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August 31, 2012

Two Weeks In Cleantech, 8-31-2012

Jeff Siegel

August 21: What Will Happen to Trina Solar (NYSE:TSL)?

Following the hypocritical “unfair subsidy” complaint against China solar panel producers along with the 31 percent import duty placed on them by the US government, the Chinese have now responded through their Commerce Ministry by stating that the United States must cut support for six government-backed renewable energy programs or face unspecified penalties.

And so continues the trade war, which was launched by the sour-grapes management of SolarWorld,(PINK SHEETS:SRWRF) and supported by those in Washington who have no clue how bad this could be for the US economy, the growth of clean energy, and domestic job creation.

China's Commerce Ministry said that it will now adopt relevant legal measures, demands that the United States cancel part of the measures that violate World Trade Organization rules and give Chinese renewable energy firms fair treatment.

This isn't even close to over.

Meanwhile, and this certainly wasn't unexpected, Trina Solar (NYSE:TSL) just missed on revenues and lowered shipment guidance for FY 2012. It's crazy, I made a fortune on Trina just a few years back. Once one of the most lucrative solar plays in the market, hitting highs in excess of $30 a share, it's now trading for around $4.60.

Although solar's future remains bright, it remains a minefield for investors. And as I've stated in the past, I will likely remain on the sidelines until sometime in 2013, when more consolidation tightens up the marketplace, and more of that glut gets eliminated.

August 22: The Wind Energy Taxpayer Boondoggle

Companies like Gamesa (PINK SHEETS:GCTAF) and Vestas (PINK SHEETS:VWDRY) were once all the rage as the wind energy industry embarked on a tremendous growth trajectory.

But like all industries that experience rapid growth, eventually the party comes to an end, and reality sets in.

Although the wind energy industry continues to grow dramatically all over the world, recessionary headwinds, loss of government support, and dirt cheap natural gas are creating a temporary slow-down. As a result, the wind energy industry is going to have a rough time in 2013.

Truth is, we've seen plenty of indications of this throughout 2012. Particularly with so many wind turbine manufacturers idling or shutting down plants, lowering guidance and laying off workers. In fact, we learned today that Vestas is now set to go forward with its second round of lay-offs this year. This time around, 1,400 folks will lose their jobs.

The company has not made it clear where the jobs will be cut, but you can bet that a sizable portion will be from the US, where there just doesn't seem to be enough support in Washington to extend the wind energy tax credit for another year.

Although I would argue that a one-year extension is of little use at this point.

The best way to move forward on this is to extend the credit for four to six years, with the understanding that it will never be extended again. This will at least give the wind industry enough clarity to make long-term decisions and prepare accordingly. That's not possible when you keep handing out these tax credits every year or two. As well, it'll keep the industry from turning into a decades-long tax payer money sucker. We've already gone down that path with nuclear.  We don't need to make the same mistake twice.

As stated in a 2011 report published by the non-partisan group Union of Concerned Scientists, after decades of government support, nuclear power is still not viable without subsidies.

The report also notes that government subsidies to the nuclear industry over the past 50 years have been so large in proportion to the value of the energy produced that in some cases it would have cost taxpayers less to simply buy kilowatts on the open market and give them away.

And as reported in Forbes. . .

“Nuclear power is no longer an economically viable source of new energy in the United States, the freshly-retired CEO of Exelon, America's largest producers of nuclear power, said in Chicago Thursday. And it won't become economically viable for the foreseeable future.”

Not economically viable?  After 50 years of taxpayer subsidies?!

Now understand, this is not an attack on the nuclear industry. It's merely an observation of how subsidies can become dangerous and addictive. We simply can't afford any more of these decades-long subsidies burdening taxpayers. Not for anything.

I don't know if the wind energy tax credit will be extended before the end of the year.  I am doubtful.  But if it is extended, and it's only extended for one year with the possibility of going through this same song and dance next year, and the year after that, and the year after that - well, we're just wasting valuable time and money.  And that's not going to help anyone.

August 27: How Tesla (NASDAQ:TSLA) Crushes the new Hybrid Lexus

  • The GS 450h, the new generation hybrid version of the Lexus GS 350 looks like it's going to deliver an EPA-rated 31 mpg. This is a 35% improvement over the previous generation, and of course, a complete yawnfest. I get that this is about luxury and not necessarily fuel economy, but I'd happily take a Tesla Model S over a 31-mpg Lexus any day of the week. You can get a Tesla Model S for about $58,000 before the $7,500 tax credit. The 2013 Lexus GS 450h is priced at around $59,000. If I'm dropping $60k on a car, you have to at least give me the same fuel economy as a 50 mpg Prius. The Tesla Model S, by the way, delivers about 160 miles on a single charge. With that, I'd never have to pull into a gas station again. Unless maybe I wanted to grab a candy bar or bag of chips.

  • It was once the world's largest maker of solar cells. But around 2009, Q-Cells reluctantly handed over that title to a handful of low-cost suppliers from China. And today we learn that South Korea's Hanwha Corp (NASDAQ:HSOL) is looking to buy the now insolvent German group. Of course, this comes as no surprise to those of you who are regular readers of these pages. We've been preaching about, and watching unfold, the continued consolidation of the solar industry. We expect to see more of this throughout the rest of this year and well into 2013 and beyond. We believe that by 2015, there will be fewer than a dozen major solar players operating globally. For now, we continue to watch everything play out from the sidelines.

August 28: California - Fiscally Responsible?

Although California tends to be a punching bag for fiscal irresponsibility, such rhetoric isn't always honest. California, just like every other state in the nation, has its fair share of waste. This is certain. But thanks to a plan designed to reduce petroleum consumption in fleet vehicles, the Golden State has successfully slashed its petroleum use by 13 percent compared to a 2003 baseline.

Under Assembly Bill 236, California will reduce or displace petroleum consumption by 10 percent by 2012 and 20 percent by 2020. Today we can see that the state is certainly on its way to reaching that goal.

Some of the actions that have enabled California to come this far include the following. . .

  • In 2009, California eliminated 3,397 of the state's oldest and most fuel inefficient passenger vehicles.

  • Also in 2009, the state reduced vehicle miles traveled (VMT) by eliminating non-mission critical VMT. This was done by eliminating 2,121 vehicle home storage permits.

  • In 2010, California restructured the lease rate of its rental fleet by separately billing state agencies for their fuel. As a result, these agencies began actively managing their fuel usage internally.

  • In 2011, the state, along with Coulomb Technologies, installed 24 Level 2 fast-charge charging stations at five separate Department of General Services parking facilities.

  • In 2012, Governor Brown issued an executive order for California's state vehicle fleet to increase the number of its zero-emission vehicles through the normal course of fleet replacement so that at least 10 percent of fleet purchases of light-duty vehicles be zero-emission by 2015, and 25 percent by 2020.

  • Also in 2012, California directed state agencies to order solar reflective colors when they acquire new light-duty vehicles. This enables a vehicle's air condition system to work less, thereby reducing fuel consumption.

Quite frankly, this really should be used as a model for other states. There's no doubt that a significant reduction in petroleum use serves to provide a budgetary buffer – particularly in these tough economic times that are only going to get tougher as inflation takes hold.

This also gives states the opportunity to get aggressive on petroleum reduction without relying on the heavy hand of the federal government.

That being said, this type of thing should also be done responsibly. California has unfortunately relied on the utilization of biodiesel and ethanol to help it reach its goals. Long-term, this is not economically or environmentally sustainable. Certainly it would be nice to see more natural gas and electricity serving as fleet fuels in the future.

August 29th: Wall Street Journal Misinforms Investors about Electric Cars

Jim Jelter over the Wall Street Journal wrote his obligatory electric vehicle-bashing piece right on schedule.

After it was announced that GM has temporarily suspended production of the Volt for a month in order to address both an oversupply issue and to prepare for production of the 2014 Impala, Jelter wrote that he didn't buy it. What's to buy?

We went through this song and dance back in March. GM temporarily halted production of the Volt due to an oversupply, and the anti-EV brigade ran to tell everyone that electric cars, including the Volt, were dead. Meanwhile, since that date, nearly 11,000 Volts have been sold.

This may not seem like much. And it's not. In fact, it's well below targets. But let's revisit some other numbers from previous disruptive vehicle technologies.

When Toyota first launched the Prius Hybrid in 1997, the Japanese automaker sold only 3,000 units. GM sold 7,671 units in its debut year. So in its first year, GM sold 4,671 more units of a plug-in hybrid electric vehicle.

And look at the all-electric Nissan LEAF. In its first year, Nissan sold more than 20,000 units. And let me remind you that the LEAF carries with it the issue of range anxiety – something Prius owners never had to deal with. So essentially, we're talking about a vehicle that requires the driver to make some pretty major changes in operating and fueling behavior.

Anytime you ask the consumer to do something differently than he's done for years, it's a monumental task. Yet more than 500% more units of the Nissan LEAF were sold in year one compared to the Toyota Prius in its debut.

Today, Toyota has sold more than 3 million units of that particular vehicle.

Jelter says consumers aren't embracing electric cars. But the data suggests otherwise.

I'm not sure if ol' Jimbo thought electric cars would bust out of the gate, selling millions in a matter of years. But I would suggest he, and other EV haters take a look at previous technologies that took decades to develop – but are now standard for most Americans. Cell phones, high-speed Internet. Hell, even what is now the outdated conventional internal combustion vehicle.

It was in 1903 when the president of the Michigan Savings Bank told Henry Ford's lawyer that the horse was here to stay, and the automobile was only a novelty – a fad. We know how that one worked out.

Of course, the Volt story was really just used as a segue for an attack on the latest fuel economy standards that'll take our CAFE up to 54.5 miles per gallon. Claiming that it will tack on another $3,000 to production costs, the new standard is being vilified. Never mind the fact that by 2025, when the standard will be reached, 87 Octane will likely cost you anywhere between $7.00 and $9.00 a gallon.

Now I fully admit, I rarely agree with much government intervention in these situations. Quite frankly, perhaps the market can get us to the 54.4 mpg fuel economy standard by 2025 on its own. But being that this really is a matter of national security, I don't see much of a downside to this new CAFE standard. I'd certainly rather take these types of steps to displace foreign oil, then keep our military in the Middle East to protect and secure oil supplies.

Of course, none of this really matters. At this point, partisan slavery always wins out over rational policy. And while I wish guys like Jelter would stop contributing to the illusion that electric cars are failures, I at least give him credit for acknowledging that, as a nation, we are struggling to get long-term planning in place – because of politics. Following on his brief coverage of Romney's joke of an energy plan, Jelter writes. . .

So what is it going to be? More regulation or less?

This is exactly the kind of political sparring that drives corporations crazy. What one party puts in place, the other seeks to remove. As long as their so-called principles leave no room for compromise, regulatory matters are doomed to lurch back and forth with every election. This stifles long-term planning and kills investment.

I couldn't agree more.

Sadly, there seems to be no middle ground. And while the Wall Street Journal will continue to publish it's anti-EV rhetoric – which, quite frankly, is incredibly unpatriotic seeing as EVs require not a single drop of Saudi oil to operate, left-leaning rags will continue to sing the praises of over-regulation, which absolutely inhibits our ability to kick OPEC to the curb.

Neither are doing us any favors.

That, my friends, should make this a national security issue, not a partisan one.

August 30: Is Suntech (NYSE:STP) a Giant Fraud?

  • Yesterday, an Italian court filed criminal charges against an investment fund controlled by Suntech Power Holdings (NYSE:STP). The charges claim Suntech illegally built solar farms to take advantage of state subsidies. If the charges stick, about $100 million in subsidy-backed solar farms could be dismantled. This comes on the heels of the world's largest solar panel maker getting hit with a class action lawsuit that claims the company didn't reveal that a Global Solar Fund executive (and shareholder) used $700 million in fake German bonds to help guarantee some of the fund's financing. And just when you think it couldn't get worse, Suntech is now desperate to land some financing to cover a convertible bond due in early 2013. Suntech has certainly had better days. 
  • In more positive solar news, it looks like India's making new moves in the solar space again. According to Tarun Kapoor, the joint secretary of the Ministry of New and Renewable Energy in India, India may soon auction about 30 percent of the solar projects it has planned to be online by 2017. This would double the nation's solar capacity. In total, India is aiming for 20 full gigawatts of solar by 2022. Following India's blackout last month, solar got a fresh coat of shine. Considering the country currently relies on coal to generate more than half of its electricity, and coal shortages have India on high alert, this isn't surprising.

DISCLOSURE: No positions

Jeff Siegel is Editor of Energy and Capital, where these notes were first published.

August 30, 2012

The 6 Hottest Ways to Alleviate Food vs Fuel

Jim Lane

With the US drought, food vs fuel has returned as an issue.
What alternatives are scientists, entrepreneurs developing to take us beyond the old debate?

With the US drought, food vs fuel has returned as an issue.

What alternatives are scientists, entrepreneurs developing to take us beyond the old debate?

In the past week we published a report that the chairman of Nestle, Peter Brabeck-Lemathe, has called anew for a ban on making biofuels from feedstocks that can also be used in food production.

The backdrop for Brabeck’s comments is the US drought, which is causing sharp falls in corn yields.

Now, there are bound to be those who shrink from taking direction on how best to feed the world from the makers of Chocapic breakfast cereal, Wonka bars and Hot Pockets – who will regard the Nestle message as self-serving and transparently aimed at shifting product margins.

But many others agree that food producers should have the first (or only) call on these feedstock – a popular meme this week on Twitter has been “why should people go hungry so rich men can have fuel for their cars?”

It’s an intuitive concern for most Westerners, who are highly urbanized, and exposed to agriculture via the grocery store. They experience the impact of rising prices in terms of their costs, not their returns on investment.

Not so, for the least developed countries. There, the most exposed portion of the global population, in terms of nutrition and all the ills of extreme poverty, tend to be subsistence farmers who are driven into misery not by low US crop yields, but low commodity prices.

What has driven many of them off the land, and into the cities where they are badly exposed to US grain cycles, is the poor returns from subsistence farming that low producer prices bring, by making technology improvements difficult if not impossible to make cost effective.

As a result – we are usually at an impasse. Agriculture pointing to the benefits of rising prices for key feedstocks, consumers pointing to the pitfalls. Hence, the food vs fuel debate.

And so the debaters debate, and debate, and debate. Meanwhile, entrepreneurs and scientists are giving us something even more precious than resolution of that debate. Which is to say, options and alternatives.

Today, we look at 6 technologies and strategies that address food vs fuel, and offer alternatives.

1. Feedstock diversification.

In biofuels, it is more talked about – the push beyond corn starch and cane sugars into corn stover, sugarcane bagasse, woods and forestry residues, animal wastes, algae, municipal solid waste, and energy grasses as well as new inedible oilseed crops such as jatropha, carinata and camelina.

But there are opportunities for food manufacturers as well.

Take for instance Solazyme (SZYM) Roquette Nutritional’s whole algalin flour. According to the makers, it provides “an outstanding solution for improving nutritional profiles in many applications, such as bakery, beverages and frozen desserts. Acting as a whole food ingredient, Whole Algalin Flour is very low in saturated fat, is trans-fat free, cholesterol free, and considerably reduces calories, as well as provides fiber and protein, while providing the same overall mouthfeel and consistency as a full fat food.”

Much of the underlying problem of food vs fuel is that multiple sectors have fallen in love with the same feedstock – frankly, that’s Nestle’s problem, and the problem of many biofuels producers. If the US is addicted to oil, many producers are addicted to corn or cane, and both sides benefit from diversifying where possible.

2. Increasing yield per ton.

There are low-yield biofuels technologies – and high-yield, in terms of productivity per ton of biomass. At the high end, consider for example Coskata’s 105 gallons per ton, and ZeaChems 135 gallon per ton yields. Compared to a technology that yields, for example, 60 gallons per ton (and they are out there), that can reduce feedstock requirements by half.

But there is more than just picking the right technology. Great technologies are those that optimize their yields. For example, the US ethanol industry used to have yields in the 2.5-2.7 gallons per bushel range. Today, 2.9 gallons per bushel is state of the art at many facilities, and POET has found ways to increase that to 3.0 gallons in some cases.

Continuous improvement is what has analysts excited over KiOR (KIOR), too – when first deployed at demonstration scale, the technology was yielding in the mid-60 gallons per ton, based on Southern Yellow Pine. But the company expects to reach 92 gallons per ton by mid-decade – nearly a 40 percent improvement.

3. Reducing water intensity.

When drought comes, water is more precious than ever. That’s why it was big news this week when Syngenta announced that it has signed trial agreements with Golden Grain Energy (GGE) of Iowa and Siouxland Ethanol of Nebraska to demonstrate the value of Enogen grain. Both ethanol plants will complete a three-month trial with the specialized corn grain bio-engineered to allow ethanol production to be more efficient, cost effective and better for the environment.

Golden Grain Energy and Siouxland Ethanol will begin their trials in the spring of 2013 with Enogen grain harvested from acres planted this past growing season. Following the trial, each plant will analyze data to discover the efficiencies created from Enogen trait technology. Pending trial results, each plant will then enter into negotiations with Syngenta to sign a commercial agreement.

As we wrote last year in profiling the technology:

“So, you get around a 10 percent lift in total capacity (from the speed-up), plus energy, water and carbon savings.

For example, in a 100-million gallon plant, efficiency improvements enabled by Enogen grain can save 450,000 gallons of water, 1.3 million KWh of electricity and 244 billion BTUs of natural gas, and carbon dioxide emissions by 106 million pounds.

That works out to around 8-10 cents per gallon in savings – that can be shared by the grower, the plant, or the customer.

4. Supertraits and super yields.

As we pointed out in 7 paths of the New Agriculture:

If new crops are unavailable, and residues exhausted, why not try to get more productivity out of the overall plant. In the old agriculture, there was double-cross hybridization to put more vigor into a plant, and there have been additional inputs such as added nitrogen, to assist with the growing cycle.

But in the new agriculture, there are traits that confer drought-tolerance, heat-tolerance, pest- or pesticide-tolerance.

Just last week, the U.S. Department of Agriculture deregulated MON 87460, Monsanto’s first-generation drought-tolerant trait for corn.  Drought-tolerant corn is projected to be introduced as part of an overall system that would offer farmers improved genetics, agronomic practices and the drought trait. Monsanto plans to conduct on-farm trials in 2012 to give farmers experience with the product, while generating data to help inform the company’s commercial decisions.

The drought-tolerant trait is part of Monsanto’s Yield and Stress collaboration in plant biotechnology with Germany-based BASF.

In specific bioenergy crops, companies such as Ceres (switchgrass, energy cane in the Blade energy crop family) and Mendel Biotechnologies (miscanthus) have been garnering the most attention as they bring new traits forward for the new integrated biorefineries utilizing energy crops.

5. Utilizing Waste Lands.

If all the above strategies are already used, or unavailable, why not bring lands into production that have previously be un-productive. This is closely related to the “super traits” pathway – in fact, many of the same companies, such as Ceres (CERE), are hard at work on traits such as salt-tolerance that will open up lands with previously unsuitable soils or water sources. But there are also companies such as SG Biofuels, working on developing non-food, extremophile crops like jatropha that can better handle poor soils and low rainfall, through its JMAX portfolio.

And, there’s microalgae from the likes of Sapphire Energy and solar fuels from the likes of Joule Unlimited. Yields in the 3,000 to 15,000 gallons per acre range – compared to around 400 this year for US corn ethanol yields (or closer to 500 in a normal rain season).

As we profiled in Natural Gas and electrofuels: one-stop shopping for energy independence:

Electrofuels use microoganisms — typically bacteria — to directly utilize energy from electricity and do not need solar energy to grow or produce biofuels. ARPA-E’s Electrofuels program is seeking to take advantage of those properties to create processes that are up to 10 times more energy efficient than current biofuel production methods. Back in 2010, they funded 13 projects that will attempt to bring a feasible technology forward to achieve those productivity levels.

The gallons per acre range – the numbers could be truly astronomical given that these can be produced them in three-dimensions to achieve efficiencies of acreage. Given that they utilize electricity rather than photosynthesis, production units can be stacked. The limiting factors are in the costs of engineering and constructing stacks, not in available light per acre.

6. Improving results from photosynthesis.

One of the more exciting entries in recent years is the recent class of technologies funded in the ARPA-E PETRO project.

PETRO aims to create plants that capture more energy from sunlight and convert that energy directly into fuels. ARPA-E seeks to fund technologies that optimize the biochemical processes of energy capture and conversion to develop robust, farm-ready crops that deliver more energy per acre with less processing prior to the pump. If successful, PETRO will create biofuels for half their current cost, finally making them cost-competitive with fuels from oil. Up to $30 million will be made available for this program area.

More on the PETRO project here.

The bottom line

Food vs fuel, for most, comes and goes with price cycles. We see it as a transitory debate, usually focused on a handful of feedstocks that producers of food or fuel have become overly dependent on. We see it in oil, too.

To us, diversity is the solution – and diversification the strategy, and scientists and entrepreneurs must ultimately solve the debate by ending the need for it.

Disclosure: None.

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

August 27, 2012

Don’t Let Waste Go to Waste

Marc Gunther

trash canReduce. Reuse. Recycle.

It sounds simple. It’s not.

Just ask Bill Caesar, who runs the recycling and organic growth units of Waste Management (WM), America’s biggest trash company, which has $13.3 billion in revenues last year.

It’s hard to get many cities and towns to embrace recycling.

It’s hard to get homeowners to figure out which plastics go into which bin.

It’s expensive to build out the infrastructure needed to separate materials, and ship them to customers.

And now, to make matters worse, the prices that buyers are willing to pay for cardboard, used paper, metals and plastics have fallen, on average, by about a third. A ton of solid waste used to yield about $150 in recycling revenues, more or less. Today, it’s closer to $100. Here’s a chart.

“The commodities are global in nature,” Bill told me the other day. “When the French stop buying things, the Chinese stop making things, and when that happens, they need fewer boxes and the price of recovered paper in the US falls.”

Who would have thought that the EU’s troubles would slow progress towards zero waste?

Bill and I met this week to after he spoke at Wastecon, the big convention organized by SWANA in the Gaylord National Resort and Convention Center outside Washington, where I cam across the recycling robot, above. (Of course you know SWANA as the Solid Waste Association of North America. Some time ago, garbage became solid waste and the city dump turned into a sanitary landfill.) Waste Management still takes most of the garbage municipal solid waste that it collects to dumps sanitary landfills–it owns more than 250 active landfills–but Bill’s job is keep stuff out of the ground. His unit looks for ways to extract more value from waste, either by recycling, or composting organic waste, or turning waste into energy.

This is a big deal, and big shift for the company.  [See my 2010 FORTUNE story Waste Management's New Direction.] Dave Steiner, the company’s CEO, likes to say: “Picking up and disposing of people’s waste is not going to be the way this company survives long term. Our opportunities all arise from the sustainability movement.”

Still, the shift is happening slowly. Waste Management recycled about 10 million tons of materials in 201o, its latest sustainability report says, up from 8.5 million in 2009. Still, well over half of the garbage collected by Waste Management–about 70%, Bill estimates–still goes to landfill. The company’s goal is to recycle 20 million tons a year.

Today’s low commodity prices won’t change Waste Management’s core strategy, which is to extract as much value from the waste stream as possible, Bill says. Commodity prices will rise again. Commercial and residential customers want the company to recycle. Energy prices are likely to go up, so the company’s bet on waste-to-energy technologies should pay off.

Bill Caesar
Bill Caesar

“The long term trends are good,” Bill says. “We’re continuing to build facilities. We’re not going anywhere.”

Waste Management’s investment strategy, which he oversees, focuses on smaller companies that can help recover energy or materials from waste. It has a portfolio of more than two dozen acquisitions, joint ventures or project investments, some of which will surely fail.

“It’s advantageous to us to invest in a series of companies at small scale because we don’t know what’s going to work,” Bill says. “Our intention is to learn, and once believe there is something there, be in a position to commercialize those offerings.”

For example, Waste Management owns a stake in a Harvest Power, a Massachusetts-based company that processes organic waste (food, yard waste, etc.) to make  renewable energy and soil, mulch and organic fertilizer. It’s also an investor in Agilyx, which takes difficult-to-recycle waste plastics and turns them into crude oil, essentially reclaiming the hydrocarbons used to make the plastic. Other companies in which Waste Management has invested include Enerkem, whose technology converts waste into ethanol and renewable chemicals, and Fulcrum BioEnergy, which turns household garbage into transportation fuels.

While these are all young companies that still need to prove themselves, what’s striking is how much innovation is going on in garbage industry. Wisely, Waste Management has decided that rather than stick with its old model of taking waste to the landfill, and risk being challenged by others, it is seeking to disrupt itself.

Bill told me that’s why he was excited to join the company. He was hired in 2010 as chief strategy officer, after more than a decade as a consultant at McKinsey & Co. Before that, and before business school at Duke, he worked for the CIA and the state department as a Russian specialist and spent a year in St. Petersburg after the collapse of the former Soviet Union. So he knows that big changes can happen, and they create opportunities.

“This industry is at an inflection point,” he says, “and that doesn’t happen very often.”

DISCLOSURE: I was paid to moderate a sustainability event for Waste Management last February.

Marc Gunther writer for Fortune, GreenBiz and Sustainable Business Forum co-chair, Fortune Brainstorm Green 2012 and a blogger at www.marcgunther.com.  His book, Suck It Up: How capturing carbon from the air can help solve the climate crisis, has been published as an Amazon Kindle Single. You can buy it here for $1.99.

August 24, 2012

Jobs at Gevo

by Debra Fiakas CFA

Management teams at the helm of public companies often shade the realities of their competitive or strategic situation, alternately painting better circumstances or downplaying declining fortunes.  There are myriad ways of giving management’s guidance a reality check.  Renewable bio-chemicals developer Gevo, Inc. (GEVO:  Nasdaq) is on my “watch list” as one of the more interesting companies in the Beach Boys Index.
Gevo’s financial results missed the consensus estimate in both the March and June 2012 quarters, but management made claims of important victories.  Gevo has won important decisions in the disagreement between Gevo and Butamax Advanced Biofuels over process technologies related to the production of isobutanol.  Butamax had alleged infringement of its patents by Gevo and had attempted to halt Gevo’s continued progress through an injunction.  Gevo recently took the offensive, asking a federal court for a declaratory judgment on the validity of a Butamax patent. 

Gevo’s confidence extends beyond the court room.  The Company has continued to line up technology and distribution partners as well as customers for its renewable chemicals products.  Recent Gevo presentations include slides with a collection of impressive corporate logos  -  Sasol (SSL), Total, Toray, United Airlines and CocaCola among others.  

Management appears to be ready to put its money behind its public pronouncements.  The corporate web site lists several open positions for technicians, including molecular biologist, biochemist, analytical chemist and fermentation specialists.  All are ostensibly for Gevo’s homebase in Englewood, Colorado and all appear to be focused on development activities rather than commercial production.  It would be more comforting to see open positions for the type of activities that would lead directly to revenue.  Then perhaps we could dial in higher sales estimates than what is reflected in the current consensus estimate.  The bevy of research analysts currently covering Gevo think revenue is likely wind up at half the level last year.

Gevo is not immune to the unfolding economic reality for corn-based biofuels and chemicals.  That could be a problem.  Without a significant increase in sales volume or prices, Gevo may not be able to make a dent in its current cash burn rate near $12.0 million per quarter.  Given the $38.6 million on the balance sheet, Gevo appears to have only enough resources to last through the first quarter 2013.

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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  GEVO is included in Crystal Equity Research’s Beach Boys Index.

August 21, 2012

No Eeyores for KiOR

Jim Lane

Analysts are bullish as KiOR’s (KIOR) drop-in biofuels technology transitions to commercial phase – what factors are driving all the good vibes?

There are a lot of Eeyores around the advanced biofuels space these days – well, around the United States and to a great extent the EU as a whole, really. Gloomy, pessimistic, chronically depressed.

Investors have been, in a similar mood, hammering advanced biofuels and biobased material stocks – in some cases to within a few bucks of cash on hand.

KiOR, by contrast, has been generally able to create and sustain its own weather, and has become a rare oasis for analyst optimism. In today’s Digest, we look in depth at the data behind the cheers.

In Texas, the company this week announced a second quarter 2012 net loss was $23.0 million, or $0.22 per share, compared to a net loss of $16.8 million, or $0.16 per share, for the first quarter of 2012 — but it was hardly the financials that prompted a wave of bullish reports from a once-bitten, twice-shy set of equity analysts who rarely hand out lollipops these days for early stage, publicly-held, advanced biofuels companies.

More about KiOR

KIOR has developed a proprietary process, biomass fluid catalytic cracking. BFCC rapidly produces renewable crude oil, which is converted via standard refinery equipment (hydrotreating) into gasoline, ultra low sulfur diesel, and low sulfur fuel oil.

In many ways, KiOR’s technology resembles a time machine – compressing the timeline by which Mother Nature accomplishes the transformation of biomass into fossil crude oil over millions of years, into a couple of seconds.

As a thermochemical technology, it has optionality on feedstock – initially, the plant will use southern yellow pine, which according to analyst option has a sustainable surplus at this time of 59,000 tons per day – enough at 90 gallons per ton to support – all by its onesey – 1.9 billion gallons of fuels. The other main input? Abundant (and highly affordable) natural gas.

Moreover, the Renewable Fuel Standard (RFS2) mandate of 36B
gallons by 2022 should support premium pricing. Scale is up 400x, to 10 TPD, and a 500 TPD plant should be on line in H2:12. We model thirty six 1,500 TPD plants from 2014 to 2021, and licensed partners should add 12 more.

A next-generation catalyst – boosting nameplate capacity by up to 20 percent?

The process produces liquids – which are hydrotreated into fuels; gases, which are burned to help provide process electricity; and coke, which is burned to provide process heat and regenerate the catalyst. However, a new catalyst, KiOR, said, may change the ratios and allow plant to produce up to 20 percent higher throughput. More about that before year-end.

Yields, now and later

In early 2009, yields were in the 17 gallons per ton range, but have improved to 67 at the present time and are targeted to reach the high 80s by 2014 en route to an eventual target of 92 gallons per ton.

Costs, now and later

For 2013, feedstock is modeled by analysts Rob Stone and James Medvedeff at Cowen & Company at $0.29 for natural gas (per gallon produced), with an expected price of $0.52 per gallon by 2022. Yellow pine is modeled at $1.07 per produced gallon in 2013, dropping to $0.89 per gallon in the long term – that equates to a $70-$80 range in the per-ton cost of wood.

Bottom line – today at plant #1 with 250 tons per day of wood biomass arriving at the time of commissioning, costs will be in the $16.27 range per gallon, according to Cowen & Company, of which the marginal costs are $8.97 per gallon.

With scale-up, total cost per gallon drops to $5.95 by 2013, $3.73 per gallon in 2014, and the magic sub-$3.00 figure in 2015 when it is expected to reach $2.62 per gallon at full-scale.

Scale, now and later

For now, KiOR is commissioning its first commercial-scale facility, which each ultimately have a 62.5 million gallons capacity (based on 1500 tons per day).

Production this year is expected to be in the 800,000 gallon range as plant #1 commissions, rising to 10.2 million gallons in 2013, and rapidly scaling up to 273 million gallons by 2016 en-route to 2.3 billion gallons by 2022, according to Cowen’s ramp-up thesis.

When will we know?

There are three key inflection points for KiOR to watch.

This year – plant #1 is expected to complete commissioning this year – watch that for a confirmation that the technology works as planned at scale.

2014 – plant #2 is expected to be up and running by the end of 2014 – watch that for confirmation of the company’s proposed timeline for new plant construction and financing, and ramp-up towards the 2 billion gallon marks by the early 2020s.

2016 – the company is expected to go sub-$3.00 in terms of cost per gallon for its fuels – thereby reaching the expected parity point with fossil fuels. If it reaches that milestone – essentially, as an infrastructure-compatible, made-at-home, drop-in fuel it should be fully independent of the Renewable Fuel Standard in terms of needing a mandate to assure a market.

Analyst opinion

Rob Stone and James Medvedeff, Cowen & Co.: “A next-generation catalyst may boost nameplate capacity up to 20%, reducing future fixed and operating cost. However, potential start-stop operations and ASP discounts during the initial ramp reduce our estimates. First Columbus revenue, more yield details, Natchez capex and offtake agreements should provide substantial triggers to support fundraising in Q4. We see 80%+ upside potential in KIOR rel. to the mkt in 12 months.”

Mike Ritzenthaler, Piper Jaffray. On the call, management stated that they expect Columbus to cost ~$213 million, 4% below the estimate on the 1Q11 call in May. The company has set its sights on completion of the design package for Natchez by the end of FY12, and has set aside $13 – $14 million for that purpose. Management affirmed that Natchez is tracking for a late 2014 startup. In addition, management announced that they expect lower coke production with improved catalysis, enabling 20% more throughput and lower capital intensity. We maintain our Overweight rating and $20 price target.

Pavel Molchanov, Raymond James: “Within the context of our broadly favorable view on Gen2 biofuels, KiOR provides investors with a pure-play on cellulosic biofuels. As such, KiOR is well-positioned to address the “food vs. fuel” concerns and price volatility surrounding sugarcane and corn. We also like the versatility of KiOR’s biocrude – the ultimate “drop-in” biofuel. Balancing our positive view on the company’s technology platform with scale-up and project financing risks, we reiterate our Outperform rating. Shares are currently trading at 63% of our DCF estimate, and our target price of $11.00 is based on a 90% multiple of DCF. Despite the more than 50% upside to our target, KiOR’s distant outlook for profitability (late 2014 at the earliest) keeps us from a Strong Buy rating.

Disclosure: None.

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

August 19, 2012

A123′s Deal With China’s Wanxiang Would Value the Stock at $0.55 a Share

Tom Konrad CFA

A123 Systems battery cell products (Source: A123)

 It was no secret that A123 Systems (NASD:AONE) was desperate for money.  It’s also no secret that Chinese companies are interested in buying Western companies, especially when they can acquire useful technology in the deal.  So this morning’s announcement that Wanxiang Group Corporation, a Chinese largest autoparts manufacturer which has significant US operations, had signed a non-binding memorandum of understanding to invest up to $450 million in A123 through a combination of bridge loans, convertible notes, and warrants seems like good news for both companies.

A123′s stock rallied initially on the deal, but has since fallen back.  As I write, the stock has fallen back to $0.48, up only one cent from yesterday’s close.  The lack of gain puzzled me, especially since A123′s liquidity problems are the main reason it’s been trading at it’s current depressed level at 37% of book value ($1.27 a share.)

While regulatory and shareholder approvals need to be met, and some existing convertible notes will need to be repurchased and retired, it seems likely to me that this deal will go through.   Although the US government has a track record of paranoia when it comes to the Chinese,  regulators have to know that A123 will likely go bust without a big injection of liquidity, and American investors have not exactly been pounding on A123′s doors.

If the deal is not blocked, I expect Wanxiang will make the whole investment.  After all, this investment for Wanxiang is almost certainly about acquiring A123′s technology and business contacts at a discount, not about short term cash flow.  Weiding Lu, CEO of Wanxiang Group, said,

A123 offers industry-leading technology for vehicle electrification and grid-scale energy storage, as well as strong manufacturing and systems engineering capabilities in Michigan and Massachusetts. We think this creates important synergies with Wanxiang, which has been involved in this field for 12 years and has strong R&D and manufacturing capabilities in China, especially as we continue to expand on our strategy of investing in the automotive and cleantech industries in the U.S.  This MOU is the first step toward a longer-term agreement through which we plan to build on the foundation A123 has established in the U.S. and help expand the company’s capabilities both domestically and internationally, which we believe would create long-term value to the customers, investors and other stakeholders of both companies.

Since I think Wanxiang is likely to make the full investment, I think the price they are likely to pay is a good short term target for AONE stock.  As long as the stock is lower than that, Wanxiang will have an incentive to buy the stock on the open market, rather than exercising their conversion option or warrants, which should provide price support.

Reading the details of the release, $75 million of the investment is to be a short term bridge loan, which does not involve the purchase of A123 stock.  The rest is to consist of $200 million in convertible notes (which can become stock) and $175 million which might be invested with the exercise of warrants.  An exercise of all these warrants and the full conversion of the convertible notes would result in Wanxaing controlling 80% of the company, or about 680 million shares, based on the 170 million shares A123 had outstanding at the end of July.  Doing the math, and assuming that the initial $75 million bridge loan is not used to purchase shares, that’s 55 cents a share.

The current price of $0.48 makes a certain amount of sense, but unless this deal is blocked, Wanxaing has indicated its interest in buying A123 at $0.55 a share, which should put a nice floor under the share price, along with a lot of potential upside as the deal gives A123 new financial stability to execute on existing opportunities and tackle new opportunities in China.

It may also be the case that the conversion price of the notes is not the same as the exercise price of the warrants.  If that’s the case, then some of the expected note conversion or warrant exercise would have to take place above $0.55 a share, and this would in turn increase Wanxiang’s incentive to buy stock on the open market.

Given all that, I just bought a little A123, which I expect to rally as the various barriers to this deal are overcome.  It’s still a small investment, since there is still no guarantee that the deal will go through, and if, for some reason the deal does not got through, AONE will almost certainly continue its slide.

UPDATE: After reading this article, I decided that Petersen is right, and any investment in A123 bears careful watching.  Since I was going on vacation, I sold my stake at a small profit.

Disclosure: None.

This article was first published on the author's Forbes.com blog, Green Stocks.

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

August 17, 2012

First Solar Goes to Thailand; US Stays in OPEC's Grasp: The Week In Cleantech, 8-17-2012

Jeff Siegel

August 15: First Solar (NASDAQ:FSLR) Moves to Thailand

In an effort to continue its steady expansion, First Solar (NASDAQ:FSLR) has set up a Thailand operating subsidy and has officially opened its Bangkok office.

The Thai subsidiary is charged with the responsibility of expanding FSLR's market for utility-scale solar projects. Senior Manger of Business Development told reporters. . .

“The long-term energy fundamentals in Thailand are very favorable for a solar power solution to meet their growing energy needs, and we will continue to invest here as part of our strategy to develop sustainable, utility-scale solar markets.”

Yesterday, my colleague R.T. Jones commented on how non-China solar companies are competing against China's solar dominance. This could be seen as an example of that. Although to assume China's solar industry is also not sailing through rough seas is naïve.

In fact, a Reuters report that came out yesterday indicated that as solar panel prices continue to fall, China solar companies will continue to struggle with increasingly heavy debt loads. We've been saying this for almost two years now!

So what's next?

Major consolidation.

Mark my words, although I remain extremely bullish on the long-term outlook for solar, we will not have much more than a dozen or so profitable solar companies operating globally after 2015.

August 16: Ford (NYSE:F) Ready to Dominate Electric Car Market

  •     Ford (NYSE:F) announced yesterday that it now has more than 1,000 engineers working on vehicle electrification, with dozens more to be added next year. The company is also now doubling its battery-testing capabilities in hopes of accelerating its hybrid and electric vehicle development by 25 percent. The Focus Electric is Ford's first all-electric offering for the masses. It's actually a pretty sweet car, although like most electric cars, it is a bit pricey. To be honest, I think the company's actually going to get a lot more traction from its C-Max, which is a crossover SUV that comes in both conventional hybrid and plug-in hybrid electric models. The former offers a pretty impressive 47 mpg, and the latter offers equally impressive fuel economy with a 20-mile all-electric range as well. Another reason I think Ford's got a winner here is the price. The conventional hybrid model goes for about $26,000. Competitive with the Prius V (The Prius version of an SUV crossover), but offering a bit more room and luxury. And the electric model comes in at about $34,000. It does qualify for a $3,740 federal tax credit, which brings it in around the $30,000 mark. Not bad for a plug-in model, especially considering the roominess of the vehicle. I definitely think Ford's going to crush it on the C-Max.
  •     CX Solar Korea has announced it's leading a group of investors that will pony up nearly $1 billion to build a massive solar farm in Pakistan. The $900 million project is set to begin with a 50 megawatt installation, with follow-on projects that'll reach 300 megawatts by 2016. CX Solar is now in talks with panel suppliers. Since the company will be using both conventional crystalline silicon and thin film, it'll be interesting to see if First Solar (NASDAQ:FSLR) gets a call about the latter. Although, as we reported earlier this year, Pakistan has been turning towards cheap Chinese solar panels to combat high electricity tariffs and dependence on diesel generators, which cost more to operate than solar. Pakistan has also been moving forward on the wind power front. Back in May, the Islamic Development Bank and the Asian Development Bank came to an agreement on a $133 million financing deal for two wind projects in that country.
  •     A couple of years ago I read a report that showed China boasting massive growth in wind farm construction. The problem, however, was that many of these farms were not connected to the grid. And in fact, weren't even close to being connected. Talk about a chicken and egg situation gone bad. But this morning, we learned that China's wind power capacity actually linked to the grid has increased by 87 percent. This year, just over 50 gigawatts of wind were connected, thereby moving China closer to its goal of 100 gigawatts by 2015, and 200 gigawatts by 2020. Although few take China at its word these days, I do believe the Middle Kingdom isn't going to just let massive groupings of turbines sit and rust. The nation is desperate for more power, and I have no doubt that in about eight years, there will be 200 gigawatts of wind power helping to keep the lights on in China.

August 17: Obama and Romney Slow Our Escape from OPEC

This is why I hate politics. . .

On the table is a plan to increase the Corporate Average Fuel Economy (CAFE) standard to 54.5 mpg by 2025.

Although automakers put up a stink early on, most have since signed on to get this done. However, the Obama administration is now dragging its feet due to “continued opposition.” Gee, I wonder who opposes making our vehicles more fuel efficient?

According to a spokeswoman for the National Highway Traffic Safety Administration, the rule is undergoing inter-agency review and the process is expected to be completed soon. And by soon, she means after the election. Because the truth is, the Obama administration doesn't want to kick the GOP beehive any more than it has to before November.

Now It's no secret that Mitt Romney opposes the future CAFE requirements. He claims this is an example of an over-reaching government, and that he would instead work with manufacturers to find ways to encourage fuel economy on the part of the consumer. What those “ways” are however, are still unknown. He said that trying to have the manufacturer push the product on the consumer – something the consumer doesn't want – is not the right approach.

Yeah, I would love to meet the guy who actually has to work for a living complain about a vehicle that gets better gas mileage. If consumers don't want vehicles that are fuel efficient, than why does every single car commercial on television clearly state the vehicle's fuel economy?

Of course, I get it. It's all politics. I highly doubt that Romney really wants to oppose something that allows us to displace enormous amounts of foreign oil. But you know the drill. It was proposed by this administration, so in an effort to secure votes, he must oppose it.

And that's why I hate politics. It gets in the way of progress.

Now look, if you're you're a regular reader of these pages, you know I'm no shill for Obama either. Quite frankly, I have zero interest in what either side has to say during election time. It's all empty rhetoric and bullshit designed to trick voters into believing that their guy will save us from decades upon decades of lies, deception and an extraordinarily unacceptable amount of fiscal irresponsibility.

But let's be real about the CAFE issue.

At this point, no one is forcing automakers to do anything. They've signed on!

And the bottom line is that by increasing fuel economy standards to 54.4 mpg, American consumers will save $1.7 trillion, and we will be able to displace about 2.2 million barrels of oil per day. Or roughly half of what we currently import from OPEC.

That, my friends, should make this a national security issue, not a partisan one.DISCLOSURE: No positions

Jeff Siegel is Editor of Energy and Capital, where these notes were first published.

August 16, 2012

Energy Recovery: A "Slender" Stock

by Debra Fiakas CFA

Investors who in the small-cap sector are familiar with the profile:  a company with a great invention that ends up with a business narrowly-focused on a particular market or customer group.  If it is a public company, the stock price is equally thin  -  if it trades at all.  Energy Recovery (ERII:  Nasdaq) is one of those slender stocks.
Over the last year ERII has traded in a relatively tight range between $3.50 at the high point and $1.55 on the low side.  The stock is seemingly stranded today 29.4% off the high.  Investors have simply stayed away, barely registering 100,000 shares per day in average trading volume.  While short interest is not particularly high  -  equal to just 10% of shares not held by insiders  -  short sellers have persistently stalked Energy Recovery.

Critics of Energy Recovery had zeroed in on the risks on the desalination market.  While clearly a promising opportunity in the long-term given the shortage of potable water in the world, the desalination market is also highly focused.  Middle Eastern countries rely to a great extent on desalination, but the Arab Spring has slowed progress on new projects.  Another key desalination area, California, has out of the market for the time being by fiscal issues.  Credit for project developers has been difficult during the European debt crisis.    Thus any company that puts all its eggs into the desalination basket is vulnerable.   

All those woes have overwhelmed investors’ enthusiasm even for a product line cloaked as social redeemable.  Energy Recovery produces pressure exchangers that are installed to reduce energy consumption in desalination plants using reverse osmosis technology.  While growing in popularity  -  reverse osmosis now commands at least 40% to 45% of the desalination market  -  it is a process that requires pumping large amounts of seawater through membranes that filter out the salt.  Any process that requires the use of “large” and “pump” together will ring up a big electric bill.  Energy Recovery’s pressure exchange device recaptures energy in the waste brine stream and transfers it back into the incoming stream of seawater.  The action saves 60% of the energy requirement, significantly improving the economics of seawater desalination.

Energy Recovery also has some competition.  First, producers of reverse osmosis systems are continuously tweaking the overall design, trying to find the most energy efficient configuration.  These include IDE Technologies, Hyflux, and Doosan among others.  Producers of the membranes, which are the business end of reverse osmosis action, are also trying to improve the marketability of their membranes with at least a partial fix for energy issue.  Dow Chemical (DOW:  NYSE) leads the membrane market, followed by Nitto Denko’s Hydronautics and Toray.

There are also other types of energy recovery devices.  FlowServe Corp. (FLS:  NYSE) sells Duel Work Exchange Energy Recovery devices or DWEERs for short.  Fluid Equipment Development Company (FEDCO) is a seller of reverse osmosis equipment and has developed energy efficiency solutions.

Any company faced with the twin threats of technology obsolescence and competing products should be scrambling to dig a moat of some kind.  I cannot say Energy Recovery management actually scrambled.  However, they have moved to protect the company through diversification.  Energy Recovery acquired Pump Engineering LLC in 2009, adding turbochargers and pumps to the product line.  The addition has given the company a foot in the door of customers in the oil and gas industry.  Now Energy Recovery can market is energy solution for gas processing systems, which capitalizes on the company’s pressure exchange technology.

I think this is a significant move forward for Energy Recovery, since the oil and gas market is populated by many participants as potential customers.  It is not subject to the same capital and credit market influences that sidelined the desalination industry.  I expect sales to oil and gas customers to help drive the top-line in coming years.

Investors appear largely unimpressed with Energy Recovery’s expansion attempts.  Ever the contrarian, my firm continues to have a buy rating on ERII and our trading guide suggests aggressively adding to positions at prices below $3.00.

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

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

August 15, 2012

Quick Notes on Maxwell Earnings

Tom Konrad CFA

Maxwell Technologies (NASD:MXWL) recently reported second quarter (Q2 2012) earnings.  Revenue growth was sluggish (for Maxwell), up 6% year on year and 1% below estimates.  The culprit was continued weakness in ultracapacitor revenue, which down slightly from Q2 2011 because of weakness in Europe.

Earnings, on the other hand, surprised strongly to the upside, at 9 cents per share, compared to estimates of only once cent, based on strong cost control and improving product mix.  Strong growth in Maxwell’s Chinese hybrid bus and wind turbine businesses continue to drive profits.

Crucially, management maintained their 15% to 20% revenue growth guidance, although now they seem to be putting more emphasis on the bottom end of the range.  However, the stock price fell so precipitously (by about two thirds) in response to lowered growth guidance after the Q1 2012 conference call that I believe further guidance cuts were already priced in.  The rapid stock decline was largely driven by selling by growth mutual funds that are now almost completely divested of the stock.  Simply maintaining revenue guidance this quarter should count as an upside surprise.

Putting this together, those of us who believed that the reduction in revenue growth was, as management said, more of a delay than a loss of future growth are likely to be rewarded with strong stock performance this week.  According to CEO David Schramm in the earnings call, those believers include many Maxwell employees, in addition to the company executives (including Schramm) and board members we knew were buying because of required SEC disclosures.

Naysayers will continue to point to concerns arising from Maxwell’s growing reliance on the Chinese market as its European markets lag.  Those concerns were highlighted by a Wedbush research report by analyst Craig Irwin.  Yet even Irwin told me “Maxwell is most likely not at risk of being outcompeted” in China.  His concern was that Maxwell’s decision to allow a subcontractor to sell own-branded ultracapacitors to customers Maxwell is unable to reach because of Chinese local content rules and other trade barriers increases the risk of direct competition in China.  For Irwin, that increase risk means that Maxwell does not deserve as high an earnings multiple as before, not that he expects Maxwell’s Chinese business to disappear in a puff of smoke, as happened to AMSC. (NASD:AMSC) last year.

Maxwell’s business in China is much more diverse than AMSC’s was (the latter relied on a single customer, while Maxwell is in multiple markets, with many customers in each), and AMSC’s intellectual property was mostly software, while Maxwell’s is its much more difficult to replicate process of manufacturing its ultracapacitor electrodes.

Even with China risk, today’s price of $7.07 fully accounts for Irwin’s low price multiple: His price target is $8, at the low end of the range of analysts, who have targets ranging up to $20, with an average of $15.60.  This leaves a lot of room for rapid price appreciation.

Disclosure: Long MXWL

This article was first published on the author's Forbes.com blog, Green Stocks.

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

August 13, 2012

Codexis, Shell to Part Company

Jim Lane

Codexis expects to lose all of Shell funding, win freedom to operate globally (excepting Brazil). Pyrrhic victory or the necessary price of freedom?

In California, Codexis (CDXS) announced that it expects to obtain rights from Shell to market its CodeXyme cellulase enzymes to other cellulosic biofuels developers, (excluding Brazil) and that Shell will discontinue its $60 million enzyme R&D program, which will result in the loss of 116 full-time jobs, or a third of the company’s staff. Raizen, the Shell-Cosan JV, will remain Codexis’ largest shareholder.

Yesterday, as the company reported Q2 earnings, Codexis CEO John Nicols said that “given the recently announced Exclusive Negotiation Agreement we entered into with Shell, we are expecting and are planning for Shell to deliver notice of a reduction in funding under our collaborative agreement by 48 FTEs effective September 1,” said Nicols. “In addition, although we have not received any formal notice from Shell, we do not currently expect any continued Shell FTE funding after October 31.”

At the same time, the company reported Q2 revenues of $22.9 million, a 12% decrease from $26.1 million in the second quarter of 2011. Product revenue in the second quarter of 2012 was $6.8 million, down 19% Q2 2011 on a change in the timing of pharmaceutical product orders.

Overall, the company reported a new loss of $5.5 million, or ($0.15) per share, compared to a $5.0M loss in Q2 2011.

Let’s look at the impact.

The financial assets.

The company has $50 million in cash and cash equivalents, and has set for itself a course to reduce operating expenses to limit its cash burn to a maximum of $10 million per year. That will keep the company sustainable, financially – however, severe changes in the R&D team and structure will result, as the company transitions from an R&D focus to commercialization.

The technology.

In total, Shell has invested $300 million in the CodeXyme cellulase enzyme platform. The claims around the performance of the platform are, basically, three.

Cost. So far as observers have been able to discern, Codexis enzymes currently are less cost-effective than, for example, Novozymes (NVZMY) CTEC3 or Genencor Accellerase Trio, but the company contends that the gap has narrowed sharply since Codexis licensed the Dyadic (DYAI) C1 enzyme production technology in 2010.

There’s high confidence at Codexis (and Dyadic) that that cost advantage can be eliminated by the time the major enzyme producers reach the kind of costs – around $0.25 per gallon of cellulosic biofuels – that are expected to catalyze major capacity building and big enzyme orders.

Performance. Dyadic has been particularly active in emphasizing that, even today, enzymes produced via its C1 technology perform better in the higher pH ranges. Motley Fool contributor Maxxwell Chatsko observed earlier this year that “Trichoderma enzymes Duet (Genencor) and Ctec2 (Novozymes) cannot compete with C1’s CMAX (Dyadic) at a pH of 6.5 – the most common fermentation pH in the biofuels industry.”

Onsite production. C1 enzymes can be produced onsite, eliminating the need for a transport system to receive a whale of a lot of off-site produced enzymes. Abengoa is heading down this route, for example, using its own enzymes produced by the C1 platform.

Potential new dance partners.

The number of available major partners available is not huge. While Codexis was a captive of Shell, POET and DSM hooked up, Abengoa (ABGOY), Sud-Chemie, TMO Renewables, and Mascoma went with their own enzymes, Petrobras went with BlueSugars, Dupont (DD) acquired Genencor, and most of the remainder (COFCO, Chemtex, Shengquan, and Fiberight) lined up with Novozymes. Inbicon has been working with both Novozymes and Genencor, and has tested DSM. The others working in the space are generally still at pilot stage or in the lab.

So, here are some potential scenarios.

1. Codexis drums up a substantial business with Raizen.

Why it’s possible. The Cosan(CZZ)-Shell JV remains Codexis’ largest shareholder, but has not yet articulated its cellulosic biofuels plans. In this scenario, the enzymes will be trained upon already aggregated sugarcane bagasse at Raizen’s formidable network of sugarcane ethanol distilleries in Brazil.

The problem. There remains much uncertainty regarding the future of the Iogen processing technology.

2. Codexis wins a waiver to work elsewhere in Brazil.

Why it’s possible. Raizen, if it decides not to compete in cellulosic arena, may well wish to realize some value from its Codexis holdings by having Codexis supply to other sugarcane bagasse technologies – or may sell its interests in Codexis outright to other interested parties.

The problem. Assumes that cellulosic biofuels will not cut in to Raizen’s existing ethanol market share in Brazil.

3. Codexis wins cellulosic biofuels business with Abengoa or Chemtex.

Why it’s possible. Abengoa has already licensed the Dyadic C1 platform itself, and may simply choose to go with CodeXyme cellulase enzymes based on performance and future potential. In turnn, Chemtex is already a Codexis customer for renewable chemicals.

The problem. Moving out the incumbent is always tougher in practice than on paper.

4. Codexis goes into partnership with Praj.

Why it’s possible
. Since the wind-down got underway at Qteros, Praj has been essentially dancing without an enzyme solution, and there is an awful lot of sugarcane bagasse in India. Sud-Chemie’s processing.

The problem. South Asia has no developers on an advanced track towards production any time soon, and Praj had sets its sights on a consolidated bioprocessing solution, which may lead it to switch, ultimately, to Mascoma and its CBP technology.

5. Other wildcards emerge.

There’s TMO Renewables, developing for the China market; there are some Novozymes clientele that may not be locked down for their Nth plants; it is possible that one of the existing players like Inbicon might add CodeXyme to their mix, or that companies like Lignol might advance substantially in their journey towards commercialization.

The bottom line.

This is the hour where Codexis pivots from R&D towards commercializing what it has got. There are some questions that remain on how much of its R&D momentum it will be able to maintain, post-Shell, and its prospects in the key market of Brazil.

That said, the company is in for a rough rise over the next few months – but may well emerge as a leaner, fitter fighter in what is expected to become a multi-billion dollar market for cellulase enzymes.

More on the Shell-Codexis outlook in Known/Unknown, Black Swans and Yellow Cranes, here.

Disclosure: None.

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

August 12, 2012

Western Wind to Sell Company, Avoid Proxy Battle

Tom Konrad CFA

Western Wind and the Toronto Hedge Funds

Last October, Western Wind Energy (TSXV:WND, OTC:WNDEF) received an unsolicited takeover bid of $2.50 a share from Algonquin Power (TSX:AQN, OTC:AQUNF) to buy the company.  Before the bid, the stock had been trading in the $1.20-$1.25 range, but President and CEO Jeff Ciachurski felt that it did not fully value the company’s projects and assets, including approximately $1 per share of US tax assets which the Canadian company Algonquin would not be able to use.

Large shareholders at the time were in favor of the sale, including at least one shareholder owning 18.6% of the stock who had entered into an agreement to support Algonquin’s bid.  However, in the face of Western Wind’s vociferous opposition, Algonquin decided a hostile takeover was not in its interest, and withdrew the offer and terminated the lock-up agreement.

A group of shareholders, which management identifies as Toronto-based hedge funds, were unhappy to be unable to book a quick profit, and took steps to begin a proxy battle to take control of Western Wind’s board.  The intent was to take control of the company’s board and put Western Wind up for sale.

Kingman solar and wind.png
Western Wind's Kingman I Wind & Solar park. Photo courtesy of the company.

Proxy Battle Looms

That proxy battle would have taken place at Western Wind’s annual meeting, due this September.

In a conference call two weeks ago, Ciachurski said he had no plans to sell the company until 2013 at the earliest.  Today, the company announced plans to sell the entire company and its assets as soon as possible.  What changed?

Although I’m now entering the realm of pure speculation, it appears to me that management believes that the recent share price fall in the wake of a disappointing federal cash grant for the company’s Windstar project has allowed the hedge funds and their allies the opportunity to gain control of enough of Western Wind’s stock to win a proxy battle.  With two weeks having passed since Western Wind CEO and President Jeff Ciachurski announced he would lead a delegation to Washington in the hopes of getting the full grant re-instated, Ciachurski likely now believes that additional grant money will not be forthcoming, and disappointed shareholders are more likely to vote against management in any proxy battle.

[UPDATE: A company spokesman contacted me to say that my speculation regarding the Windstar cash grant is incorrect, and that the delay is related to difficulty scheduling time with a judge.]

Since Ciachurski now seems to believe he would lose a proxy battle, and the new board would be likely to put the company up for sale anyway, he has decided to steal their thunder, and put the company up for sale himself.  The press release mentioned that,

The CEO of Western Wind receives a bonus within his Compensation Agreement that pays out increased amounts of cash on obtaining the highest share price on the sale. Western Wind emphatically states that the CEO and Board are highly motivated to achieve the highest sales price, and are the only parties able to achieve the highest sale price possible.

In particular, this “increased amount” is $2 million which Ciachurski will receive if the sale price is $3 a share or more and an extra $1 million for each additional dollar above $3, according to Western Wind’s 2011 proxy statement.

Likely Sale Price and Timing

If Ciachurski believes that he has a better chance of eliciting an offer of $3 or more for Western Wind than would the new managers after a successful proxy fight, he has a strong incentive to conduct the sale himself.  We know they would be satisfied to sell the company for $2.50 a share, so he justifiably worries that they might sell for less than $3, if only to expedite the sale.

With the company already up for sale, other shareholders are much less likely to vote for a slate of directors whose platform is to put the company up for sale.  Further, with a sale already in progress, the Toronto funds will likely not go through the trouble and expense of staging a proxy battle, unless they believe that Ciachurski would cancel sale process after the annual meeting.  But since such a cancellation would destroy any trust most shareholders have for Ciachurski, I would expect the sale to go through (although the search for a buyer could drag on if Ciachurski is unable to find a buyer willing to pay the magic $3 per share or more he will want to hold out for.

I expect Western Wind will sell for something more than $3 a share.  This is easily possible, since the value of the company’s assets based on discounted cash flow is north of $5 a share, so a protracted sale process is far from inevitable.  Even if Ciachurski wants to delay a sale, he will have limited flexibility to do so.  This morning’s press release listed three milestones:

1. Financial completion and start of major construction on the 30-MW Yabucoa Project, Puerto Rico. This will add $160 million to Western Wind’s balance sheet to approximately $560 million at time of sale;

2. Negotiating the balance of the cash grant proceeds from treasury;

3. Completion of the mezzanine loan facility from our senior lender in the amount of $25 million, which can repay the high cost corporate notes;

Negotiations with the treasury are unlikely to drag on for months: The original grant process is supposed to take only 60 days, so it seems unlikely that Western Wind’s appeal will task that long.  The completion of the mezzanine loan facility is also unlikely to drag out for more than a month or two.  That leaves the start of construction of the Yabucoa Project, which the company expects to begin by October, and almost certainly to begin by December.

Champlin / GEI Acquisition

The all-share deal to acquire a 4 GW development pipeline from Champlin / GEI Wind Holdings is almost certainly off.  In a conference call exactly two weeks ago, Ciachurski said that this deal would be finalized “in the next two weeks.”  If it were going to be finalized at all, there would have been a mention in today’s news release.

The stated motivation for the Champlin/GEI deal was to provide a long term development pipeline for Western Wind, and that pipeline is unlikely to be useful in the case of a quick sale, while the 8 million shares of stock which were to be issued in exchange for the pipeline would lower the expected sale price.  Further, the unstated motivation for the deal was likely that Ciachurski wanted those 8 million shares in friendly hands, supporting him in any proxy battle.  Since a proxy battle is now unlikely, this motivation no longer applies.


A sale agreement will almost certainly be finalized sometime this year, even in the event Ciachurski cannot get his $3 price.  But we will not have to wait months in order to get a lot more information about the process, and even see some bids.  In order to avoid a proxy battle at the annual meeting, the company will need to provide enough information to shareholders to make it clear that a sale is virtually certain.  That means that before the late August record date for the annual meeting, Western Wind will likely have selected two M&A advisory firms to advise on the sale.  I think it’s also likely that we will see one or more initial bids or expressions of interest  before the end of August.

A sale may not be finalized until towards the end of the year, but expect Western Wind shares to continue rising rapidly, as more details of the expected sale emerge over the next few weeks.

Disclosure: Long WNDEF.

This article was first published on the author's Forbes.com blog, Green Stocks.

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

August 11, 2012

Two Weeks In Cleantech: 8-11-2012

Jeff Siegel

August 1: Siemens (NYSE:SI) Lands Major Australian Wind Turbine Deal

  • Yesterday morning, New Jersey's Public Service Enterprise Group announced that it's now looking to invest up to $833 million for an expansion of the the utility's solar power programs. This investment seeks to facilitate the developing of an additional 233 megawatts of solar capacity. The expansion is expected to create about 300 direct jobs annually over the next five years.

  • In 30 days, Mitsubishi Motors will launch its all-new Mirage global compact car in Japan. At a cost of between US$12,800 and US$16,500, the 3-cylinder vehicle offers a very competitive fuel economy of 64 mpg US. This exceeds Japan's 2015 fuel economy standards by 20%.

  • The forecast for German wind power has been raised after expansion in the first half was greater than expected. Beating estimates by about 200 megawatts (2,200 megawatts vs. 2,400 megawatts), first half installations expanded by 26 percent. Of course, only 45 megawatts of offshore wind was added in the first half, which came below estimates. The shortfall is primarily the result of connection delays. These connection delays are expected to result in Germany's 10 gigawatt target to be reached later than expected – likely by 2020. Still, 10 gigawatts of offshore wind in less than eight years is nothing to trivialize.

  • Siemens (NYSE:SI) has announced that it has secured its first contract to build a 270 megawatt wind farm in Australia. The new power plant is expected to be online by 2014, and when completed, will provide electricity for 180,000 homes.

  • US firm RenuEn Corporation has just announced that it has secured a 50 megawatt solar project in Pakistan. This project will be managed by a foreign operating subsidiary, which is joining RenuEn upon closing of the acquisition. A 25-year power purchase agreement is in place, with the government of Pakistan being the power purchaser.

August 2: ABB (NYSE:ABB) Lands $55 Million Transmission Deal in Brazil

  • ABB (NYSE:ABB) announced this morning that it has landed a $55 million substation and transmission infrastructure deal in Brazil. Brazil is actively building out its wind power capacity with plans to install 7 gigawatts over the next five years. This will be in addition to the 1.5 gigawatts currently installed. I'm bullish on ABB right now and think at current levels, the stock is undervalued.

  • Frost & Sullivan has recently reported that the number of electric car charging stations in the U.S. could reach 4.1 million by 2017. Today there are about 10,000 publicly-available charging stations. If this isn't monumental growth, I don't what is. And it speaks volumes about where this industry is heading, despite what the partisan slaves and naysayers would like you to believe.

  • For some of India's rural poor, solar saved the day during those massive blackouts last week. This, according to David Biello from Scientific American who wrote, “some of the formerly energy poor – rural subcontinent – found themselves better off than their middle-class compatriots during the recent blackouts, thanks to village homes outfitted with photovoltaic panels. In fact, solar power helped keep some electric pumps supplying water for fields parched by an erratic monsoon this year.” It's worth noting that India has plenty of reason to embrace solar. For one, it's becoming harder and harder for India to secure coal supplies. As reported in the Economist, by 2017, domestic coal production in India will meet only 73% of demand. The country's already spent $7 billion over the past six years acquiring outside coal pits in Australia and Africa. Now there are a lot of folks in India who rely on diesel-powered generators, too. But with higher diesel prices, it actually costs more to run those generators compared to solar. And of course, for a country that was ranked as having the world's unhealthiest air pollution, according to a Yale study, a little extra solar is certainly going make breathing a lot easier.

August 6: Is First Solar (NASDAQ:FSLR) Moving to India?

  • General Electric (NYSE:GE) announced today that it will be partnering with Enel Green Power (OTC:ENLAY) to provide about $156 million in common equity for one of Minnesota's largest wind farms. As is no surprise, this wind farm will be using GE turbines. GE actually owns 51 percent of this 200 MW wind farm now under construction in southern Minnesota. When completed, it will help the state of Minnesota reach its 25 percent renewable energy goals by 2025. With this deal in place, GE's total wind portfolio is now just shy of 10 full gigawatts.

  • Looks like First Solar (NASDAQ:FSLR) may be considering manufacturing in India, according to a recent piece in The Hindu. During an earnings conference, First Solar CEO Jim Hughes said in regards to India, “Ultimately, if the kind of visible demand that we expect develops in that market, that is likely a market where we would look to put manufacturing in place.” We've discussed the rise of solar in India in the past, and continue to believe India could soon prove to be one of the most lucrative solar markets on the planet. You can read more about that here.

  • To date, the U.S. military has ponied up for 168 road-capable plug-in electric cars. But according to an Air Force spokeswoman, more are on the way. Yes, while partisan slaves and dim-witted naysayers continue to attack the development of electric cars – you know, those things that help us displace an enormous amount of foreign oil and help bolster national security, the military remains quite bullish on electric cars.

  • While the future may not be so bright for the wind energy production tax credit, wind power that is already installed in the United States continues to show its immense value. According to Xcel Energy (NYSE:XEL), Colorado's largest utility, on April 15, nearly 57% of the electricity that was generated in the Centennial State came from wind power. Xcel has credited the record with new advances in technology, including an update of its weather forecasting ability and an upgrade of software the utility uses to control its wind farms and fossil fuel plants.

August 8: China Rescues A123 Systems (NASDAQ:AONE)

  • A123 Systems (NASDAQ:AONE) has announced that it landed a $450 million financing deal with a Chinese auto parts maker. This infusion will likely help the company stay afloat at a time when it continues to bleed cash. As I've mentioned in the past, I'm a fan of the company, but I'm still not convinced that AONE can swim upstream against the reality of cost advantages boasted by foreign competitors. Still, today's news catapulted the stock from yesterday's close of $0.47 to almost $0.60 in pre-market. It'll be interesting to see how the stock does today.

  • In an effort to cut its $4 billion annual energy bill and to lessen the potential of blackouts, the Defense Department is working with developers to build solar and wind farms on 16 million acres of open land that currently surrounds military bases. According to a recent DoD study, the lands that surround military bases in Southern California alone could generate seven gigawatts of power. That's the equivalent of seven nuclear reactors, or enough to power more than five million homes.

  • Although sales of SUVs have fallen over the past few years, mostly due to the fact that it can cost well over $100 to fill one up, Americans still love these vehicles. It's why smaller, crossover SUVs continue to sell. And to make sure the electric car segment doesn't miss out on an opportunity to convert internal combustion lovers to electric, a number of automakers are electrifying SUVs. Toyota has its new RAV4 EV, which goes on sale this month, and Ford's new C-Max Energi comes in both conventional hybrid and plug-in hybrid electric. The conventional hybrid model delivers a stellar 47 mpg and the electric model offers the highest electric-only speed of any plug-in hybrid on the road. So is this the new trend in vehicle design for SUVs? Brad Berman from Plugincars.com dives into thi

August 10, 2012

Solazyme, Gevo, Amyris earnings, outlook: the 5-Minute version

Jim Lane

As Solazyme, Gevo and Amyris report on results for Q2, update forward guidance – what does the data reveal about demand, supply of advanced biofuels and co-products?
We digest down analyst reports, company comments into a 5-minute summary of “news you can use”.

In California and Colorado, the newswires have been working overtime this week in advanced biofuels, as several industry titans reported their latest quarterlies and subjected themselves to public scrutiny, which sometimes resembles the Puritan practice of mounting minor offenders in the public stocks and pelting them with rotten eggs and tomatoes.

But it was all quite civil this week in biofuelsland, as the companies generally reported that they remain generally on track in terms of the direction and timing of their long-term journeys toward cash flow, and strategic partners continue to provide help with capital and offtake.

Cash, production quantity, offtake and price/margin – these have happily become the new metrics, instead of government R&D contracts, VC financings, and MOUs for future developments.

General themes: as expected, early markets remain focused on higher-value opportunities, fuels (road, aviation or other) are an aspirational goal awaiting the construction of larger capacities and the lower per-gallon costs and assurance of supply that comes with maturity and scale. Analysts are in general agreement on Amyris (AMRS); Gevo (GEVO), all are generally bullish, some more so than others; with Solazyme (SZYM), Piper Jaffray is somewhat pessimistic but overall the consensus is broadly quite positive.

Future capital raises for capacity expansion are expected this year and next for Solazyme and Amyris, with Gevo just completing a raise. Strategic partners continue to arrive with impressive balance sheets: Totral for Amyris, Toray and Sasol for Gevo, Bunge for Solazyme.

Let’s look at the companies one by one for signs in their individual journeys, and some review of the state of play as a whole. Analysts in the mix include the estimable Rob Stone and James Medvedoff from Cowen & Co, Mike Ritzentheler from Piper Jaffray and Pavel Molchanov from Raymond James.

Amyris[1].jpgAmyris key takeaways.

Cash. $30M from Total was totally welcome; ultimately, “our cash burn projections imply another equity raise around year-end 2012. The new Total funding package may push that out, so our updated model reflects equity issuance in 2Q13.”

Production quantity. Numbers are small now, Pariso plant is mechanically complete, startup in Q1 2013 remains critical.

Offtake: “Building on their long-standing partnership, Amyris and French oil major Total (TOT) are amending their diesel collaboration to firm up and accelerate R&D funding. The new provision is Total’s commitment to fund up to $82 million over three years, including a $30 million down payment in 3Q, via convertible debt (1.5% coupon, due 2017). To be sure, this project – like Amyris’ overall business plan – is behind schedule. Last year, the aim was full-scale production start-up in 2013-14. While that’s no longer realistic, Total’s reaffirmed commitment is encouraging.”

Price/margin: Owing to start-up during cane off-season, “It may be mid-2013 before performance/cost data at scale can be reported” based on the primary feedstock.

Timeline to cash flow positive: “We project operating cash flow turning positive in late 2014, as the Sao Martinho facility starts up.”

The bottom line:
”Progress On Opex; Cash Needs, Production Cost Remain Hurdles.” No upgrades or downgrades from analysts. Despite “lower revenue and wider gross loss,” Amyris is “behind schedule” but signs are “encouraging”.

For investors: Price targets range from $4 to $4.76.

gevo logoGevo key takeaways.

Cash. “Gevo reported cash and cash equivalents on hand of $38.6 million as of June 30, 2012. The concurrent public offerings of common stock and convertible senior notes generated net proceeds of $98.8 million in July 2012.”

Production quantity. “Management announced product shipment, and reiterated their expectation to exit FY12 at a 1 million gallon per month run rate.” ”We still expect Redfield to be up and running in Q4 2013, about a year behind the original plan. However, in order to do so, construction must begin within the next few months (Luverne took 12 months, but was less than half the size).”

“Weak ethanol markets are clearly driving interest in Gevo’s technology – the problem remains capitalization of potential licensees, in our view.”

In addition, Gevo COO Chris Ryan commented to the Digest. “we are not going to get into seriously investing capital at Redfield until there is more data from the Luverne facility.”

Offtake: “The company shipped about 50,000 gallons of isobutanol”… “to both chemical and non-automobile fuel customers.” “Toray has made an upfront capital investment [for a] Gevo pilot plant to produce renewable bio-paraxylene…Toray [will] purchase initial volumes from this plant [for] renewable PET fibers, films and plastics.”

Gevo’s Ryan adds: “On the chemical side, it’s very positive. Within the speciality chemicals that Sasol will be serving, there is lots of demand, positive feedback. In the paraxylene market, we continue to see an increase in momentum there and now talking to others in that supply chain to develop the process, but it will not be commercialized in the next year or two.”

“Gevo’s fixed margin offtake deals largely insulate it from corn cost risk. This summer’s record-high corn prices and awful ethanol economics can actually give Gevo greater leverage in signing up ethanol producers as joint venture partners. That said, Gevo is still focused on transitioning to cellulosic feedstocks.”

Litigation: ” Regarding the IP dispute with Butamax, we continue to believe that Gevo will be able to operate unencumbered…and perhaps the new preliminary injunction filed by Gevo will catalyze a settlement.

Timeline to cash flow positive: “We now model 2012-15 EPS of ($2.06), ($1.15), (50c) and 17c vs. prior ($1.98), ($1.10), 29c, and 84c on lower revenue assumptions”.

The bottom line: “Cutting Estimates On Rollout Pacing; Long Term Intact; Redfield: Construction Needs To Get Started. ” No upgrades or downgrades from analysts.

For investors: Price targets remain widely dispersed, from $5.50 to $17.
Solazyme logo.png

Solazyme key takeaways

Cash. Solazyme ended 2Q with cash of $195 million…Solazyme should exit 2012 with cash of $140+ million, and we assume a round of equity issuance in mid-2013, ahead of a likely acceleration in capital spending. “Management reiterated their expectation that their contribution to the 50/50 Bunge (BG) JV would be $72.5 million, and are hopeful that the BNDES will fund 60% or more of the Moema capex, but the visibility won’t come until mid-2013.”

Production quantity. ”In April, Solazyme finalized its JV with agribusiness giant Bunge  for its first Brazilian production facility to be co-located at Bunge’s Moema sugar mill…The plant, with capacity to produce 100,000 metric tons of tailored oils annually, is expected to come on line in 4Q13.”

Offtake: Algenist sales continue to impress, with 1H12 sales exceeding the total of 2011. Other than a 3Q dip in Pentagon-related fuel sales, there is no change in outlook. Ritzenthler adds: “Underweight rating reflects our view on…building capacity ahead of firm demand [for volume products].

Price/margin: “No surprises in 2Q12. Revenue of $13.5 million, flat sequentially, was within 1% of our estimate, and the mix between product sales and R&D/licensing also stayed consistent. ”

Timeline to cash flow positive: “On track for positive cash flow by mid-2014.Our projections indicate that Solazyme’s operating cash flow will turn positive once Moema fully ramps up, which could be as early as late 2014.”

The bottom line: Management guides down revenues for FY12, primarily on the loss of government-funded projects. No upgrades or downgrades from analysts.

For investors: Price targets range from $9 to $14.00.

Disclosure: None.

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

The Wanxiang Transaction Is Not Necessarily A Permanent Solution For A123's Problems

John Petersen

On Wednesday A123 Systems (AONE) announced the execution of a Non-binding Memorandum of Understanding with the Wanxiang Group that will, if successfully implemented, restore A123 to a sound financial footing. Since the basic deal terms are a good deal more complex than the reports one reads in the mainstream media, I think a drill down into the detail may be helpful for investors who want to understand what a restructured A123 will look like. The critical document for this analysis is the MOU included as Exhibit 99.2 to A123's recent report on Form 8-K.

The basic business deal has three distinct structural elements:
  • A $75 million senior secured bridge loan facility with associated warrants;
  • A $200 million senior secured convertible note financing; and
  • A block of warrants that will, if exercised, generate up to $175 million of additional equity.
The bridge loan facility will be secured by substantially all of A123's assets and has been separated into two tranches. The first $25 million, which includes $15 million in cash and a $10 million letter of credit, will be immediately available to A123 upon execution of definitive agreements. The $50 million balance will be funded when certain first tier conditions are satisfied, including:
  • receipt of a favorable determination from the Committee on Foreign Investment in the United States;
  • receipt of Chinese government approvals;
  • retention of the R&D and engineering teams; and
  • other usual and customary conditions.
Barring a mass exodus of the R&D and engineering teams, I think there's a high probability that the entire $75 million bridge loan facility will become available to A123 over the next couple months; Wanxiang will obtain a reasonable level of de facto control; and A123 will get enough breathing room to finish a more comprehensive restructuring.

The senior secured convertible note financing will be more complicated and time consuming. Wanxiang's commitment to buy $200 million in notes is subject to several second tier conditions, including:
  • reasonable assurances that A123's government grants and tax credits will remain available;
  • stockholder approval of the restructuring transaction;
  • conversion or repurchase of at least 90% of $143.8 million in convertible notes that were issued in April 2011;
  • conversion or redemption of the $50 million in convertible notes that were issued in May 2012;
  • an increase of the number of directors from seven to nine and the election of four directors designated by Wanxiang;
  • compliance with Hart-Scott-Rodino and other antitrust laws; and
  • continued listing of the Common Stock on Nasdaq.
It's clear from the MOU that the retention of A123's government grants and tax credits is a critical valuation issue. If the grants and credits remain in place, the exercise price of the bridge financing warrants will be $0.425, but the exercise price will be reduced to $0.17 if the grants and tax credits are lost. Similarly, the conversion price of the senior secured notes and the exercise price of the related warrants will be $0.60 per share if the grants and tax credits remain in place, but they'll both be reduced to $0.24 if the grants and tax credits are lost.

Under the circumstances, I think A123 will probably get the necessary government assurances and approvals. It should also be able to negotiate the redemption or repurchase of its outstanding debt on reasonable terms. While investors may grumble, particularly if the proxy statement for the required stockholder approvals includes a reverse split to solidify A123's Nasdaq listing, there really isn't an alternative so they'll eventually go along.

While the series of transactions have been described as a $450 million rescue in media reports, the only funds Wanxiang will be required to invest are $75 million for the bridge loan facility and $200 million for the senior secured convertible notes. If one assumes that no additional shares will be issued in connection with A123's outstanding convertible debt, the bridge loan warrants will give Wanxiang the power to obtain 51% voting control by tendering that debt in payment of the exercise price. While conversion of the notes would increase Wanxiang's voting control to 75% if it chose to exercise its rights, a reasonable risk manager could conclude that voting control coupled with $200 million in secured debt was a more advantageous position for Wanxiang given the uncertainties of A123's business.

I've always believed that prudent investing begins with a worst case analysis. In the A123 - Wanxiang transaction I believe the worst case is a $75 million equity infusion that will increase A123's book value to $188.8 million, or $0.544 per share, and give Wanxiang voting control. While the $200 million senior secured convertible note financing will increase A123's liquidity, a substantial portion of the cash will be used to redeem or repurchase A123's other debt securities.

I believe it's safe to assume that the holders of the $143.8 million in convertible unsecured subordinated notes that A123 issued in April 2011 will be willing to accept a haircut in connection with an early redemption. I don't, however, have any basis to predict what the haircut might be. While holders of the $50 million in convertible unsecured senior notes that A123 issued in May 2012 might also be willing to accept a haircut in connection with an early repayment of the $39.6 million balance, I'd expect their negotiating position to be more aggressive. In a worst case scenario, the bulk of the $200 million in proceeds from Wanxiang's senior secured convertible note financing will be used to retire junior debt.

On balance I believe the Wanxiang transaction is a positive development for A123's stockholders because it will stop the issuance of additional common shares under the 2012 notes and help alleviate the intense selling pressure that's resulted from the issuance of 23.4 million new shares since June 26th. It will also restore A123's stockholders equity to a more reasonable level and give the company time to restructure its affairs. The transaction is not, however, a permanent solution to A123's problems and any number of uncertainties are yet to be resolved.

While I don't see anything in the deal structure that would justify a rush to the exits. I believe investors who decide to hold or buy A123's stock must pay careful attention to future releases that quantify the current uncertainties. This is not a good time for irrational exuberance.

Disclosure: None.

August 08, 2012

There are Always Buyers

There are Always Buyers – even for Clean-tech deals. An Update from the Street.

In the movie Wall Street, Michael Douglas plays a greedy, ruthless banker who hangs everyone out to dry in order to win. His motto is “greed is good”. Well, his character’s antics have turned out to be more reality than fiction as we uncover more real life blunders of Wall Street bankers. What does this have to do with our current markets? Everything, really. Since 2008, only select stocks have performed well in the overall market and the clean tech sector has been obliterated. It seems the big banks have been playing roulette with client money every chance they get. This has affected investor confidence and is reflected in lower stock prices and trading volumes across the board. Added onto world economic woes, fear and doubt have been instilled into the markets.

While many may be saying this is not the time to get into the markets others, like Warren Buffett are licking their chops. They see opportunities everywhere and at bargain prices compared to just a few years ago. Where does an investor like Warren Buffett get his confidence to buy when everyone else is stuffing their mattresses? From what I have read, he believes in market cycles and through his experience believes that the markets will recover and still be the best place to put his money for the long term.

Before you get too depressed, think about this. Because of the greed factor, many Wall Street types have historically created all kinds of products to make money in the stock market, such as, Mutual Funds, Junk Bonds, Derivatives, and ETF’s just to name a few. All of these are products that were “invented” by some Wall Street guru or mathematician who figured out a new way to make money in the market. Trust me, they will think of something else to get money to come back to the market and it will turn around again. Eventually, investors will pour back in and look for new ways to invest because they want to make big bucks too. They want a return on their investment not just cash under the mattress. It is just a matter of time.

So how does a new venture find the capital it needs, and how do existing companies find investors to move their stock prices up? The answer is complicated. “Show me the Money” – another famous movie quote rings true today – finding those pockets of money is harder than ever before. But not impossible. Here is what we are hearing: Best sources of funding are now from private equity groups, family offices, and corporations with innovation funds looking for smaller companies to invest in. Keep your rolodex fresh with all your contacts and utilize them all when looking for capital. Money is much harder to come by these days for junior and start-up companies, but for the right venture, the money will come forward eventually if you are persistent and on top of your game.

To learn more about investment ideas and companies, check out our upcoming program, the Modern Energy Forum, September 5-7, in Denver Colorado. For more details on how you can succeed in these markets, contact michele@minellc.com.

The preceeding post is a Special Information Supplement by our Featured Company MiNELLC.

August 07, 2012

Finavera to Sell Wind Project for Three Times Its Market Cap

Tom Konrad CFA


On July 23rd, Finavera Wind Energy (TSXV:FVR, OTC:FNVRF) announced a deal to sell its 77 megawatt Wildmare Wind Energy Project to Innergex Renewable Energy (TSX:INE, OTC:INGXF.)  The sale will come as a great releif to Finavera’s long-suffering shareholders, who have seen the stock halve in value since the start of the year.

I included Finavera in my annual list of clean energy stocks this January because, even at the time, Finavera was trading at a fraction of the value of its wind projects, despite a weak balance sheet.  Since then, Finavera has moved its projects forward, receiving important environmental andconstruction permits, but limping along on the finance side with a small (but dilutive) private placement and loan with more dilutive warrants, with the two deals totalling only a little more than $1 million.

The $22 million received from Innergex for Wildmare should put an end to shareholder dilution, since it is sufficient to pay off Finavera’s entire $11 million debt burden and allow Finavera to advance the company’s other projects.  As CEO Jason Bak said, “This transaction illustrates the significant asset value Finavera has created for shareholders and provides a strong return on our investment in the development of wind energy for British Columbia. This transaction creates a stable platform for long term growth and allows Finavera to recycle capital and fund the ongoing development of its remaining portfolio of projects.”

The money, along with another $8.8 million which the company expects from its partnership in an Irish wind farm moves Finavera out of the asset-rich and cash poor renewable developers which have been languishing for the lack of funds, and firmly into the camp of asset rich firms with strong balance sheets able to profit from the availability of cut-price development projects.

Disclosure: Long FNVRF

This article was first published on the author's Forbes.com blog, Green Stocks.

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

August 06, 2012

Geothermal in South America: Major Prospects for Development

Meg Cichon

Geothermal well photo via Bigstock
With climate threats and increased energy demand, South American countries are set to develop their vast geothermal potential. Will developers be able to acquire investment and favorable policy?

If any part of the world should be concerned about the effects of climate change, it is South America. Despite contributing some of the lowest emissions globally, many of the countries in the region are

As South America’s population is expected to rise 72% by 2035, the impact of climate change grows more significant each day. Governments are reacting with renewable energy development — and geothermal power has several major prospects.

Burgeoning Potential

South America has largely relied on hydropower, but its capacity is weakening. Though many regions have further untapped potential, most is located in remote regions with limited access to the grid, according to Meeting the Electricity Supply/Demand Balance in Latin America & the Caribbean, a report released by the Energy Sector Management Assistance Program (ESMAP).

Geothermal presents a major opportunity throughout South America, but exploratory drilling has been limited. According to the ESMAP report, the range of geothermal capacity estimates is quite broad. Though expectations may be uncertain, many regions are hopeful that exploration will reveal something more.

‘Extrapolating from the experience in the US, where there has been a large amount of exploratory drilling, the potential of conventional geothermal resources in Latin America might be as much as 300 TWh per year,’ the report states.

The most viable resources are thought to be located along the Pacific Rim, which ranges from Mexico to Chile. Key spots in the Caribbean islands also carry some potential, according to researchers.

Policy Push

Several South American countries have spearheaded policy incentives to move renewable energy plans forward. Countries of note include Argentina, Chile and Peru, according to the 2012 Geothermal International Market Overview Report released by the Geothermal Energy Association (GEA).

Argentina implemented a feed-in tariff (FiT) plan for geothermal projects, with a 15-year entitlement period after the plant is brought online. The plan also includes a goal to reach 8% of renewable production by 2016.

According to the GEA, ‘Though a 1998 law supported wind and solar generation, geothermal did not become eligible as a renewable energy source until 2007. ... In May 2009, the Genren Program was launched, aiming to purchase and incorporate 1000 MW from renewable energy plants, 30 MW of which is to come from geothermal energy.’

With geothermal potential of up to 16,000 MW, the Chilean government is ready to take advantage of its untapped renewable sources. To drive renewable development, the Chilean National Energy Commission partnered with the US Department of Energy (DOE) to create the Renewable Energy Center in Chile. According to its website, the DOE uses the facility to compile global renewable energy best practices and techniques to then use in the region.

‘The Chilean center will serve as a clearinghouse of information and analytic tools and a leading source of expertise on renewable energy technologies and policies for Chile and, once it is up and running, for the region. It will also help research, develop and promote non-conventional renewable energy projects, and will serve as a source of information for investors and policymakers.’

Chile’s non-conventional renewable energy law enforces all utilities with a total capacity of 200 MW and greater to demonstrate that at least 10% of their energy comes from renewable sources. After 2014, this enforcement will increase by 0.5% annually until 2024, when it finally reaches 10%, according to the GEA report. Chile also enforces its law of geothermal concessions, established in 2000, which regulates exploration and permitting of geothermal projects. In response to this favorable policy, a total of 83 geothermal exploration concession requests are under review as of June 2012 at Chile’s energy ministry, according to Business News Americas.

Peru is thought to have nearly 3000 MW of geothermal potential, none of which has been exploited. The country currently draws most of its energy from natural gas, hydropower and fossil fuels. Recognizing its need for energy development, the Peruvian government has set FiTs and tax incentives for renewables. It has also held auctions for contracts, including a recent 500 MW tender. Its goal is to generate 5% of its electricity from renewables by 2014.

Other South American countries have also recognized the need for clean energy and have implemented favorable policies. According to the International Energy Agency (IEA), Bolivia began its efforts in 1999 with grant incentives for rural renewable projects, and in 2000 passed a rural electrification project. In 2005, Bolivia passed the Rural Electrification Decree that promotes collaboration between private energy companies and government agencies to establish renewable projects.

Where is the Investment?

Though much investment has come from private funding, the Inter-American Development Bank has been a key player in South America. It has a five-year target to invest 25% of its loans toward climate-related projects, and it recently established the Emerging Energy Latin America Fund II.

According to its website, ‘IDB’s participation will consist of a senior A loan of up to US$30 million with a tenor consistent with the life of the fund (expected at 10 years), including a five-year commitment period. The repayment structure and the scope of security will be defined during due-diligence.’

The fund, a successor of the $25.2 million CleanTech Fund, is expected to reach $150 million. According to Andres Ackerman, an IDB project team leader, the fund was created due to major expected energy demand increases in the region — 75% by 2030 — half of which could be generated by renewables.

‘This financing is part of the IDB’s commitment to develop mechanisms to support long-term funding of renewable energy and clean technology projects in the region, which stimulate innovation, job creation and green economic growth,’ said Daniela Carrera-Marquis, head of the financial markets division at the IDB’s structured and corporate finance department (SCF).

Race To Be the First

Though there are no plants currently online in South America, several projects are nearing completion. Argentina could technically claim groundbreaking fame with its demonstration project built in 1988 in the volcanic Copahue region — a site that has been explored for geothermal development since the 1970s. Decommissioned in 1996 due largely to high electricity prices, the 670 kW project used 171°C sources at depths of 800 to 1200 meters.

Near the decommissioned demonstration plant is a new potential frontrunner — the 30 MW Copahue project in development by Earth Heat Resources. According to the company, the project has the potential for massive expansion after the success of the initial 30 MW plan. Now in its second phase of development, the project is expected to be completed this year.

‘This second stage study will encompass many elements of the upcoming program for this year including drilling, civil works, other facilities, engineering and transmission line issues,’ said Earth Heat Resources managing director Torey Marshall. ‘This milestone will confirm the location of wells, location of roads, location of potential plant sites and transmission line locations; an enormous step in our development of the Copahue Project.’

Earth Heat Resources recently signed a power purchase agreement (PPA) with Electrometalurgica Andina SAIC for an initial 30 MW per year. It has also signed a letter of intent with Xtrata Pachon SA to purchase 50 MW per year, with the potential for further expansion. Xtrata sees the potential in geothermal and is eager to get involved with sustainable, renewable projects in Argentina.

‘We are committed to finding the best environmental, social and economic solutions in support of our potential future investments in Argentina, and look forward to working with Earth Heat in the first geothermal plant in the country,’ said Xavier Ochoa, Pachon’s general manager.

Fast on its heels is Enel (ENLAY.PK) Green Power’s Cerro Pabellón geothermal project located in Pampa Apacheta, Chile. With eight geothermal concessions in Chile — the most recent acquisitions include Colorado, San Jose I, and Yeguas Muertas — Enel is eager to tap the nation’s vast potential. The 50 MW project recently received environmental approval and is ready to move forward.

‘The country’s geothermal potential is one third of the installed geothermal capacity worldwide,’ explained Enel Green Power CEO Christian Herrera. ‘Electricity generation through geothermal energy not only helps meet the growing energy demand in the country, helping to reduce dependence on imported fuels, but [it’s] also a concrete contribution to reducing greenhouse gas emissions, contributing to the mitigation of global warming.’

In development but further from completion, renewable energy firm GGE Chile submitted an environmental impact assessment (EIA) for a $330 million geothermal project planned for its San Gregorio concession in southern Chile. Expected to break ground in 2013, the 70 MW Curacautin geothermal project will consist of 10 drilling platforms, 14 production wells and 11 reinjection wells, and is scheduled to come online in 2016, according to Business News Americas.

The nearby Mariposa Geothermal System owned by Alterra Power Corp (AXY.TO, MGMXF.PK)  is located near an active volcanic region in the Chilean Andes Mountains. Exploration for the project began in the early 2000s, when great potential was found in the area. According to the project website, based on the exploration results, the inferred resource estimate is 320 MW available over 30 years. To date, slim holes have been drilled, and 200+°C resources have been found at the top of the wells; additional holes will be drilled to determine further resources. A 50 MW plant is in development and expected to be completed by 2016, and Alterra is searching for partnerships to continue exploration and development at the Mariposa site.

A key factor to this project is the nearby hydropower projects. Developers are hopeful for a collaborative effort to build transmission systems to feed the renewable resources to the Central Power Grid.

Northern Influence

Facing many of the same issues with climate change and population growth, Central America and the Caribbean have embraced their geothermal resources much more than their southern neighbors. According to the GEA report, a majority of the countries in Central America have developed a portion of their geothermal resources.

‘El Salvador and Costa Rica derive 24% (204 MW) and 12% (163 MW) of their electricity production from geothermal energy respectively. Nicaragua (87 MW) and Guatemala (49.5 MW) also generate a portion of their electricity from geothermal energy,’ said the GEA’s report.

The potential for further development of Central America’s geothermal resources remains significant, and the geothermal potential of the region has been estimated between 3000 MW and 13,000 MW at 50 identified geothermal sites.

The SIEPAC (Sistema de Interconexion Electrica para America Central) transmission interconnection has greatly influenced this region’s geothermal development. In an effort to reduce electricity costs, countries are able to develop their geothermal sources and spread the renewable wealth throughout the region at competitive prices.

Electricity costs have influenced geothermal growth on the Caribbean islands. Compared with current fossil fuel production at $0.24/kWh, geothermal costs $0.05/kWh, according to the World Bank.

In sharp contrast, South America has strayed from transmission interconnections. According to the GEA report, there have been recent issues regarding the flow of energy across national borders, which have led to underdeveloped, rarely used and cut transmission lines. This dissension has resulted in increased blackouts and worker strikes. Though this may have held back development, the current climate crisis and the increased need for clean energy have spurred a government response to develop the massive geothermal resources throughout the region.

According to Geothermal Resources in Latin America and the Caribbean, a report released by Sandia National Labs and the US DOE, ‘With [gigawatts] of estimated power potential, geothermal energy can and should supply a portion of the additional capacity required [in Latin America].’

 Meg Cichon is an Associate Editor at RenewableEnergyWorld.com, where she coordinates and edits feature stories, contributed articles, news stories, opinion pieces and blogs. She also researches and writes content for RenewableEnergyWorld.com and REW magazine, and manages REW.com social media.  Formerly, she was an Associate Editor of ideaLaunch in Boston, MA. She holds a BA in English from the University of Massachusetts and a certificate in Professional Communications: Writing from Emerson College.

August 05, 2012

11 Clean Energy Stocks for 2012: August Update

Tom Konrad CFA

July Overview

July was a good month for my Clean Energy model portfolio.  Since the last update, these 11 stocks are up an average of 3.3%, with a year to date return total return a tiny loss of -0.5%.  While it's never pleasant to be down for the year, it's helpful to compare this performance to that of the most widely held clean energy ETF, the Powershares Wilderhill Clean Energy ETF (PBW), which was down 8.7% for the month, and down 21% year to date.  All in all, it has been a miserable year so far for most clean energy investors, and I'm happy to say that my model portfolio has managed to avoid almost all of that misery.

The broader market, as measured by the Russell 2000 index (^RUT), had a weak July as well, down 2.5% for the month, but it is still up 7.1% for the year.  With the broad market up, my hedged portfolio, which includes a put on the broad market ETF SPY, is lagging the model portfolio, with a total loss of -6.5% year to date.

I believe the model portfolio's year to date out performance is mostly due to avoidance of the moribund solar sector, which has declined 37% since the start of the year, even after a 63% decline in 2011, as measured by the Guggenheim Global Solar ETF (TAN).  However, TAN gained 3% since the last update, even as PBW declined, so this month's strong performance is due to other factors.

News Driven Returns

Company-specific news events drove the model's July performance.   New Flyer Industries (TSX:NFI / NFYEF), Western Wind Energy (TSX:WND, WNDEF) and Finavera Renewables (TSX-V:FVR, FNVRF), which were up 25%, 35%, and 23% for the month all gained because of significant news releases.  This more than compensated for bad news from Lime Energy (LIME), which lost 40% (see below for details.)
11 for 12 July.png

While those four stocks were charging ahead or falling off a cliff, the rest of the portfolio was more sedate.

Europe-based stocks Veolia (VE), Rockwool (RKWBF), and Accell Group (ACCEL.AS) all declined modestly (-8%, -4%, and -4%) becaue of continued concerns over the Euro crisis.  Nevertheless, these three remain positive or flat for the year (2%, 8%, and 0%.)  Domestic companies Waterfurnace Renewable Energy (TSX:WFI / WFIFF), Waste Management (WM) and Honeywell (HON) produced modest gains of 4%, 5%, and 8%, partially offsetting the losses among the European companies and Canadian Alterra Power (TSX:AXY / MGMXF), which gave back -5% after a strong showing in June.

I've written extensively about three of the big movers elsewhere, so I will just provide a quick summary for each and links:
Distracted by all the news at these three companies, I have not found time to write about the news at New Flyer Industries, which over the last month has announced strong order activity and backlog for the second quarter, and has snagged an order in the New York market as a consequence of the exit of Daimler's Orion division from the North American bus market. 

My Trades

During the month, I bought Western Wind (both before and immediately following the sale announcement), Finavera (right after the wind farm sale), and Lime, where I think the current price has discounted all the very real accounting risk and then some.  I also re-entered Veolia at $10.36, having sold in June when the stock was above $12.  The decline in price and some progress cleaning up the balance sheet combined to make this stock attractive to me again.


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

August 04, 2012

Cosan: No Haven for Ethanol Investors

by Debra Fiakas CFA

cosan logoThe stark reality of basing their business model on a food commodity has been brought into sharp focus for ethanol producers.  The drought settling across the U.S. corn crop is helping drive up corn prices for hog producers, chicken farms and ethanol plants alike.  Investors who simply must have a position in ethanol might think the sugarcane-based ethanol producers could offer a safe haven against the supply and margin squeeze that is certain to hobble GreenPlains Renewable Energy (GPRE:  Nasdaq), Pacific Ethanol (PEIX:  Nasdaq) and Poet (private), among others relying on corn feedstock.

Think again!  Cosan Ltd. (CZZ:  NYSE) is one of Brazil’s leading ethanol producers and sources sugarcane from other farmers as well as its own farms.  After strong growth at the beginning of calendar year 2011, adverse weather conditions got the best of Cosan as well.  Crushed sugar cane volumes declined year-over-year as did ethanol and sugar volumes.  In the fiscal year ending March 2012, Cosan reported a 10.9% gross margin, well below the prior fiscal year profit of 16.1%.

Cosan is not a unique case in Brazil.  In calendar year 2011, Brazil produced 5.6 billion gallons, representing 25% of the world's total ethanol used as fuel.  This compares to 7.5 billion gallons in 2010.  As the year unfolded politicians began getting nervous.  In August 2011, in anticipation of further ethanol production declines, the Brazilian government took measures to prevent shortages by lowering Brazil’s gasoline blend requirement from 25% to 20%.  Nonetheless, in the dramatic volume decline, Brazil is struggling to meet domestic demand for ethanol.

Thus it is not just the use of food commodities for ethanol feedstock, it is the use of crops that are particularly susceptible to weather extremes.  It is clear the renewable energy sector has a long way to go to perfect technologies and business models.  Unfortunately, cellulosic ethanol technologies remain illusive and drought resistant crops require years to perfect.  In the meantime, investors could simply accept what has not been fixed.   Use seasonal and cyclical influences to establish long positions in corn and ethanol at value prices….or take profits in short-positions previously established at cycle peaks.

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

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

August 03, 2012

While Tesla is Heading into the Valley of Death, Kandi has Already Crossed

Tom Konrad CFA

  My friend and frequent electric vehicle (EV) critic John Petersen recently worried that Tesla (NASD:TSLA) shareholders now buying the stock because of the launch of the company’s new Model S were doomed to lose money, since the company is just entering the “trough of disillusionment,” as shown in this stylized diagram of the losses a company suffers in the Valley of Death from Osawa and Miyazaki.
Tesla Kandi Valley of Death.png
Although Petersen is relentlessly negative on EVs, he has a great depth of experience with launching new technologies, and investors ignore him at their peril.

Fortunately, Tesla is not the only EV game in town, and there is another EV company at a much more auspicious stage of the product cycle.  That company is Chinese mini-EV manufacturer Kandi Technologies (NASD:KNDI.)  Incidentally, Kandi is the only EV company Petersen has ever written a positive article about.

Model S: Fast like a hare. Photo courtesy Tesla Motor

Today, Kandi Technologies announced that they had signed a framework agreement with the government of Weifang Binhai Economic Development Zone  in Wei Fang City of Shandong Province under which Kandi will build a factory in the Zone.  The Zone will provide support in the form of infrastructure, promotion, and incentives in order to help the company sell no less than 20,000 EVs per year in Shandong Province.  The factory will have capacity to manufacture key components of up to 100,000 vehicles per year, and is expected to be completed within two years.

According to Wikipedia, Shandong province is one of the most populous and affluent in China.  Shandong is also new territory for Kandi, which recently signed a deal to sell 20,000 EVs for a leasing program in the city of Hangzhou in Zheijiang Province.  More details of that deal emerged yesterday, when it was said (unfortunately in Chinese PDF only) that the order would proceed with 1000 EVs per month for September to December 2012, and 2000 EVs per month from January to August 2013.  Since we can expect a gross profit of about $1300 to $1700 per vehicle, that should amount to an additional $0.15-0.20 a share profit in 2012, and additional $0.60 to $0.80 cents a share in 2013.

The Kandi KD5011 Mini-EV to be leased in Hangzhou. Kind of looks like a tortoise, doesn't it? Photo by Marc Chang.

Kandi was already profitable on the basis of its growing off-road vehicle business.  It earned $0.20 a share over the last 12 months with only minimal EV sales.  With rapidly growing sales of EVs underwritten by Shandong and Hangzhou, Kandi has had the kind of help across the Valley of Death that Tesla can only dream of.

Tesla CEO Elon Musk may expect the company to sell 20,000 EVs in 2013, but such sales depend on fickle consumers.  Analysts expect a loss of $2.44 a share this year, and a profit of only $0.63 a share next year.   Further, it will cost you over $30 a share to buy TSLA, which has a book value of only $1.46 a share.

Meanwhile, Kandi already has an order to sell 16,000 EVs in 2013, and more are likely to follow.  I expect the company to earn between $0.40-$0.60 a share in 2012, and $1.20 to $2.00 a share in 2013.  It only costs $4.05 to buy the stock as I write (although the stock has been advancing rapidly on the recent news).  Kandi’s book value easily exceeds Tesla’s at $2.14 a share.

So why is anyone bothering with Tesla?

Disclosure: Long KNDI.

This article was first published on the author's Forbes.com blog, Green Stocks.

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

August 02, 2012

Veolia Cleaning Up Balance Sheet

Tom Konrad CFA

300px-Veolia_Environnement.svg_1[1].png On Thursday, Veolia Environnement (NYSE:VE) closed a deal to sell its solid waste business for $1.9 billion.  This is part of its ongoing effort to reduce debt and cost of operations by selling assets worth $6.14 billion, which the company expects to complete by the end of 2013.  Last year, Veolia took the first step in this program by selling its UK water business, also for $1.9 billion.

I’ve long been attracted to Veolia for its green credentials and high dividend yield.  The company paid a euro 0.70 ($0.85) dividend in 2012, and will pay the same in 2013, for a yield of 8.2% at the current price of $10.33.  However, the company’s high debt ($23.7 billion after the recent sale, which it plans to reduce to $14.7  billion by the end of 2013 through a combination of asset sales and retained earnings) and negative free cash flow have made me wary.

Debt is still higher than I would like, and free cash flow is still negative, but with the stock trading at a forward P/E of 8 and at less than two thirds of book value, this seems a good time to re-enter this high yielding company before it completes it’s restructuring and attracts more cautious income investors.

I re-purchased Veolia today (I sold a month ago, when the stock was over $12, and the recent asset sale had not yet been announced.)  The company bears watching, since there is no guarantee it will continue divest assets and cut operating costs, but a successful restructuring leading to less debt and positive cash flow will make Veolia into an attractive stock worthy to be among the core of stable green income stocks in my portfolio.

Disclosure Long VE

This article was first published on the author's Forbes.com blog, Green Stocks.

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

August 01, 2012

2012 Modern Energy Forum

We are happy to have The Modern Energy Forum as an advertiser on AltEnergyStocks.com once again. The 2012 Modern Energy Conference will be held in Denver from September 5 to September 7, 2012. Details of the the conference will be posted on AltEnergyStocks.com soon - for now, we encourage you to visit their site and have a look.

On the Edge of the Subsidy Cliff: Will the US PTC Expire?

Steve Leone

Udall ptc.png
Sen. Mark Udall

Udall’s approach is equal parts steady ascent and unflagging determination. His base camp is the Senate floor and from there he plans — to critics, annoyingly so — to make the extension of the PTC a daily topic of discussion. In a town notorious for the filibuster, the Democrat’s approach is slightly different in that he’s scheduled time each morning for when Congress is in session. And so it will be that every morning from now through the August recess, Udall will remind his colleagues why the PTC has gained widespread bipartisan support across much of the country, and why Congress should extend the soon-to-expire tax credit soon enough to keep the industry from contracting — and taking jobs with it.

This is the same refrain that has echoed through the halls of Congress and numerous statehouses since the end of last year. The industry’s growth, which is expected to surpass 10 GW of new installations through the end of this year, is closely aligned with the PTC, which pays out 2.2 US cents per kWh generated. That credit has helped to make wind energy a lucrative and worthwhile pursuit for developers and utilities alike, and its relative stability over recent years has allowed projects to move ahead with confidence. That strong pipeline has in turn ushered in a new era of US manufacturing, which has sprouted up across much of the country — all to support the growing industry.

Without promises of an extension, development plans have skidded to a halt, orders have dried up and large manufacturers are plotting their escape — or at least a scaled-back presence. At stake, according to a recent Navigant study, are as many as 37,000 jobs, a staggering number for an industry that currently employs about 75,000 workers. And extension, meanwhile, would add 17,000 jobs, according to the same study.

The industry has been down this path before, but the last time the PTC was allowed to expire the only real victim was project development. That was in 2004 and at that time about three quarters of the industry’s supply chain came from imports. Now, the US wind industry boasts about 500 manufacturing facilities, many of which are centered in places like the Southeast, where wind energy is a rare find, but where wind manufacturing is seen as one of the few bright spots for an economy that’s struggling to find traction.

Ideologically, the wind industry may find its broadest support among Democrats. But wind generation remains strongest in staunch conservative pockets like the Midwest, where turbines line farms across Texas and Iowa. And in states like Oklahoma and Kansas, the industry is ramping up to become a political force.

That’s why the PTC is a rarity. It’s a political hot potato, yet it’s one with wide support that has prominent Republicans and Democrats calling for its extension. Most agree that the tax credit is worth the $4 billion–$5 billion bill that comes with a one-year extension. According to PTC supporter Senator Charles Grassley, Republican of Iowa, members of his party are reluctant to move ahead with legislation until they can find budget savings to offset that expense. So far, the support has produced lots of nods and handshakes, but not enough legislators willing to jump into the hot seat and vote for its extension. The hot seat, of course, is boiling at the moment because of a perfect political storm. The general election is just months away and a centerpiece of the criticism is President Obama’s pursuit of a clean energy policy. And nipping at its heels is the growing reality that fundamental tax reform will follow the election. That has industry insiders and analysts trying to read Washington’s swaying tea leaves. How will tax reform come together? Will any type of tax policy receive a long-term extension in this political landscape? And how does wind differentiate itself amid the coming fray?

The Timetable

At Windpower 2012, the American Wind Energy Association (AWEA)’s annual conference in Atlanta in June, Republican strategist Karl Rove told those in attendance that the worst thing that happened for the wind industry was when Obama put the PTC extension on a Congressional ‘to-do list’ ahead of its August recess. Republicans say it won’t happen because Obama is failing to show leadership on the issue, and that the ultimatum proves their point. Democrats contend that there’s no way House Republicans especially will give Obama a political victory on the eve of the November election. Either way, few are giving a pre-election agreement much hope, even if Udall does succeed in giving the issue mainstream prominence each and every day.

That pushes the real political horse-trading into the tight window between the end of the election in early November and the new Congress in mid-January. By then, the PTC will be one of many cutthroat issues on the agenda, and it could get lost in the fray as the Bush tax cuts, the payroll tax holiday and the potential raising of the debt ceiling take precedence.

According to Tim Kemper of the Reznick Group, the PTC’s best bet is that it gets passed early in the lame-duck session (taking place after the election for the next Congress has been held, but before the current Congress has reached the end of its constitutional term). 

If that happens, the industry may have enough deals waiting on the sidelines to retain some of that 2012 momentum. The later a deal is struck, the more difficult it will be to salvage 2013, which according to Bloomberg New Energy Finance could see as little as 500 MW of new installations. IHS Emerging Energy Research, meanwhile, has projected the market could drop from 11 GW in 2012 to just over 2 GW in 2013.

This small window of opportunity comes as America debates the future size of its government, and ultimately what role taxpayers will play in energy investment. The recent economic downturn has paved the way for fundamental tax reform, and programmes like the PTC could get caught in the line of fire.

The last big tax reform came in 1986, and it was the type of divisive, laborious process that makes rewriting the tax code in 2013 a long shot. That realisation could, perhaps, bode well for a one-year extension, but that would really put pressure on the industry to secure something longer term.

Many in the industry don’t think a one-year extension will do much to secure the confidence of international companies and investors. That thinking extends to statehouses across the country — those places where jobs are the driving issue of the day. One such place is Arkansas, home to major manufacturing operations for everything from blades (LM Wind Power) to turbines (Nordex(NRDXF) to Mitsubishi). The notion that a one-year extension, especially with looming tax reform, will give companies the confidence to stay or invest in his state is a nonstarter for Democratic Governor Mike Beebe.

‘We don’t need it renewed for a year,’ he told the industry at Windpower. ‘How in the world do multimillion dollar investments get made ... how in the world can business or industry chart a course ... how in the world can the transmission system be expanded as it needs to be ... how in the world can all these capital decisions be made when you’re making public policy for something as important as this tax credit on a year-to-year basis and you don’t know whether it’s going to be renewed? That’s insane.

‘I can’t imagine with the sort of [bipartisan] support that there would be any hesitancy at all not only to renew, but to put in a cycle that people can be assured that they can make decisions two years, three years and five years down the road,’ he added.

Companies React

For legislators like Beebe as well as Governor Sam Brownback of Kansas and Senator Charles Grassley of Iowa, both Republicans, there’s little secret why they are among those leading the crusade. Wind has become big business in their states, and the success and impact of the industry easily cuts along party lines. And that’s certainly why Udall is heading up the charge from the Senate floor.

Earlier this year, when Danish wind giant Vestas (VWDRY) announced it was cutting more than 2300 jobs in Europe, it took the opportunity to warn that it could slash its presence in the US in half if the PTC failed to be extended. Many of those 1600 potential job losses could come in Colorado, where Vestas has spent about $1 billion building three manufacturing plants and one engineering facility. Those operations employ about 1700 people.

And it’s not just Vestas. Vermont-based NRG Systems, which manufactures wind measurement technology, had to cut jobs in May for the first time in its 30 years. President and CEO Jan Blittersdorf said, ‘Anything we can do to get past this and back to steady growth is fine by me.’

Mitsubishi Heavy Motors scrapped plans for a manufacturing plant in Beebe’s home state of Arkansas, which certainly didn’t diminish his passion for strong policy. And in rural Virginia, an area with few inroads in wind generation, a 45-MW wind farm targeted for completion by the end of this year was pushed back to 2015.

From developers to turbine manufacturers, the wind industry has already seen a stark downshift in its production plans. And while many are busy moving ahead to close out a strong 2012, they’re looking at the stark realities of 2013.

Where the Market is Going

As industry giants react to the lack of orders for 2013, they’re turning to other markets to fill the void. During a visit by Grassley to the Acciona (ACXIF) plant in Iowa, company officials said they’re turning to Canada to fill their own pipeline. That’s a similar approach to that reportedly considered by Siemens (SI) and Gamesa (GCTAF), who see the smaller Canadian market as a way to weather the short-term downturn.

Canada in 2011 installed more than 1200 MW of new wind energy capacity and has plans to install 1500 MW in 2012. The country, which boasts stable policies in Ontario and Quebec, has surpassed 5000 MW of cumulative capacity, and it has plans to top 10,000 by 2015. Partnerships with companies rooted in the US market may soften the jobs impact there. But those companies are also sure to explore their options in Latin America, where wind has been gaining serious momentum.

Whether such a strategy would work for long depends on transportation costs — the main reason that domestic wind projects have drawn manufacturing to the US. For a company like TPI Composites in Newton, Iowa, the blades they make are not necessarily less expensive to produce than those coming in from places like China. But transporting 50-metre blades to construction sites can push transportation costs to $15 to $20 per mile, said TPI CEO Steve Lockard. The US wind industry has evolved out of a need for transportation efficiency in a way that’s unnecessary for relatively lightweight industries like solar. So from the US wind industry’s point of view, feeding long distance markets may keep the jobs intact, but it won’t create the long-term stable economics it’s working to achieve.

Absent consistent federal policy, domestic developers and manufacturers may look for other ways to regain their post-PTC footing. According to Kemper, as they view the prospects of a zero-build year, they’ll be forced to reconsider what constitutes an acceptable deal. And they’ll also be driven by existing state policies. Ultimately, we may see some states increase their wind incentives as a way to drive production and manufacturing within their own borders. While this likely won’t make up for the potential loss of the PTC, it could lessen the blow from its demise.

Dan Shreve of MAKE Consulting recently released a report that looks at the US wind industry from 2013 to 2016 under a series of scenarios, ranging from no extension to the adoption of a Clean Energy Standard. While MAKE expects the PTC to get a one-year extension, there are other factors at play that could weigh down the industry over the next few years regardless of an extension.

According to the report, none of the policy scenarios it looked at supported more than 7 GW of new installations per year, and the more likely scenario was peaks of about 5 GW through 2016, with significantly lower figures in the short term.

The reasons for the lower wind installations have much to do with the expectation of continued low natural gas prices and a lessening commitment from utilities in states with a Renewable Portfolio Standard (RPS). Those states, says the report, have made great strides in meeting the RPS and they’ll need to invest less in wind to maintain their pace.

‘Strong year-on-year build cycles, plus effective “banking” of renewable energy credits (RECs) ensure that many utilities are already in compliance and can use cheap REC purchases from existing capacity,’ the report says. MAKE’s baseline scenario estimates RPS policies will drive little more than 15 GW of new capacity through 2016.

While this changing policy landscape paints a murky portrait, it will force the industry to in many ways stand on its own ahead of schedule. This, says the report, will drive innovation and cost savings in ways that may not lead to massive installment numbers, but will position it better for future success.

Steve Leone is an Associate Editor at RenewableEnergyWorld.com.  He has been a journalist for more than 15 years and has worked for news organizations in Rhode Island, Maine, New Hampshire, Virginia and California.

« July 2012 | Main | September 2012 »

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