by Debra Fiakas CFA
U.S. Geothermal (HTM: AMEX) is scheduled to report third quarter 2013 financial results on November 15th, taking every day allowed to a public company to reveal the fruits and labors of a quarter. There will be plenty to talk about in the conference call with analysts and investors. USG closed a loan financing to support the first phase of its San Emidio geothermal power project in Nevada. The loan valued at $30.7 million bears a fixed interest burden of 6.75% will replace a $25 million construction loan for the project and supply working capital for operation of San Emidio, shown right.
There should be a few dollars left over from the October loan deal to use as seed capital to begin the second phase of the San Emidio project. In early 2012, the company commissioned a 3.5 megawatt power plant, but intends to replace that with a more efficient 9 megawatt plant. The company has already started drilling new production and injection wells and will upgrade transmission capacity as well. Phase II is to start producing power by 2015.
Investors in alternative energy companies like USG are accustomed to hearing about plans for the future and power capacity at some time point ahead. However, USG has more to offer investors that a lot of promises. Sales in the twelve months ending June 2013 totaled $21.9 million and $2.0 million in operating cash flow. That is a cash conversion rate of 9.1% for those who are keeping track.
The feat of positive cash generation is an important one. USG has a history of red ink, burning plenty of cash to bring its three geothermal power plants online. Besides San Emidio the company operates a plant at Raft River in southeastern Idaho and another at Neal Hot Springs in Oregon. The company has two more leases in the San Emidio Desert in Nevada and owns a geothermal concession near Guatamala City in the Republic of Guatamala. Expect more investments and the potential for operations to burn cash again in the future.
There are no consensus estimates published for U.S. Geothermal, but there are high hopes for the quarter report. Message boards are filled with continuous chatter about the company’s progress. Unfortunately, that has not translated to a higher valuation for HTM. The stock has traded sideways for the last three months, after setting a 52-week high price of $0.61 in August and then falling off the June quarter results were published. The March 2013 and December 2012 quarters had both been profitable and the net loss in the June 2013 quarter was unsettling. I am always more concerned about operating cash flow in a growing company like Geothermal. Cash flow from operations was likewise lower sequentially, but still positive.
Profits or losses. Cash use or generation. As far as valuation is concerned it might not matter. At less than two bits per share the stock is priced very like at option on the company’s geothermal assets and management’s ability to turn hot rocks into a power source. With a third geothermal plant now completed and operating and long-term financing in place, it seems clear management has got the knack for it.
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.