comparison of four vehicle electrification options.
  • The Toyota Prius uses 1.3 kWh of batteries to slash fuel consumption by 50%;
  • The GM Volt uses another 14.7 kWh of batteries to save the next 30%;
  • The Nissan Leaf uses another 8 kWh to save the last 20%; and
  • The Tesla Roadster uses another 29 kWh to satisfy the range requirements of people who have a commute of more than 30 miles, the maximum that Nissan recommends for potential Leaf purchasers.
There may be a "PHEV-light" alternative like Toyota's planned Plug-in Prius that gets to a more optimal point on the marginal utility curve, but the big battery behemoths have all the long-term potential of the Edsel unless someone can find a way to repeal the law of diminishing marginal returns.

Impossible Thing #3 – Available Raw Materials

Like all things in life, electric vehicles are subject to raw material constraints. Each year our planet produces a few kilograms of aluminum and copper and a few grams of rare metals per person. It is impossible for more than a handful of politically favored elites to use hundreds of kilograms of highly refined and processed metals to reduce their personal consumption of oil, which is produced at a rate of 616 kilograms per person.

Impossible Thing #4 – Assured Battery Safety

The green press is full of happy stories about the improving safety of lithium-ion batteries. At the same time, Federal regulators are focused on a recent 747 crash in Dubai that was caused by spontaneous ignition of lithium-ion batteries during shipment. While EVangelists think mommies and daddies across the land should place their child safety seats securely on top of the battery pack, the Federal government is preparing to impose sweeping restrictions on the transportation of those same batteries on US cargo planes.

Impossible Thing #5 – Assured Recycling

EVangelists invariably assume away battery recycling issues with blithe assurances that somebody will solve the problem before used battery packs become a disposal problem. However, nobody has been able to demonstrate a cost-effective lithium-ion battery recycling process. The primary recoverable materials are steel, aluminum, copper and some rare metals. While these materials were highly refined when they went into the batteries, they lose the original processing value in recycling and the recovered metals aren't worth much more than any other scrap metal. Since there is no recycling technology, a discussion of the problem promptly degenerates into "second life" mythology, where electric utilities will become dumping grounds for used battery packs that have outlived their usefulness in transportation.

Impossible Thing #6 – Economic Payback

Even EVangelists acknowledge that the incremental investment in an electric vehicle will not be recovered over the life of the vehicle unless oil prices soar to levels that would crush the global economy. Most investors are concerned with return on investment. A business model that can't offer a return of investment is worrisome.

Any one of these six impossible things should be enough to give a contemplative investor pause. In combination they spell disaster for investors in electric car manufacturers like Tesla (TSLA), Fisker Motors and Th!nk, and nothing but trouble for battery manufacturers like A123 Systems (AONE) and Ener1 (HEV) that are devoting immense resources to the electric car dream. There are a wide variety of rapidly evolving and lucrative markets for lithium-ion batteries, but companies that chase this White Rabbit down the hole may be unable to find their way out.

Most of us know that money managers, analysts and investors tend to follow the herd, but few of us ever really come to grips the unappetizing corollaries that:
  • Unless you're the leader the view never changes; and
  • If you follow a big enough herd, you'll spend a lot of time wallowing in manure.
Disclosure: I'm a former director of Axion Power International (AXPW.OB) and have a substantial long position in its stock. I don't believe that Axion's advanced lead-carbon PbC® battery will be a contender in the plug-in vehicle space because it's a power battery rather than an energy battery. Accordingly, the success or failure of electric cars will be irrelevant to my finances. With any luck, this will be the last time I focus on electric cars because there are important business opportunities to discuss and I'm not willing to waste any more time debating make believe with the folks who slept through Economics 101.

September 20, 2010

The Best Peak Oil Investments: Pure-Play Mass Transit Suppliers

Tom Konrad CFA

I'm attempting to bring this series on peak oil stocks to a conclusion in which I can choose five stocks that should benefit from rising oil prices.  One sector I feel should be represented is suppliers to mass transit companies, but I only looked at the percentage of revenues coming from mass transit and rail when I brought you my list of nine mass transit stocks.  From that list, the following companies get substantially all their revenues from mass transit, passenger rail, or rail freight:

  1. New Flyer Industries (NFYIF.PK/NFI-UN.TO), is the largest manufacturer of heavy-duty transit buses in North America, and has been a long-time favorite of mine.  The company trades in Toronto under the ticker NFI-UN, which is an unusual "stapled" security consisting partly of company stock and partly of a high-yield bond, giving it a much higher yield than most other companys.  This makes apples-to-apples comparisons with different stocks difficult, but I'll do my best.
  2. Vossloh AG (VOS.DE) supplies rail fastening systems, switching, services, and both diesel and electric locomotives, including locomotives for high speed rail.  Their electrical systems unit supplies electric drivetrains for both locomotives and trolley buses.
  3. While Portec Rail Products (PRPX) is a pure-play rail supplier, I'm not going to include it in this comparative valuation because the stock is currently trading based on the a takeover offer from L. B. Foster (FSTR).  This offer is on hold pending a ruling from the US Department of Justice, but L.B. Foster is confident enough of obtaining final approval (after some asset dispositions) that they increased the offer price to $11.80 per Portec share and agreed to pay $2 million to Portec if they are unable to consummate the deal by the end of the year in order to induce Portec to extend the agreement when the original offer expired on August 30.
  4. Wabtec Corporation (WAB), primarily serves the freight and passenger rail industries, supplying braking and other safety systems for both rail cars and locomotives.
One last company I will add to the list is the Spanish firm Construcciones y Auxiliar de Ferrocarriles (CAF.MC), also known as CAF.  A reader suggested I look into CAF shortly after the publication of the original list of transit stocks.  CAF manfactures railway cars, components, and complete turnkey rail systems.  In 2009, 58% of revenues came from Spain, rapidly growing international operations accounting for the balance of 43%. 

Valuation and Liquidity

The following table lays out several important valuation and liquidity ratios for these companies:

New Flyer
Share Price 9/7/2010
€80.18 US$45.84
Financial Stmt Date
TTM Earnings Yield
TTM Free Cash Flow Yield
Dividend Yield
Net Debt/Equity
Current Ratio
YoY Sales Growth
* Note: The yield on New Flyer's securities is not comparable to the other numbers in this chart because it includes the value of interest payments on the debt portion of the security

The only one of the four I currently own is New Flyer.  The bus manufacturer is returning to profitability after a year of losses caused by the downturn and an unexpected delay in an order from a large customer.  This has caused fairly strong price appreciation for what I consider an income security, so I have recently sold a little over a third of my holdings in order to rebalance my portfolio.

Wabtec and CAF both show weak free cash flow.  For Wabtec, this reflects a temporary surge in investment to support future growth.   In my opinion, Wabtec's strong balance sheet, with its low debt and a strong current ratio, should be sufficient to sustain this planned surge in investment.
CAF's low free cash flow seems to reflect a surge in working capital with the build-out of current projects.  Since CAF contracts to build entire turnkey transit facilities, large surges in working capital requirements are part of its normal course of business.

Vossloh seems the best overall value of the four, with an inexpensive price/earnings ratio of 11, decent growth and dividends that are well covered by income and cash flow.  The company does not have excessive debt, and maintains a moderate liquidity buffer.


Vossloh AG seems like the best buy of these four at current prices.  The conservatively managed balance sheet and moderate Price to Earnings ratio of 11 mean this company should be able to weather continued economic weakness, while still being able to benefit from any potential increased investment in mass transit systems.


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.

September 18, 2010

Kandi Technologies (KNDI) Stock Valuation

Part IV - KNDI's Stock Valuation

Arthur Porcari.

This is the last installment in a four-part series on Kandi Technologies (KNDI)Part I was an introduction, Part II took a look at Kandi's Business, and Part III looked at the company's financial condition.

What’s With The Stock Price?

KNDI, like most US traded China stocks is currently trading approximately 50% below its January high for the year, and 60% below its 2008 all time high. Unlike most, it's numbers are growing dramatically. Perhaps not too a-symptomatic when one considers how little Wall Street knows about this company brushing it with the broad China Stock brush.  The Company currently has approximately 21.7 million shares with the CEO owning 12.3 million. At the current price of $3.25 a share, it is obvious that either the stock has yet to be taken seriously, or the “market has little clue” as to what is about to happen with the opening of China sales this current quarter, or perhaps both. I suspect “both” is the correct answer. 

Short Interest

While the reported short interest has dropped significantly to the recently reported 904,000 from  month ago high of 1.18 million shares, so also has the volume. In January when the stock hit its high of the year,  average daily volume (ADV) was in excess of 550 thousand shares. A month ago the ADV was around 175 thousand shares. This past two weeks it has dropped to under 50 thousand shares per day. With the solid base that has been built in the low “3’s” and the decreasing short position, it appears that the short sellers are now beginning to realize that this Company “just might be real”. But with the declining volume and still very large percentage of shares short, a question could be raised, did they wait too long to start covering?  It is very likely that the Average "Days to Cover" could jump to 20 or more days when reported on Sept. 24th. As an old OTC Market Maker of ten years, years ago, who worked with a number of "old, but no longer bold" short sellers, I can attest that shorts don't give up easy. But in a rapidly performing company, they do give up. Voluntarily or involuntary, in most cases, not until they are squeezed. 

As in the case of most China stocks, KNDI's short began with it's large run-up late last year, accelerated when they announced their $10 million funding, and further accelerated with the sharp downturn in virtually all US and Shanghai Composite China stocks. IMO, the major difference in KNDI's case is the, to date, almost total lack of hedge fund longs, leaving most of the float+ in the hands of long term investors who have done their homework and continue to patiently hold or add to their positions with each bear read attempt. At no time is this more telling in KNDI then by watching the stock action after one of their several very positive press releases or outside published articles. After their first PR of the year on January 4 which caused the stock to gap open at $.45 hit an inter-day high of $6.16 and close at $5.72 on all time single day record volume of 1.84 million shares, virtually every PR since, no matter how strong, has been met with aggressive raids hitting bids.
historical chart
This is a common pattern in any stock that has a major short position in that the short seller will do whatever he can to kill enthusiasm and keep momentum buyers from jumping in and running him over.  This works to a point, but once long funds and institutions start buying, particularly from a low daily volume base, the future quick upside moves can be impressive.  The likelihood of this happening soon is  anyone's guess, but there has been a small but growing institutional interest in the stock, tripling since the beginning of the year. The top five each have positions almost too small to note, but each of these could easily decide on any given day to add a million shares which could be catastrophic to the short seller. Not so far fetched now that China sales are beginning. 


As can be seen by the chart below, KNDI has strong support in the low $3 area. For the past month it has been trending higher and nudging up to the 50 day moving average at 3.32 and just above the upper Bollinger Band. This is a very similar pattern, but on lower volume, as was seen the month just before the extended heavy volume break-out on no news in early August.  

Value Compared To Other China Auto Stocks

In deference to the short, an unknowing investor might look at the current 30 PE as rich,  compared to other more well known China auto stocks. And if all one were allowed to look at was this number based on history, I might agree. But, let’s throw in another very important factor, “growth”, and look at what comes out. One important variable that should be taken into consideration in comparing other China stocks is; “where was the market for these other stocks during the 2008-9 economic downturn”? We know KNDI was exclusively exporting non-essential “toys for big boys” to the US, so obviously they took a big hit in both top and bottom line.  But most other China stocks were able to ride out the storm selling domestically giving them reasonably good numbers last year allowing for a much lower 52 week PE. 

For comparison sake I will use a modified one year Price to Earnings Growth (PEG) ratio. In the case of the other more well known stocks; I’ll take the current PE for the formula “dividend”, last years earnings and this year’s analysts consensus to calculate the “growth” to be used in the “divisor”. For KNDI since it has no analysts following yet, I will pass on my higher estimate and instead use well known and respected Wall Street pundit Jim Altucher’s estimate published in a recent story of around $.30 per share for the full year (ten times earnings), to be used along with last years earnings to calculate the divisor. Now we know with a PEG ratio the closer the number gets to "1.0" the more fully valued the the stock, the smaller the number, the more undervalued the stock. So let’s run a few  of these modified PEG ratios. KNDI’s PEG ratio with a current 30 PE would be .05. Auto China (AUTC) with a current 7.5 PE, the PEG would be .14. China Automotive (CAAS) with a current PE of 15 would generate a PEG of .36. And Sorl Automotive Parts (SORL) with a current 10 PE would give a PEG of .53. I would have also added Wonder Auto (WATG) with its 12 PE, but since the analyst consensus is flat to negative growth for this year, the number would be meaningless. So using this comparison, each, other than WATG is undervalued, but KNDI is three times more undervalued than AUTC, seven times more undervalued than CAAS and ten times more unvalued than SORL.

A last, but important comment here that may shine positive for getting the KNDI story out to Wall Street. As previously mentioned, Mr. Hu doesn’t speak English. For that matter, neither does any other member of the Management team. Additionally, due to Mr. Hu’s conservative penchant for not putting anything out until it is done, to date, Company guidance has been out of the question. With no one here to field questions in English, there is no wonder no analysts and few institutions are following the stock. (Even the well respected China Analyst website after a recent rally in the price above $4 ranked KNDI as the #2 on it Aug. 8, "Top 10 Rebounding  Auto Stocks" seems to have forgotten that KNDI is even a China stock as can be seen by this ( link.) However, during my last translated conversation with Mr. Hu a month or so ago, I brought up the possibility of the Company bringing a new top level Executive on board that is US based and bi-lingual. To my pleasant surprise, I was told that such a search was already underway. Last week I was further told from a normally knowledgeable source, that such an individual has been chosen and should be announced shortly.


Based on my assumption of the second paragraph above, China consumer sales revenues for the second half should be at least $15 million with $2.5 million net profit. Other China Government sales should reach $6 million adding $1.3 million net profit. Historical, conventional export sales, should reach $25 million for an additional $3.1 million net profit. Conservatively total is $46 million in sales and $6.9 net profit or approximately $.31 a share for the second half of the year and $.40 for the full year. 

When one looks at the Company’s prior record year, 2008, on $40.05 million in sales they delivered $4.92 million net (eps $.25).  All of those sales were on much less profitable all export sales requiring shipping costs to the US, plus US Distributor fees for their lower margined off-road recreational vehicles. With what could quickly be a majority of future sales being made in China selling directly to the Government and self distributes to dealers, 2010 margins should increase significantly over 2008 making my last half forecast quite reasonable.

Bottom Line

In my 37 years in the market as both a market professional and investor, I have never seen such an apparently undervalued speculative Company with such a seemingly clear road ahead to potentially be a multi-billion dollar participant in a potential Trillion dollar space. I apologize for the length of this article, but if you have had the interest to get this far, then hopefully you will find as I, that Kandi is a “sweet” story at least worth "putting on your radar".


Arthur Porcari is a retired former regional stock brokerage firm President with 37 years stock market experience. His finance background includes, three years a stockbroker, ten years a brokerage firm President, an OTC Market Maker, twenty three years an Investment Banker to include 14 years as Managing Consultant to Corporate Strategies, Inc. a firm specializing in advising young public companies and companies about to go public on the “Ways of Wall Street”. He currently blogs on Seeking Alpha under “Corstrat” and has in the past been an on-air guest as well has a guest host on Business Talk Radio Network His passion and particular expertise is for small cap emerging growth companies.

He currently is and has been a shareholder of Kandi Technologies since it was first listed for trading in the US.

September 17, 2010

Kandi Technologies (KNDI) Financial Condition

Part III - Financial Condition

Arthur Porcari.

This is part three of a four-part series on Kandi Technologies (KNDI).  Part I was an introduction, Part II took a look at Kandi's Business, and Part IV will look at the company's stock price, forecast and bottom line.

KNDI recently completed another excellent quarter with an 80% Year Over Year Increase in Revenues and 425% Gain in Net Income. For the six months, Revenues grew 91.5% to $18,166,224 and Net income advanced 383.5% from $(356,525) in the first half last year to $1,010,782. Full year 2009 results showed revenues of $33,827,762, net income of $999,801.  Full year 2008 results showed revenues of $40,513,788, net income of $4,922,078.

I mentioned in Part II that Management took the Company through a major restructuring on two fronts in late 2008 and 2009. Prior to the restructuring KNDI was exclusively an exporter of gas and diesel powered off road recreational vehicles. As can be seen by recent record quarterly numbers by competitor Polaris Industries (PII), this is still a very good and growing business and KNDI will remain a strong participant in this legacy sector. However, a combination of the global economic meltdown causing a dramatic drop in KNDI's legacy export sales, increased fossil fuel costs and a worldwide recognition with China in the forefront that EV's were a wave for the future, created an opportunity for KNDI to reshape its destiny and become a legitimate potential contender in a potential future Trillion dollar market. This type of major shift does not come without cost. As would be expected with any company making such a change, during this time R&D, re-tooling, and marketing costs ramped up considerably. Yet during this time, in spite of the non-recurring spikes in these costs, and 50% or more drops in revenues, KNDI low and extremely flexible labor costs managed to complete the transition suffering only one quarter of a cash loss of only a few hundred thousand dollars. A task the would be incomprehensible to any US manufacturing company. During this time, the Company developed, received approval and initiated sales of four different EV's, two for export and two in China. With the transition effectively completed as is evidenced by the 65% reduction in R&D and 55% decrease in Selling & Distribution expenses, year over year in the recently reported second quarter, and initial consumer sales along with government and municipal sales of EV's in China beginning in this current third quarter, both revenues and net income should be expected to dramatically increase in the second half. More on this later.

But what about the Balance sheet?

At face, a quick review of KNDI’s balance sheet may make one think the Company might be low on cash to grow, particularly using US Company measures. However, a combination of a closer reading of the 10Q, along with an understanding of the way China banks handle their credit facilities and the way Government and Municipal subsidy payments work presents a different story. Particularly when one sees how low the tangible assets are valued on the books. 

Earlier this year the Company completed its first ever outside financing with a $10 million 6.25% convertible note offering convertible at $3.59 a share with two US Institutions which certainly has enhanced their balance sheet.  With that offering completed, let me show why the Company is in excellent financial condition with no foreseeable need for additional equity capital unless of course the stock prices rises to a point that it would be imprudent not to add capital.  With current assets of $49,115,201 and current liabilities of $48,433,030, its small positive  working capital is as strong a financial position that the company has ever seen. A year ago, in the middle of its restructuring, current assets were $29,997,837 and current liabilities were $42,100,705, a negative $12 million yet they completed the restructuring with little problem. A potentially fearful situation if this were a US based Company, but not necessarily so for a China company. Let me explain the difference. 

Most don’t realize, but China Banks typically do not provide long term financing as explained in a footnote in the Company's SEC filings. China banks typically just provide credit facilities for one year with a mutual understanding that aside from adjusting for current rates, as long as the Company stays current, the facility will continue to roll over each year. This Company has been financed this way almost from inception. For this reason the Company has little Long Term Debt. While the balance sheet does show Long Term Liabilities of $5,969,452, $4,791,969 of this amount is a non-cash warrant liability, leaving only $1,177,483 in true long term debt. 

Lets look at the Assets

If this were a US Company, it would have a fantastic looking balance sheet. Why? A US company would most likely have a long term mortgage debt against its primary asset, its modern, ten-building, 2.7 million sq.ft. under roof, 400 acre campus. Due to statutory depreciation this asset is only carried on the books for approximately $11.5 million. This video clip which is a bit outdated and these photos will give an idea of their facilities and capacities. In today’s much increased China Real Estate market, it is unlikely the company could rebuild this facility for less than $80 million. A value considerably more than the current stock market cap of $63 million. Further reading of the most recent 10q, shows they still have some $7.5 million in available untapped Credit facility if needed. They also have almost $10 million in inventory (an almost double from last year) already built out for the quarter ahead. Virtually all of this inventory and available credit facility is for the export side of the business. The China side of the business is being built almost exclusively through innovative use of the China subsidy programs.

Why the China side requires little capital outlay

As mentioned above, the current quarter is the quarter that vehicles for sale in China start showing up on their financials. As mentioned prior, in this second half, they have government approval for subsidies for some 3000 cars to be sold in Jinhua City China alone. This should add some $18 million to the legacy business for the second half. Additionally, more direct Government and Municipal sales are anticipated in the second half. The good part about this business is that the subsidy alone covers more than the actual raw costs of building the cars, and they get paid this subsidy approximately ten days after they sell vehicles to the dealers. So, for example, this is how they can build out this order with very little out of pocket cost. First they build 100 cars which might cost them $300k out of pocket, the then deliver these 100 cars to the dealer and get paid maybe $200,000. They then bill the Government for an approximate $400 thousand for the subsidy and get paid the subsidy in about 10 days. They now have $600,000 to build 200 cars and do the same procedure all over again, then 400 cars and so on. So you can see, they are barely out-of-pocket any significant cash at any time and can make the whole 3000 car delivery in just a few months.

Continued in final Part IV which will look at the company's stock price, forecast and bottom line.


Arthur Porcari is a retired former regional stock brokerage firm President with 37 years stock market experience. His finance background includes, three years a stockbroker, ten years a brokerage firm President, an OTC Market Maker, twenty three years an Investment Banker to include 14 years as Managing Consultant to Corporate Strategies, Inc. a firm specializing in advising young public companies and companies about to go public on the “Ways of Wall Street”. He currently blogs on Seeking Alpha under “Corstrat” and hn the past been an on-air guest as well has a guest host on Business Talk Radio Network His passion and particular expertise is for small cap emerging growth companies.

He currently is and has been a shareholder of Kandi Technologies since it was first listed for trading in the US.

September 16, 2010

Kandi Technologies (KNDI): The Business

Part II - The Business

Arthur Porcari.

This is part two of a four-part series on Kandi Technologies (KNDI).  Part I was an introduction, and Part III and Part IV will look at the company's financial condition and stock price, respectively.

Kandi was founded by its effectively sole controlling shareholder Hu Xiaoming in late 2002 in Jinhua City, Zhezjiang Province, PRC as a prolific developer and manufacturer of two, three and four wheeled gas powered, mainly off road, recreational vehicles exclusively for the US export market. By 2007 KNDI rose to the status of being China’s largest exporter of high end Go Karts (more like mini-dune buggies) with a impressive15% of the total market. In addition, KNDI also developed and manufactured an array of ATV’s, UTV’s, Trike’s, etc. Unlike most start-ups, KNDI was financed from its inception through the end of 2009 without going to outside equity investors. Also, unlike most startups it has been profitable each year including the last two in spite of an almost total collapse of the export market for non-essential products as KNDI was offering.

With the Energy Crisis of 2008, a window opened for Mr. Hu to make what could now only be looked at as a perfectly timed Company transformation simultaneously on two fronts. He rapidly moved the emphasis of the Company to develop and market mini-electric cars and to develop these cars along with the Company’s legacy products for not just the export market, but also for domestic PRC consumption. Before anyone thinks that the move into EV’s was just the move of a stock market opportunist CEO, I suggest you check out this link for a short bio of his credentials as an earlier pioneer in mini-cars, EV’s and batteries.

Where does KNDI stand today on the EV front?


For openers, I suspect that most had no idea that KNDI was China’s largest exporter of pure 4 wheeled EV’s to the US with over 3500 mini-EV’s delivered the past twelve months. The initial sales were of a cute two seat convertible called a Coco, followed now by a more powerful hardtop with AC and power windows (Yes that is me in the car). The latter recently arrived at KNDI’s West Coast facility within the past few months and only last week reached its first dealer in my home city of Houston. In fact, thanks to Rick Erhlich of Houston Electric Car Company, Saturday I was able to take a head turning spin through downtown Houston. While both these cars are designated as Low Speed Electric Vehicles (LSEV), meaning they must be speed restricted down to 25mph in any state that doesn’t have its own specific requirements, Texas allows the speed to be set at 35mph. I can assure all; this car without the governor will go well past the 35mph restriction. With the addition of this air conditioned model (better for both hot and cold climates), and the existing and impending tax credits in several states, paired with the federal tax credit of 10%, I can easily see sales of  5,000-7,000 more export units over the next twelve months. These sales should also include the impending opening of their new EuroGroup market.

People's Republic of China (PRC)

Consumer Sales

While the KNDI's legacy export business is profitable steak, what is happening in China beginning this quarter is surely the sizzle. As mentioned above, Mr. Hu is Johnny come lately when it comes to EV’s. Last year the word came out that the China Government was going to go all in with incredible subsidies and grants to make China the Worlds #1 manufacturer and consumer of EV’s. Immediately all of China’s, and a number of other international auto manufacturers came running to the market with their big beautiful $30,000 plus full speed EV entrants. In June, the subsidy plan was unveiled giving PRC subsidies up to the equivalent of $8600 US per sale, additionally local Provinces and Cities also added subsidies. As we now know, this great deal has been about as successful as a Chinese firecracker in a typhoon. Why? The big guys will tell you it is because the subsidy is not enough. “If a buyer can’t afford $30,000, then they can’t afford $22,000 either". True statement, but… that’s not the main reason. There are at least two other more important reasons, and KNDI knew it.

The most important credo in manufacturing is “know your market
. Something the big guys either forgot or ignored. In most of the world, EV’s for years to come will be either a second car, or a novelty market. Not so for China for at least two reasons. In China with its current minuscule cars per family ratio and huge 300 million urban emerging middle class, EV’s are likely to be a first and only car for quite a while. This group is evolving from bikes and scooters, so any economic enclosed vehicle they can step up to for a few thousand dollars is cause for excitement. But additionally, they would like to have the ability to get not just from point A to B, but on to the rest of the alphabet. Let me explain.

KNDI and Mr. Hu know the above is KNDI's market, in the same way Henry Ford with the Model-T and Ferdinand Porsche with the Volkswagen knew their market was for the common man. With most of the above potential consumers living in high rise condos, just finding parking alone will be a universal problem, let alone finding a place to plug in for an overnight recharge. Obviously this is not a good environment for a big expensive sedan. KNDI’s solution; make the car half the length of the sedan, sell it without the most expensive single item, the battery, and forget about plug in recharging (thought the KNDI vehicles do allow plug-in). And, BTW, this will make it a lot easier to get from A to C and beyond without waiting for hours for a recharge IF you can find a place to recharge. KNDI's solution; Build the car with battery quick change access and also build the battery changing stations.

Mid last year while the rest of the auto makers were developing their big expensive cars, ten of the biggest got together and formed a group to address the re-charging issue as can be seen in this article snippet translated from this translated China news story:

“Not only the ‘external environment’ case, even the electric car production camp is also due to the formation of two different charging modes martial. Such as FAW, SAIC Motor, Changan and other domestic 10 vehicle companies jointly established in August 2009 electric vehicle industry alliance to promote plug-in electric vehicles and models of commercial standards.”

Late last year, KNDI, due to it’s ownership of a technological patent for quick battery change, led the formation of its own group. From the same article: (Condi is Kandi after Google translation)

“While Condi is with CNOOC Zhejiang, China Putian, Zhejiang days Battery Co., Ltd. and other energy giants could reach an agreement, set up a ‘Chinese electric car industry Promotion Alliance’, seeks to expand the change battery mode of influence.”

Now the big guys came up with the brilliant idea to set up tens of thousands of plug in terminals all over the country. With current average full charging times of up to six hours, there had better be a good triple feature movie theater nearby.

The KNDI lead group is currently building a series of Changing Stations similar to what Shai Agassi is trying to do internationally with his not yet trading already Billion dollar VC funded A Better Place company. Just drive you car in, let a robot arm change out the battery, and in less than two minutes you are back on your way to point C with a fresh battery. But KNDI’s group is taking the changing station concept to a more advanced level. When you buy your subsided car you buy it separate of the additionally subsidized battery which is leased from their same group for a pittance. Aside from the obvious lower initial cost, always a fresh battery, and ecologically friendly battery recycling, this is also a great deal for the car buying consumer in that his purchase price is cut in half and his resale value will not drastically decline with the age of the battery. 

For KNDI this is an excellent situation in that in addition to selling their cars equipped with the quick change battery feature, they get paid a fee from the battery change alliance each time an exchange is made.

Now as is Not typical for a US company which might take years and millions of dollars to implement such a plan, KNDI, thanks to their contribution of the technology, has no capital requirement towards building out the battery changing infrastructure. The PRC, local Governments and KNDI's partners are covering all costs. And according to this translated China article the first six changing stations and main charging station are scheduled to be completed in October. But what is really big for KNDI is the initial commitment for the City of Jinhua to subsidize an initial 3000 cars of KNDI’s recently Government approved larger mid-speed car, the KD5010XXYEV which can cruise at 80kph with a 160km range between battery changes. After subsidy paid to KNDI directly after each sale to a dealer, the consumer cost at the dealership will be between $2500 and $3000 USD. An entry level that most emerging middle class can embrace. KNDI’s gross margins should exceed 35% on these sales.

Government and Municipal Orders

To date, KNDI has made initial sales for trial purposes to the China Postal Service in both Jinhua City and Hangzhou, cities totaling some 9.1 million in population. The most recent sale of 60 cars which are modified versions of the KD5010XXYEV sold directly by the Company with the batteries was made at approximately $10,000 USD per vehicle. Here is a video clip from a China TV piece aired in June. While it is in Chinese, the video alone shows an impressive operation. The green vehicles with the light on top you see throughout the clip and the plant manager being interview in front of, are the new China Postal vehicles.  Much can be read as to the potential of Government sales through the below excerpt of this recent press release.

This initial order by the Hangzhou Postal Service is for vehicles to be used as a Special Postal Vehicle. Hangzhou, one of China's most prosperous cities, is one of the first five Chinese cities in which the Chinese government will begin to offer significant subsidies and special policy incentive to electric vehicle and hybrid manufacturers as announced by the Ministry of Finance on June 1, 2010. 

The Company added that the initial order by the Postal Service totaled approximately RMB 4,080,000 (US $602,450). It was in response to a widespread call by government officials in Hangzhou for its municipal services to adopt alternative energy vehicles. The Company said the government approved Kandi EV emits no emissions, and meets all of the standards set by the Chinese government. After a finishing touch of green paint, it is anticipated the cars will be shipped and begin to appear on the streets of Hangzhou before the end of July. 

"By improving the environment and raising the standard of service provided by the Postal Service in Hangzhou, we believe this sale will serve as an example of the potential for utilizing electric vehicles for mail delivery throughout all of China," stated Mr. Xiaoming Hu, Chairman and CEO of Kandi. He added, "We will continue to market our EV products to all major government agencies in China.

Continued in Part III


Arthur Porcari is a retired former regional stock brokerage firm President with 37 years stock market experience. His finance background includes, three years a stockbroker, ten years a brokerage firm President, an OTC Market Maker, twenty three years an Investment Banker to include 14 years as Managing Consultant to Corporate Strategies, Inc. a firm specializing in advising young public companies and companies about to go public on the Ways of Wall Street. He currently blogs on Seeking Alpha under Corstrat and has in the past been an on-air guest as well has a guest host on Business Talk Radio Network His passion and particular expertise is for small cap emerging growth companies.

He currently is and has been a shareholder of Kandi Technologies since it was first listed for trading in the US.

September 15, 2010

Why Wait For Tesla Or, A Better Place? Kandi Technologies is Already a Profitable EV & Quick Change Battery Company

Part I

Arthur Porcari.

Ever hear of China based NASDAQ listed Kandi Technologies (KNDI)? If you haven't, you're not alone.

No financial writers, no analysts, and no significant institutions or funds are interested.  But they should be.  This series will go into the reasons why.

In part II, we'll look at the company's business and history :

  • Kandi is already selling EV mini-cars by the thousands.  
  • Kandi landed a joint venture with three multi-billion dollar Companies for quick-change battery charging, with the first stations opening in November.
  • Owns a mortgage free modern ten building, 2.7 million sq.ft., 400 acre complex with manufacturing potential of over 100,000 vehicles per year. 
In part III, we'll look at Kandi's financials:
  • The first six months 2010 revenues up 91.5% to $18,166,224 and net income up 383.5%  to $1,010,782. 

  • They are sufficiently capitalized and led by a highly experienced and “connected” CEO and 60% controlling shareholder.
In part IV, we will look at the company's current valuation and where I think it will be heading.
  • Kandi's second half 2010 top line should double, bottom line should quintuple.

  • The company is significantly undervalued.
  • They have been continuously profitable and trading under replacement value.
  • The stock is trading  at 50% off its high year to date.
I have closely followed KNDI and have been a shareholder since the day it started trading in the US in mid 2007. This is a company led and controlled by a very conservative non-English speaking, well connected, very wealthy, CEO who even to this day still personally guarantees the majority of its debt. Not because he has to as I will discuss later on in the Asset part of this tome, but because it keeps the cost of money down. (Know of any other NASDAQ CEO’s who only hold 60% of the current 21 million shares and is paid an annual salary of $24,000 a year that has that much confidence in his company? I don’t.) When I say conservative, I am speaking of a man who flies coach, hates to announce anything until it is done and almost always surprises on the upside.

While I have met the CEO once, and spoken to him through a translator a total of three times, I neither claim, nor do I care to have, any special access to information other than what is published both in the US and in the PRC. The latter, thanks to the Internet and Google Translator, I must add is a treasure trove of Company information that we don’t see published in the United States. 

Intrigued?  The rest of this series will be published over the next few days.


Arthur Porcari is a retired former regional stock brokerage firm President with 37 years stock market experience. His finance background includes, three years a stockbroker, ten years a brokerage firm President, an OTC Market Maker, twenty three years an Investment Banker to include 14 years as Managing Consultant to Corporate Strategies, Inc. a firm specializing in advising young public companies and companies about to go public on the “Ways of Wall Street”. He currently blogs on Seeking Alpha under “Corstrat” and has in the past been an on-air guest as well has a guest host on Business Talk Radio Network His passion and particular expertise is for small cap emerging growth companies.

He currently is and has been a shareholder of Kandi Technologies since it was first listed for trading in the US.

September 14, 2010

The Cruel Realities of EV Range

John Petersen

An English proverb teaches us to hope for the best but plan for the worst. With the imminent introduction of a variety of plug-in vehicles that will begin hitting showroom floors in the next few months, the phobia du jour is range anxiety, an entirely rational terror that an EV will get you to your destination in eco-chic style but only get you home with the help of a tow-truck. Sadly, most people who extol the virtues of electric drive are incurable optimists that have little or no regard for the risks inherent in complex systems and the widely variable needs of individuals. The quick and dirty overview is that every plug-in owner will have to cope with range degradation before the new car smell fades and his problems will only get worse as time passes.

Nissan Motors (NSANY.PK) will soon start delivering its battery powered Leaf, the world’s first production EV. The Leaf will get its power from a 24 kWh lithium-ion battery pack and Nissan's advertising campaign focuses on a showroom floor range of 100 miles. While they include the usual throw-away warnings that "Range will vary with driving habits, conditions, weather and battery age," they haven't been entirely forthcoming with the inconvenient truth that battery packs start to degrade with the first charging cycle and the process never stops.

The following graph comes from a recent National Renewable Energy Laboratory study that examined the long-term effect of local weather conditions on power degradation in lithium-ion battery packs. This particular graph has an upward slope because it's showing the percentage of power loss over 15 years. To show expected vehicle performance, the curve would need to be inverted. While the study's authors warned that their results were optimistic because they didn't include battery degradation from the heat buildup that happens whenever a car is parked in the sun, most potential buyers will find the optimistic numbers shocking enough.

9.2.10 Climate.png

In Minneapolis, an EV-100 will be an EV-90 after one year and an EV-80 after five. In Phoenix it will be an EV-80 after one year and an EV-60 after five. These are not minor differences to people that need dependable transportation to and from work, particularly if they plan for the worst when they make a buying decision.

Other major range penalties that potential buyers must consider include:
  • Cold weather penalties of 10% to 20%.  While heat increases the rate of battery degradation, the widely reported experience of Mini-e drivers has shown that cold weather is a killer. If you live someplace where your dog's water bowl occasionally freezes over, you need to plan on an occasional 10% range reduction, but if your dog's water bowl frequently freezes solid it's better to plan on a 20% reduction.
  • Hilly terrain penalties of 5% to 10%. Hilly terrain is one of those things that most drivers don't consider because logic dictates that the energy used to climb a hill will be recovered on the downhill. In reality the energy used in climbing is far greater than the energy recovered coasting downhill. While this reality isn’t important to drivers, cyclists quickly learn that 500 feet of elevation gain increases the energy expended on a 60-mile ride by about 5%. While cars have better aerodynamics than bicycles, hills are never free and the downhill wheee! is never fair payback for the uphill grind.
  • Stop and go traffic penalties of 30% to 50%. Of all the factors that impact EV range, stop and go traffic is the biggest offender. According to Nissan, the Leaf's range will fall by 40% in 15 mph stop-and-go-traffic at low temperatures and by 50% in 6 mph stop-and-go-traffic at moderate temperatures.
When you put it all together, a three-year old EV-100 will probably act like an EV-50 on a frosty winter's day in Minneapolis. While a foolish consistency may be the hobgoblin of small minds, I think consumers will tend to be very cautious when it comes to choosing between dependable transportation and an eco-chic image.

The simple solution, of course, will be bigger, better and cheaper battery packs. According to popular media and specious political promises, that wondrous day is just around the corner. While I suppose anything is possible, I find it hard to ignore 30 years of hands-on experience with R&D companies and H.L. Mencken's warning that "A newspaper is a device for making the ignorant more ignorant and the crazy crazier."

In August Greentech Media reported that battery prices were plummeting, Project Better Place would pay $400 per kWh for lithium-ion battery packs with a 2012 delivery date and IBM has plans to demonstrate a prototype lithium-air battery pack within two years. The ecstasy was palpable, but wholly irrational.

Better Place has based its business model on leasing batteries as a service instead of selling them as a product and even a modest level of success will give it buying power comparable to a first tier automaker. Better Place is planning on massive government support and at least in the U.S., the subsidies could exceed its capital costs for a time. Under those circumstances Better Place doesn't need to sweat minor details like battery quality, service life and pack degradation because it can simply discard problem packs that were bought with somebody else's money and continue to collect rental charges with little or no capital investment. It should be a hell of a party until the governments get a clue and take away the punchbowl. The hangover, however, may be painful.

As we leave our pleasant dreams of a Better Place and awaken in the real world, the dynamic changes rapidly. Consumers need warranties to protect their investment and companies that write warranties need to cover their costs. While Tesla Motors (TSLA) has been able to get away with three-year battery pack warranties for its roadster, real automakers will have to provide eight to ten year warranties and eventually earn a normal profit on vehicle sales. So even if they start with a battery pack that costs $400 per kWh at the battery factory, the fully loaded cost to consumers with an eight to ten year warranty and a normal markup will be closer to the $750 per kWh Nissan has ascribed to the battery pack in the Leaf.

In a May 2009 report for the DOE, TIAX LLC pegged the current cost of commodity grade 18650 lithium-ion cells at $200 to $250 per kWh, which resulted in pack costs of $400 to $700 per kWh. Despite the happy talk about economies of scale, large format batteries are a good deal more complex than a giant economy-sized box of laundry detergent. While the cost of large-format automotive grade cells may eventually approach the cost of small-format commodity cells, they're not likely to get any cheaper without intervention from the commodity price fairy. By the time you add in warranty costs and automaker's profits, end user battery costs of $400 or even $500 per kWh are a little more than pipe dream unless lithium-air or molten salt technologies make lithium-ion batteries and the factories that make them obsolete.

We've all seen the "hope for the best" stories about how electricity for an EV will cost the equivalent of $1.20 per gallon of gasoline. Those stories, however, assume that like butterflies batteries are free. An optimistic "hope for the best" total cost of ownership scenario looks something like this.

9.15.10 Hope.png

A more rational "plan for the worst" total cost of ownership scenario looks more like this.

9.15.10 Plan.png

I have little or no patience with battery manufacturers, automakers, politicians, journalists and quasi-religious EVangelists who create unreasonable expectations based on hopeful scenarios instead of reasonable expectations based on likely scenarios. A Nissan Leaf may get 4 miles of range per kWh of battery capacity on a sunny afternoon in Florida, but it will be lucky to get half that on a winter morning in Chicago.

EV buyers who pay a filet mignon price and end up eating pork tartar will not be happy. Their lawyers, on the other hand, will be tickled pink.

If the EV and battery industries want to avoid interminable litigation and untold reputation damage they need to get honest with their stockholders and customers. They need to tell potential customers that they might get 4 miles per kWh of pack capacity on a good day, but can't plan on getting more than 2 miles per kWh on a bad one. They need to stop comparing the fueling cost for a brand new EV with the average economics of an aging automotive fleet. They need to stop dividing 12,500 miles per year by 300 days and telling potential buyers that 40 miles of EV range is enough when they know that customers will need at least 80 miles of reliable range to accommodate day-to-day variations and achieve an annual average of 12,500 miles. Instead of bafflegab claims of pennies per mile, they need show more realistic economics based on end-user battery pack costs and reliable ranges in congested traffic and poor weather.

The realities of EV range are a bitch and I'm not the only one who questions whether long-range EVs can ever be cost effective. Industrial revolutions arise from technologies that first prove their economic value in a free market and then seek subsidies to accelerate growth. A business model that can't work without subsidies doesn't make sense because the punch bowl always gets taken away too early, particularly if customers aren’t happy. The green jobs myth of the EV revolution has already proven to be a mirage. The cost effective and reliable transportation myth will be the next to crumble.

The last few weeks have been a busy time in the happy-talk press corps as Ener1 (HEV) arranged $55 million in potentially toxic debt financing to continue its plant construction, Valence Technologies (VLNC) trumpeted a six-year extension of a contract with Wrightbus that may generate a three or four million dollars in annual revenue, A123 Systems (AONE) announced the opening of its new battery manufacturing plant in Livonia, Michigan and Compact Power, a subsidiary of Korea's LG Chem, broke ground for its new battery manufacturing plant in Holland, Michigan. All these events gave rise to great trading opportunities, but there is a wide gulf between progress on the construction of a battery manufacturing plant and profitable operation of that plant.

Every prior generation of electric cars has died of congenital birth defects. While the next generation may not be stillborn, I have no confidence that the outcome will be different. In my view these companies are not equities you want to buy and squirrel away in a safe deposit box for the grandkids. Hope, after all, is not an investment strategy.

Disclosure: None.

September 10, 2010

The Best Peak Oil Investments: Accell and Six Other Bicycle Stocks

Tom Konrad CFA

This article gathers all the bicycle and e-bike stocks I've found in one place, and takes a look at a recent find: Accell Group (ACCEL.AS).

When I first became interested in alternative transportation as a peak-oil investing theme in late 2007, I was frustrated at my inability to find very many good alternative transportation stocks: The list of bike stocks I found was already very out-of date, and the lists of rail transit and bus companies I found did not distinguish between publicly traded companies I could invest in, and private companies I could not.

Almost three years later, I finally feel I've found enough publicly traded alternative transportation stocks that I feel I have a chance of finding a few good value stocks.  My alternative transportation stock list has expanded to 27 names, and is still growing with a new reader suggestion every couple of weeks.  Recently I published lists of nine mass transit stocks and three mass transit operators.  I also found four bicycle and moped stocks, only to find that list instantly out-dated because of three new reader suggestions and one bike manufacturer I found among the holdings of the Powershares Global Progressive Transport Portfolio (PTRP.)

List of Bike Stocks

In the interest of having a list of bike stocks all in one place, here are the ones I currently know about, along with where to find a more detailed discussion of the company's business and fundamentals.

Dorel Industries, Inc (DII-B.TO, DIIBF.PK),
Giant Manufacturing (GTMUF.PK, TWSE:9921), and
Piaggio & C.S.p.A. (PIA.MI, PIAGF.PK) are discussed in my first article on bike and scooter stocks.

Advanced Battery Technologies (ABAT) features in my second list of electric and hybrid electric vehicle stocks.

Shimano (SHMDF.PK), sometimes called the "Intel of the bike industry" is discussed here.

I have yet to write about these bicycle makers:

Accell Group (ACCEL.AS) was suggested to me by Peter Cox of Greentech Opportunities, whom I met at the San Francisco MoneyShow.  I take a look at it below.

Merida Industry Co (9914.TW) is a bicycle company based in Taiwan.  I have been unable to find an English-language version of Merida Industries' annual report or other filings.  If any readers know where to get them, or some other source that includes Merida's full financial statements, let me know, and I'll write about it in a future article.

Accell Group

Accell Group is a Europe-centric manufacturer of bicycles, bike parts, bike accessories, and fitness equipment.  Sales by CountryThe stock trades on the Amsterdam stock market with the symbol ACCEL.  The company owns a wide portfolio of national and international bicycle brands, and the company's strategy is to buy and cultivate brands that are or can be leaders in their respective national or functional niches.  The company's annual report lists 18 "main" brands with focuses on everything from bikes for kids (Loekie), to high-quality bikes and e-bikes in the Netherlands (Koga-Miyata), to bike parts suppliers like Junker and Brasseur.  If there is an underlying theme among the brands it is attention to research in innovation combined with sophisticated distribution and marketing. 

As I discussed in my first bike stock article, I'm most interested in bike stocks because I expect rising oil prices to stimulate the use of bikes first for short trips and errands, and then for commuting.Sales by Segment  This trend is already much more advanced in Europe than in the United States because of their more compact cities, higher gas taxes, and greater awareness of green issues.  This has helped Accell's brands to stay in the forefront of e-Bike and commuter bike development, and possibly giving them a better understanding of what the future bike market will look like than rival North American manufacturers.  With a greater focus on volume production, Asian bike manufacturers such as Taiwanese Giant (and possibly Merida) with a greater focus on volume production rather than technical innovation and tailoring bikes to their customers needs are more likely to be followers than innovators in this regard. 

Accell might be better in a rapidly rising oil price environment where bicycle demand grows and changes rapidly, while the volume manufacturers are more likely to have the advantage in a more slowly evolving environment associated with a more gradual rise in the price of oil.  As I recently discussed, I think the more likely scenario is highly volatile and rising oil prices, giving a slight advantage to innovative companies like Merida and Shimano.

Liquidity and Valuation

The following table summarizes some of Accell's important liquidity and valuation ratios:

Share Price 9/3/10
Financial Stmt Date
TTM Income Yield (PE)
10.3% (9.7)
TTM Free Cash Flow Yield
Dividend Yield
Net Debt/Equity
Current Ratio

Accell's liquidity is good, and the company is not highly leveraged.  The high 4.8% dividend yield should be considered in light of the fact that Accell has a policy of setting the annual dividend at around 40% of the previous year's profits.  This allows the dividend to fluctuate over time, allowing a higher average dividend than would be likely in a company with the same level of profitability but a fixed dividend policy.  Despite the financial crisis, revenue and earnings have been growing steadily at least as far back as 2002, with 12% compound annual revenue growth and 22% compound annual earnings growth over that period.  The most recent 6 month earnings statement showed more subdued growth, with year-over-year revenue growth of 3% and year-over-year profit growth of 9%, but high growth is not necessary to justify Accell's quite reasonable valuation.


Overall, Accell seems a good value play in an industry that should benefit from rising oil prices.  The only company included in the list of bicycle stocks above with a comparable valuation is Advanced Battery Technologies (ABAT).  ABAT has the advantage (at least for US based investors) of trading on NASDAQ, but is a Chinese company and only about 46% percent of its sales consist of e-bikes and batteries for e-bikes, while Accell gets almost all of its sales from bikes and bike parts.  If I had to buy only one of these seven at current prices, I'd buy Accell.  In fact, I currently have an open limit order to buy the company at only slightly below the current price. 

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.

September 07, 2010

The Best Peak Oil Investments: Three Mass Transit Operators

Tom Konrad, CFA

Government budgets are putting pressure on mass transit operators, but the best public companies are likely to benefit from the trend.

Three recent Economist articles led me to question my assumption that rising oil prices should be good for mass transit operators.  In the August 19th edition, there was an article about mass transit service cuts in Atlanta, as well as one about the likelihood of rising rail fares in Britain

In crisis, there is also opportunity.  Reading beyond the gloomy headline of the Atlanta article, it becomes clear that the Metropolitan Atlanta Rapid Transit Authority's (MARTA's) decision to cut 40 of 131 bus lines has more to do with the operational inefficiencies of a state-run bus service.  MARTA has several competing, subsidized, transit agencies in the Atlanta region, does not receive any subsidies of its own, and has significant legislative constraints about how it spends its money.  Inflexible rules have even forced MARTA to buy buses that it does not have the money to operate. 

Demand for public transit services is rising, even as transit agencies like MARTA are cutting back.  This should open up opportunities for efficient and flexible privately run operators willing to fill in the gap left by the retreating public sector.

The story behind the likely large increases in Britain's rail fares leads to a similar conclusion.  Rising rail fares will be driven by government belt-tightening, and rail operators must negotiate with local authorities for their share of revenues and expenses.  This seems to imply that rail operators will not be able to capture a share of rising revenues beyond what can be justified by growing expenses, and may even see their margins squeezed in coming years.  But the effect on bus and coach (inter-city bus) operators should be positive, as rising rail prices induce commuters and travelers to seek more economical alternatives.

The Companies

I've recently been researching three London-listed transit operators with both bus and rail divisions.  I've been aware of FirstGroup PLC (FGP.L) for some time, and the company appeared in my recent list of nine public transit related companies.  While looking at the holdings of the Powershares Global Progressive Transport Portfolio (PTRP) for this series on Peak Oil stocks, I came across another: Stagecoach Group, PLC (SGC.L), and Stagecoach's annual report pointed me to two other publicly competitors: National Express (NEX.L) and Arriva

Arriva was recently acquired by the German government-controlled Deutsche Bahn, and so is no longer publicly traded.  Although this gives investors one less option in the sector, another article in the Economist predicts that Deutsche Bahn may continue looking for acquisitions as part of its growing rivalry with the French rail operator SNCF.

Although each company treats revenue breakdown differently, each company seems to earn a little more than half of their revenues from bus services and a little less than half from rail services.  All three operate in the UK and North America, while National Express also has operations in Spain.

The economic downturn hurt revenue at all three firms, but all  have seen revenue increase since 2009.  Both FirstGroup and Stagecoach Group maintained profitability through the downturn, but National Express lost money in 2009 and went through a fairly dramatic restructuring.  It has only recently returned to profitability. 

National Express might potentially be a turn-around play, but I expect economic times to remain difficult, and so prefer companies with more financial strength.  The other two seem to have adapted well to the downturn, but Stagecoach's low debt means that the company probably has more flexibility to take advantage of any opportunities opened up by a retreat of public sector transit providers.

Below is a table summarizing several valuation and liquidity ratios for the three companies.

National Express
Share Price 8/26/10
Financial Stmt Date
TTM Income Yield (PE)
8.9% (11)
0.04% (25)
9.1% (11)
Free Cash Flow Yield
Dividend Yield
Net Debt/Equity
Current Ratio


Of the three stocks, Stagecoach's combination of low debt, relatively strong liquidity, and reasonable earnings multiple make it my favorite of these three bus and rail transit operators.  Had I known about National Express and Stagecoach when I was putting together my Ten Clean Energy Stocks for 2010 (in which I included FirstGroup,) I would have chosen Stagecoach in FirstGroup's place.


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.

September 03, 2010

The Best Peak Oil Investments: PTRP - Powershares Global Progressive Transport Portfolio

Tom Konrad CFA

Many investors find the prospect of selecting individual stocks simply too daunting.  For those investors interested in investing in peak oil, but uncomfortable with the risks and moral dilemmas inherent in oil company stocks, there is another option: Powershares Global Progressive Transportation Portfolio (PTRP)

I've been researching and writing this series about investments that will benefit from peak oil for half a year.  If you've read the 20+ articles in the series so far, you've learned about several stocks that should be well positioned to benefit from rising oil prices, and you should also have a good idea about which sectors are best to avoid.

On the other hand, if you are just coming across my writing now, you're about to learn about a single investment that should not only benefit from peak oil, but it will give you diversification at a fairly moderate cost.

The Powershares Global Progressive Transportation Portfolio (PTRP) is an Exchange Traded Fund (ETF) that invests in companies that "the Index provider believes stand to benefit substantially from a societal transition toward using cleaner, less costly and more efficient means of transportation.  These companies focus on technologies for utilization of greener, more-efficient sources of energy for transportation. These technologies are designed to improve energy efficiency and reduce the costs for fuel or time in transit and include renewable energy harvesting or production, energy conversion, energy storage, improvements in energy efficiency, power delivery, energy conservation and monitoring of energy information."  In short, the ETF is a collection of many of the same stocks I've been writing about in this series.

Why Use an ETF?

There are several benefits to using an ETF.  One of the most commonly cited is diversification: a single investment gives you a small slice of forty different companies.  My reading leads me to believe that this is more diversification than you are likely to need, given the fact that the ETF itself will only be a fraction of your portfolio.  (I discuss optimal diversification in detail here.)  

I was recently speaking to an investment advisor who made the case for diversification this way: if any individual stock is only 1% of your portfolio, if one of them fails, you will only lose 1% of your portfolio value.   What he was not thinking about was the fact that, the more companies you own, the more likely you are to own a company that goes bust.  For instance, even many "socially responsible" mutual funds had relatively large stakes in BP.   Second, with today's low brokerage commissions, most investors will pay more to own even relatively low-cost ETFs than they will to own stocks.  If a fund's expense ratio is the price you pay to avoid large blow ups, PTRP's 0.75% annual expense ratio, is the same as having one out of 133 stocks in your portfolio guaranteed to fail every year, in addition to any real company failures.

On the plus side, global exchange traded funds like the Powershares Global Progressive Transport Portfolio allow access to foreign-listed companies that many investors might find difficult or expensive to buy.  My analysis of PTRP's holdings found that over 60% of the fund's portfolio does not trade on US markets.

Sector Allocation

Another aspect of an ETF like PTRP is that its holdings are based on an equal-weighted global index of stocks.  That means that if there are not very many publicly traded stocks in a specific sector, the index will give a low weight to the sector, and if there are a great number of publicly traded stocks, the exposure to the sector will be high.  I prefer to weight sectors that have a low degree of investor interest much more heavily than those that have drawn a lot of investor attention.  As I've discussed in this series, my favorite progressive transportation stock are alternative forms of transportation such as bike stocks, mass transit stocks (especially bus stocks such as New Flyer Industries (NFI-UN.TO), a long-time favorite), in addition to IT-based Smart Transportation

Below is the sector breakdown of the holdings of PTRP from early August.  For companies such as FirstGroup PLC (FGP.L) which have both rail and bus operations, I split the fund's stock holdings between the relevant sectors.

PTRP Sector.png
For my own portfolio, I would like to see a much higher allocation to buses, a higher allocation to bikes and mopeds, and a lower allocation to natural gas vehicles.  The sizable allocations to "Other Alt-energy" and "Non-green" are the inevitable result of the fact that many companies have operations both inside and outside the transportation sector.

Stock Discoveries

Despite my quibbles about PTRP's sector allocation, combing through its portfolio holdings is almost always a useful exercise.  In this case, I found another bicycle stock that I had missed in my previous list of bike stocks, Merida Industry Co (9914.TW), a Taiwanese bicycle maker, as well as London-listed bus manufacturer Stagecoach Group (SGC.L), both of which I've added to my list of companies I plan to research further, given that they are in my favorite progressive transport sectors.


While not without its faults, The Powershares Progressive Transport Portfolio (PTRP) is a good option for investors looking for a one-stop shop of non-oil related stocks that are better prepared to cope with rising oil prices than the vast majority of the companies that comprise our transportation system.  If you want to invest in the sector, but you do not have much time to devote to stock picking and the complications of purchasing foreign-listed stocks, PTRP is a good choice for you.

DISCLOSURE: Long New Flyer Industries

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.

« August 2010 | Main | October 2010 »

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