It's no secret that money is flooding into the alternative energy sector, but not all of this money comes from sophisticated, investors. Unsophisticated investment is a lighting rod for the scam artists. Because there is both an urgent need to deal with the the problems posed by global warming, energy security, and resource depletion, and the new money is rapidly accelerating the advance of technology in renewable energy, new innovations are very plausible.

There are many ways to lose money in alternative energy, even without being taken by a scam. The current emotional climate in the industry makes even the most solid companies' shares gyrate wildly. Even mildly profitable, relatively unexciting picks like LED-maker CREE go on wild rides from $35 in April 06 to $15.25 at the start of February this year, only to shoot back up to over $25 today. A speculative technology startup such as Beacon Power Corp. (NASDAQ:BCON) , on the other hand, is likely to be even more volatile, having dropped almost 80% in a little over a year, and now looking as if it is headed into an upswing (as our own Charles Morand hopes.)

With all the risk already inherent in investing in a booming (or is it bubbling?) emerging industry, shell companies founded just to raise money from unsophisticated investors are at least one risk we can protect ourselves against. Below are a few basic precautions. I plan to illustrate them and how they apply to U.S. Sustainable Energy Corp. (OTCBB:USSE), a company that recently announced a "revolutionary new process" for creating biofuel from soybeans, which was brought to my attention by a comment on an article I had written on Green Diesel.

1. Stick to the exchanges. With a stock market listing comes regulation and oversight. A stock market listing is not a guarantee that a company is for real, but the extra oversight of the exchange means that if you stick to companies listed on the NYSE, the NASDAQ, and the AMEX, you're very unlikely to be buying into a scam. Even stocks which don't trade on an exchange in the United States often trade on exchanges abroad, but not all exchanges are equal. You're much safer with stocks on the London Stock Exchange than on London's Alternative Investment Market. Another quick screen is to check to see if any legitimate mutual funds or ETFs own the company you are interested in (in fact, for new investors looking to create their own alternative energy portfolios, a good starting point is the holdings of the industry mutual funds and ETFs.)

If you use one of these strategies, essentially trusting the regulator or the investment company (mutual fund) to weed out the scams for you, you don't need to worry much more about scams (unless you've ventured onto some of the wilder and woollier exchanges.) But the cautious approach may preclude investing in a technology that you just have to have in your portfolio. In that case, all is not lost, there are several other ways to sniff out scams. You may end up rejecting a few legitimate companies, but given the risks, why take a chance?

USSE: Traded on the bulletin board, with little or no oversight. Even worse, they got their stock market listing as the result of a reverse merger with a shell company, Laforza Automobiles, which means they also avoided the scrutiny that comes as part of an IPO. Recently, legitimate companies have chosen to use reverse mergers simply to avoid the headache of going public under Sarbanes -Oxley, but it is not a good sign, especially with a Bulletin Board stock.

2. Technology. It may sound obvious, but when picking an investment advisor, an investor will be better served by trying to understand how that advisor manages money,and if she/he is any good, rather than just picking the most likeable person who wants to put them in a "balanced portfolio of mutual funds." Unfortunately, many people do exactly the opposite. This same trap lurks in assessing technology, and scammers know that the typical American has a dismal understanding of basic science. Checking the science with an expert in the field, or even a blog/bulletin board search can go a long way to protect you from hoaxes. Countless startups with sound technology have failed because of bad management, soif there is any doubt about the plausibility of a company's technology, it's just not worth the risk.

USSE: Since their technology sounds somewhat akin to Pyrolysis followed by Fischer-Tropsch conversion, I asked Tom McKinnon, professor at the Colorado School of Mines, because I know he does research on pyrolysis chemistry. He responded:

1. The stated feedstock is corn and/or soy which makes it sound like an oil crop process, but the rest of the text doesn't make any reference to vegetable oils.

2. The three products (char, pyrolysis oil, and gas) are more consistent with a pyrolysis processso why did they mention corn and soy. It would be a waste to use oil crops for pyrolysis when you can use low grade biomass as a pyrolysis feed.

3. The pyrolysis gas is not suitable for FT synthesis without a lot of effort (at least that is my recollection, I haven’t gone back and dug into this.)

4. The high energy content of the fuel indicates that it contains very little, if any, oxygen. Typical pyrolysis oils contain phenols and a whole witches' brew of nasty reactive oxygenates.

5. Pyrolysis oils are generally quite unstable and degrade fairly quickly (time scale of weeks). I don't think anyone in their right mind would put pyrolysis oil into an expensive diesel engine, so maybe these guys have some other process.

Clearly, their technology is either revolutionary or a hoax. I also had a hunch that their claim of producing over 3x more energy in their output than biodiesel from the same feedstock seemed very high, and perhaps that there was actually more energy in their output than in their input. This would make their process another variant on a perpetual motion machine, and as such, violate the laws of physics. To do my calculations, I needed to know the BTU content of a bushel of soybeans (their stated feedstock), so I did a web search, and came across a discussion of none other than USSE. It turns out I was not the only skeptic thinking along these lines. If it's not perpetual motion, it's darn close.

It's also interesting to note that their "letter of validation" is from a Ph.D. wildlife ecologist and Biologist with an M.S. from a State University. I guess that all the engineers and chemists had something else to do that day, rather than tour the facilities of a company with a revolutionary new process that will help solve both peak oil and global warming.

3. Management. It's worth looking at management's background. Often shysters wrap up one scam, only to start another. Make sure you get biographical data from sources other than the company's website. You will want to make sure that the board of directors includes outside members with both the ability and motivation to oversee management and make sure that they do not make off with the firm's money.

USSE: Checking the company's management and board of directors , we note that the two lists are almost identical, with the exception of an extra member of the board, David Crow, a former (according to the site) senior vice president of "Pratt and Whitney." As the only person who has any chance of resembling an independent director, I looked him up and found him under the emeritus faculty at the University of Connecticut. He does seem to be an expert on gas turbine engineering, which would be useful for the power plant that USSE is planning, but he seems to have no experience which would help him in his duties of overseeing management.

4. Conservatism. Scammers have the incentive to boast about their company's future, solutions to big problems draw more suckers than fixing mundane, everyday problems. They will also gravitate towards business plans that are easy for everyone to understand and that people can see in their everyday lives. Not constrained by actually needing a real product to sell, they will almost invariably come up with a product that will make most people think "Wow, that'd be great." Conversely, you don't have to worry too much about the company that is trying to sell its widget that will make sewage treatment plants 5% more efficient.

USSE: Quote: "Our patent-pending liquid biofuel provides clean, renewable energy at a fraction of the cost of traditional biodiesel. It's also a superior fuel: it produces more energy and doesn't degrade engine performance, among other benefits."

I'm hardly the first person to point out that something smells in the state of Mississippi, but I hope this example will help give my readers the tools to avoid the next revolutionary new technology to teleport in.

DISCLOSURE: Tom Konrad and/or his clients have positions in these stocks mentioned here: CREE, BCON. He is neither long nor short USSE (his broker does not let him short penny stocks.)

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 01:03 AM | Permalink | Comments (0) | TrackBacks (0)

In the face of a declining overall energy market today, three of our favorite alternative energy stocks posted strong gains on high volume.

The Oil Services HOLDRs ETF (OIH) was down 2% and the PowerShares WilderHill Clean Energy ETF (PBW) was down 1.7%. Indeed, the vast majority of the energy stocks that we track were in the red. But bucking the trend were two energy stocks that we have profiled in the recent past and a third company that we will begin covering today.

First on the list is our favorite wind energy play, Welwind Energy International (WWEI). We recommended Welwind during October of 2006, when it was trading around $0.07. It closed today at $0.18, up 26% on 4X average trading volume. That is more than a 900% gain in the six months since we first initiated coverage on Welwind.

Next on the list of breakout stocks today is Nova Biosource Fuels (NVBF). Nova just announced a move from over-the counter to the AMEX, which will be effective on Monday, May 14. Nova recently held its official groundbreaking ceremony at the site of its planned biodiesel refinery in Seneca, Illinois. The plant is expected to have a 60-million-gallon per year biodiesel production capacity from locally generated, low-cost feedstocks, including rendered animal fats and oils and recycled vegetable and animal- based greases. Nova’s stock price increased by 4.5% today on 12X normal trading volume.

Our final stock is getting its first mention on Gold Stock Bull today. Despite being the darling of the ethanol investment community and attracting funding from none other than Bill Gates, we have been hesitant to recommend Pacific Ethanol (PEIX). We watched the stock quadruple during 2006 from $10 to nearly $45, but couldn’t see any fundamental justification for the rise and held off. PEIX has since retreated to around $15 in an overall downturn amongst ethanol producers.

So what is driving our optimism with Pacific Ethanol? A shift from hype to substance. The Sacramento, Calif.-based company swung to a first-quarter profit, earning $1.9 million, or 5 cents per share. During the same quarter last year, Pacific Ethanol lost $612,000, or 2 cents per share. This first-quarter profit was generated from revenue that more than doubled to $99.2 million from $38.2 million. Pacific Ethanol sold 37.5 million gallons of ethanol, almost twice as many as it did a year ago, and ethanol prices were up more than 20 percent.

Pacific Ethanol’s share price responded by climbing 9.1% on 6X normal trading volume. Despite fears by some investors of an oversupply in ethanol during the back half of 2007, we believe PEIX will continue pushing higher. We have a price target of $22 for 2007, which is a 47% increase from the current price. The chart below shows clear support at $15 and we believe a bounce off this price floor is imminent.

Pacific Ethanol currently has one plant operational, one plant about to open and three other plants under construction. The operational plant is located in Madera, California and has a capacity of 35 million gallons per year. It is the largest ethanol plant on the west coast.

Their second plant is being constructed in Boardman, Oregon and will also have a capacity of 35 million gallons per day. Construction is scheduled to be completed in the next few months.

Pacific Ethanol also has begun construction on three 50 MGY name plate capacity production plants that will open mid 2008. Magic Valley, Idaho will serve growing markets in the Intermountain West, while Pacific Ethanol’s Stockton, California and Imperial Valley, California plants will help meet the growing demand for ethanol in California.

The energy bill passed by Congress in 2005 requires an increase in ethanol use by refiners to 7.5 billion gallons by the year 2012. With Democrats now controlling both houses and looking likely to take over the presidency, we can only expect additional government incentive for alternative energies such as ethanol.

A significant portion of Ethanol demand is coming from the fact that states across the country have banned MTBE (Methyl Tertiary Butyl Ether), a fuel additive formerly required to increase octane levels of gasoline. MTBE has found its way into drinking water and many believe is cancer-causing. Ethanol is the only other commercially viable additive that will bring gasoline into compliance with state and federal clean air regulations. Consumption and production of ethanol has continued rising at a record pace and should be considered as part of any investment portfolio.

Good luck and happy investing!

Jason Hamlin is Founder of Gold Stock Bull, a site that has been tracking the secular bull market in gold and silver since its inception, back in early 2002, as well as the emerging bull market in energy since it took off in early 2004.

Posted by Jason Hamlin at 11:22 PM | Permalink | Comments (0)

The International Monetary Fund released its Spring 2007 World Economic Forecast today.

Fuel Vs. Food

There is a short sub-section in Appendix 1.1 ("Recent Developments in Commodity Markets") that I thought might be worth sharing with you. If you download the PDF version of the report and scroll down to page 44, you will find the said sub-section under the heading "Food and Biofuels".

In it, the IMF notes that food prices (as measured by its own food price index) rose by 10% in 2006, driven partly by a poor wheat crop in certain countries but also by (mandated) demand for biofuels in the US and Europe (see graph below).

The report notes that, looking ahead, the prices of crops like corn and soybeans, which are the main feedstocks for ethanol (US) and biodiesel (Europe), respectively, should: (a) continue to rise and (b) begin moving in line with the price of crude oil, which is currently the case with sugar because of its role in the Brazilian ethanol industry.

About the recent news that US farmers are planning to plant more corn acreage next year, the IMF has this to say:

"For 2007, the United States Department of Agriculture is estimating a record corn crop, as planting areas increase by 10 percent from 2006 at the expense of soybeans and cotton. Still, demand fueled by the increase in domestic ethanol production capacity is expected to outpace the production rise."

IMF economists also point out that the price of "partial substitutes" such as wheat and rice, as well as the price of meat and poultry, should trend upwards as a result of higher corn and soybean prices. Finally, high crude prices could place further upwards pressure on the price of corn because corn farming in the US is highly energy intensive.

The IMF - Not Especially Bullish on Corn Ethanol

It is the sub-section's final paragraph, in my view, that best captures IMF's view of current US and European biofuels policy. It reads as follows:

"While on a small scale biofuels may be beneficial by supplementing fuel supply, promoting their use to unsustainable levels under current technology is problematic, and long-term prospects for biofuels depend heavily on how quickly and efficiently second-generation substitutes (such as plant waste) can be adopted. Many energy market analysts also question the rationality of large subsidies that benefit farmers more than the environment.

While new technology is being developed, a more efficient solution from a global perspective would be to reduce tariffs on imports from developing countries (for example, Brazil) where biofuels production is cheaper and more energy efficient."

This reaffirms some of the contentions that were made on this site in the past:

(a) The way the US is proceeding with its approach to ethanol will inevitably place inflationary pressures on domestic and global food prices, which will result in tensions at home and abroad.

(b) The main reasons for pursuing ethanol in the manner in which it is being pursued in the US right now are, in order: (a) placate the farming lobby and earn valuable political support in America's hinterland; (b) placate the wean-America-off-foreign-oil lobby; (c) placate the soft environmentalist lobby; (d) combat climate change...oh, wait a minute...I guess no one's settled that thorny energy balance question yet, have they?

(c) Not letting emerging markets export ethanol tariff-free to the US is bad economically for a lot of people, from poor Brazilians to middle-class Americans

(d) Cellulosic ethanol is the only way forward if biofuels are ever to displace oil in a sustainable manner

To Conclude...

"Old news!", you might say...well you're right, except for this: it's one thing when I or some other insignificant blogger bashes (or celebrates) corn ethanol; it's quite another when the top economic think-tank in the world tells you that it sees real long-term viability problems with the way that this industry is currently structured.

To be sure, it's not like the IMF dedicated a large amount of space to this issue, and I'm quite certain that most of the economists who participated in producing this report don't loose sleep over it at night. But the strong terms used in that little sub-section further reinforce what the corn ethanol bears have been saying: enjoy it while it last, because it's not structured to be sustainable in its current form for much longer...and I'm not talking about environmental sustainability here.

DISCLOSURE: The author does not hold a position in any company involved in biofuels

Posted by Charles Morand at 06:53 PM | Permalink | Comments (2) | TrackBacks (0)

On January 29th, M~Wave [NASDAQ:MWAV] and private vertically integrated Biodiesel distributor Blue Sun Biodiesel announced a merger between the two, with Blue Sun becoming a division of M~Wave, and the merged company being renamed Blue Sun Holdings. Managerial control will also pass to "certain directors and the officers of SunFuels."

If this merger goes through as planned in the second quarter of 2007, US investors will have their first opportunity to invest in a stock focused on a biofuel which is much less controversial among environmentalists than corn-based ethanol. Estimates of the well-to-wheels Energy Return on Energy Invested (EREoI) for biodiesel range from about 1.93 and up, depending on the feedstock, although few numbers are available. The most commonly quoted EREoI for biodiesel is 3 or 3.2, but I've never found a reputable reference for that, and it will clearly vary widely depending on the oil feedstock, with waste oil being "best."

Speaking of feedstock, Blue Sun is a vertically integrated company with several farmer cooperatives raising oil exclusively for Blue Sun, often using varieties of mustard and canola being developed in-house by Blue Sun, although they have also used soy bought on the open market.

They have their proprietary blend of additives, which allows their Blue Sun Fusion biodiesel to offer superior cold weather performance. I've had several conversations with one of their distributors who uses their B100 in a dual tank diesel pickup, and he has been able to drive on B100 when the temperature is as low as 15 degrees F (-9C) (Unless you, like him are a mechanic who happens to carry around a spare fuel filter in your trunk and a spare tank on your vehicle, I would not recommend trying this... he has also had his fuel filters clog when he pushes the envelope too much... ). I'm no mechanic, and so I stick to B20 except during the summer when the temperature stays comfortably above 40F(+5C).

Their additives, according to a study by the National Renewble Energy Laboratory, allow the usual lower maintenance requirements due to the increase lubricity of biodiesel, and reduction of carbon monoxide, hydrocarbons and particulates also seen with most biodiesels, but Blue Sun's blend shows reductions in NOx as well, something that can be a serious issue for biodiesel producers, as we saw when Texas considered banning biodiesel because of increased NOx emissions last fall.

Finally, along with the announcement of the merger with M~Wave, they also announced a partnership with ARES Corporation to build biodiesel production facilities throughout North America, with the first in Clovis, NM. They had previously relied on contract biodiesel production at first tier facilities. Bringing production in house, combined with their own additives, they will have control of the entire biodiesel production and distribution chain (their distributors sign detailed agreements with them on how the biodiesel will be handled all the way to the pump) will likely help them cement their chosen market niche as the high quality biodiesel leader, which will give them a chance to compete with agricultural giants such as ADM and Cargill in the rapidly growing biodiesel marketplace.

Another publicly traded competitor is Earth Biofuels [OTCBB: EBOF], but their main competitive advantage is celebrity endorsement (BioWillie), rather than quality. Of course, investors considering buying MWAV as an early in to this quality biodiesel play should keep in mind that it ain't over til the fat lady sings when it comes to mergers and acquisitions.

Tom Konrad, Ph.D. is an independent investment advisor registered in the state of Colorado who helps people reach their investment goals while protecting the environment.

DISCLOSURE: Tom Konrad and clients hold positions in MWAV, as well as a private equity position in Blue Sun.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 08:30 AM | Permalink | Comments (3)