Tom Konrad CFA
|Geothermal well photo via Bigstock|
Ram Power (OTC:RAMPF, TSX:RPG) recently provided an update on progress at its flagship San Jacinto project in Nicaragua. This was the project where cost overruns and construction delays last year sent the stock plummeting from over C$2 a share to around C$0.50 a share at the start of the year. The decline has continued, despite the fact that the project seems back on track with the hiring of a new subcontractor, and the stock now trades at C$0.23, a fraction of book value (C$0.91.)
According to the update, a tariff increase was “contemplated by the initial Project concession [and] will allow the Company to recover unanticipated Project costs associated with both the development of the resource and plant construction.” Because it was part of the original agreement, it seems likely that some tariff increase will be granted.
The company estimates that a new tariff would result in an annual revenue increase for Ram of between $8 million and $11 million upon completion of 72MW San Jacinto project expansion, which the company expects in December 2012.
Since any additional revenue from a tariff increase would not involve additional costs, we can expect substantially all additional revenue to flow to pre-tax income, and would amount to an additional 2 to 4 cents per share. I expect the stock to jump on this news, with a much bigger jump in the event that the tariff negotiations are successful. I think successful negotiations are very likely, since management would probably not have announced the negotiations if they had significant doubts.
I think past setbacks at Ram and the high profile problems at rival geothermal company Nevada Geothermal Power (OTC:NGPLF,TSXV:NGP) have led markets to heavily discount Ram’s chances of completing San Jacinto on time and on schedule. In particular, I don’t think markets are considering the fact that geothermal field expansions are substantially less risky than initial development, because much more is known about the structure of the geothermal reservoir.
Ram’s COO of Latin America, Tono Rodriguez says,
With a majority of the engineering and construction completed, the Phase II expansion construction continues at a rapid pace. We fully expect the project to come in on time and on budget, with an expected on-line date in the fourth quarter of this year.
I believe this. The riskiest part of project development is over, but investors are treating it as if it were riskier than ever. While I doubt Ram will see a C$2 share price in 2012, I think a price double is likelier than not upon completion of San Jacinto and a successful tariff renegotiation.
Disclosure: Long RAMPF
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