This article is a continuation of my Ten
Alternative Energy Speculations for 2008, with picks #8, 9, and10 published last
Thursday. If you haven't already, please read the introduction to that
article before buying any of the stock picks that follow. These companies
are likely to be highly volatile, and large positions are not appropriate for
many investors. My least risky picks are part of that same article
linked to above; the moderately
risky picks are here. This article contains the most speculative three
picks.
#3 Nevada Geothermal Power (OTCBB:NGLPF
or Toronto:NGP.V) US$1.29 or
CAD$1.26
Geothermal first started catching investors' attention about six months
ago. I went into detail as to the reasons for its appeal, and the factors
bringing it to investors' attention in this profile
of Geothermal power in October.
Since then, we have been given an added reason to appreciate Geothermal in
the United States. While the recent energy bill did not contain a national
RPS, nor tax credits for renewables, it did give
the geothermal community much of what they were asking for since it
contained the "Advanced Geothermal Energy Research and Development Act of
2007."
There are three ways to invest in geothermal power: through the technology,
through existing plant operators, and through resource explorers and
developers. The provisions relating to Enhanced Geothermal Power and
Co-production in oil fields should help technology and service providers such as
Ormat (NYSE:ORA)
and United Technologies (NYSE: UTX)
over the long term, since they will help open up new opportunities for
Geothermal. Over the short term, which is what this article is about, I
expect the "Industry-coupled drilling" provision will be most
important, and help explorers and developers of conventional geothermal
resources.
According to the Geothermal Energy
Association, the Industry-coupled drilling provision "pairs
the federal government with geothermal developers to reduce drilling risks and
improve drilling precision." Geothermal exploration and development
is a very risky process, so government risk-sharing should greatly increase the
value of Geothermal prospects by lowering the effective discount rate at which
they are valued. Coming as it does early in the development process, a
reduction in risk could easily be worth more to a company which owns the rights
to develop an undeveloped geothermal resource than the later boost to income
that would come from a Production Tax Credit, even though the industry-coupled
drilling provision is likely to cost the government far less than a Geothermal
Production Tax Credit.
US-based geothermal developers are most likely to benefit from this
provision. These include US
Geothermal (OTCBB: UGTH, GTH.TO),
Sierra Geothermal (OTC: SRAGF,
SRA.V), Raser
Technologies, (NYSEArca:RZ),
and Nevada Geothermal (OTC BB: NGLPF.OB,
NGP.V)). US
Geothermal and Raser Tech are up over 3x from their 52 week lows, while Sierra
and Nevada Geothermal are each up about 2x, although the Nevada Geothermal share
price was stagnant for the previous two years, while Sierra Geothermal has been
following a steady uptrend.
Comparing these last two with the least recent appreciation, Sierra
Geothermal has many more early stage projects, while Nevada Geothermal has just
four high quality projects nearer to production. In fact, Nevada
Geothermal owns Sierra Geothermal's most advanced project (Pumpernickel),
and Sierra's exploration and development efforts will earn them at most a 50%
share of the project. This is only Nevada Geothermal's second most
advanced project, after their wholly owned Blue
Mountain project which is on track to begin producing electricity in 2009,
and for which they have already completed a Power
Purchase Agreement and an interconnection
agreement with local utilities. Nevada Geothermal is currently funding
development of its projects with loans from the likes of Geothermal specialist Glitner
Bank and Morgan
Stanley, while Sierra Geothermal is financing its exploration needs with dilutive
private placements.
Because of the relatively small recent run-up for Nevada Geothermal, its
strong financial position, and ownership of a late-stage project (as well as sufficient
promising projects to keep them busy with development for many years to come), I
see the most potential for robust returns in Nevada Geothermal among geothermal
developers.
#2 Finavera Renewables (TSX:FVR
or FNVRF.PK) CAD$0.335 or
US$0.3371
I chose to include Finavera in my Top Ten Speculations for 2008 for my own
reasons, but AltEnergyStocks.com Editor Charles Morand has been following the
company longer and more closely than I have myself, so I asked him to profile
it. You can read what he has to say about Finavera
Renewables here or simply scroll down to the next post.
#1 First Solar (Nasdaq:FSLR)
$267
When I disclosed
that I was short First Solar in the first installment of this series, I
received an incredulous comment soon after the article was syndicated
on Seeking Alpha: "OUCH!! You have a short position in FSLR? I hope it
doesn't come back and bite you!" I'm sure the commenter is not alone
in his conviction that First Solar's rise will continue. The fact that First
Solar has risen so far so fast only because people like the commenter have been
purchasing the shares like hotcakes all year.
Shorting is inherently more dangerous than being long, because in a long position
you can not lose more than you initial investment. Shorting a momentum
stock, even when it is overvalued, can be especially risky, because momentum
tends to be a self-fulfilling prophecy, with more investors becoming interested
and driving the price up as they try to buy the stock. For all those
reasons, shorting First Solar deserves to be the #1 riskiest of my 10
speculations for 2008.
Why did I decide to short at all? What makes me think that 2008 will be
the year that First Solar's bubble pops?
First Solar's valuation seems out of line because of an inherent limitation
on their profitability. Their solar panels are based on Cadmium-Telluride
(CdTe) thin film technology, and Tellurium (Te) is one of the scarcest elements
in the Earth's crust. In 2006, First
Solar's 60MW of production consumed 4% of the world's annual supply of the
metal. In 2008, analysts expect revenues of approximately 4x the 2006
number, meaning they will need approximately 16% of new annual Tellurium
supplies. PrimeStar Solar, a private company is using a recent infusion of
capital from General Electric (NYSE:GE)
to quickly begin production of their own CdTe modules. They do not
disclose the timing of production "for competitive reasons," but their
hiring and equipment
orders speak of an aggressive schedule; I expect they will begin production
in 2008.
With this much demand on short-term Tellurium supplies, we can expect
continued price increases. First Solar cannot set the price of their
product in the market, because they will be in direct competition with
conventional solar modules as will as thin film modules based on CIGS and
amorphous silicon technologies. With the failure of the US Congress to
extend tax incentives for solar or to pass a renewable electricity standard,
demand for solar panels may not continue to grow as robustly as it it has in
recent years. If anything, this should cause prices per watt to fall
somewhat in 2008.
Ethanol producers were caught in a commodity squeeze this year by using 25%
of the United States corn supply. In contrast to First Solar, ethanol
production has only been growing 20-25% a year, much slower than the demand for
Tellurium from CdTe cells, and corn production was artificially sustained at an uneconomically
high level before the advent of corn ethanol by farm subsidies. Hence, I
would expect a commodity squeeze for CdTe producers at a lower percentage of
supply. My 16% projection for 2008 does not seem out of line to trigger a
commodity squeeze, which could cause First Solar to miss (or at least cease to
beat) earnings estimates in the coming year. Missing or just failing to
exceed earnings estimates almost always leads to quick price drops for high
multiple companies. According to Yahoo!, First Solar's trailing P/E is
about 195.
If First Solar produces 240MW of panels in 2008, and Te prices remain at
$100/lb, as they
were in 2006, Tellurium cost alone would be $87 million [NOTE 3/8/08: I received a comment that I had lost a decimal in this calculation, with actual Te cost being only $8.7 million... don't take this as gospel, make sure to double-check if this makes a difference in your investment decision.], compared to First Call average estimated Revenues of $800M, and $146M estimated earnings. I
don't know what Tellurium prices were used in those estimated earnings, although
I expect it was over $100/lb. Whatever those estimates were, a $200/lb
underestimate would completely wipe out earnings for 2008, and, as the oil price
has shown us, even moderate increases in demand for a commodity with inelastic
supply can create massive price rises. What will new demand for Te rising
from 4% of supply to 16% of supply in two years do to the price?
UPDATE 1/2/08: Ken Zweibel, President of PrimeStar
Solar and former head of NREL's
thin film partnership program, got back to me today on a research question
for this article, now that the holidays are over. He couldn't tell me
much for strategic reasons, but did say that he isn't skeptical of First Solar's
valuation, and "There is more Te from nontraditional sources than people
are aware of." I believe he is referring to Te
from oceanic ridges, which I don't believe can be extracted in significant
quantity within the next couple years, although a Tellurium price rise like the
one I anticipate would lead to mining of oceanic ridges in the medium to long
term. Nevertheless, Ken is responsible for much of what we know about CdTe
technology, so his comments should not be taken lightly, and there may be other
nontraditional sources which can ramp up production more quickly.
The other reason to believe that First Solar's meteoric rise might halt in
2008 has to do with investor sentiment. An unscientific survey of
sentiment among Seeking Alpha bloggers (myself excluded) has turned negative (as
far as I can tell, only Andrew
Ling is still writing positively about the stock), and the Tellurium problem
is getting wide attention. How long will it take the mainstream press to
latch on to the Tellurium story? It's impossible to say, and another run
like last quarter could easily squeeze out the shorts.
Taking this all into account, my short position is only about 0.1% of my portfolio,
more of an intellectual experiment than a real bet. As Keynes said,
"The market can remain irrational longer than you can remain
solvent." I wouldn't advise anyone to take a short position in
FSLR so large that they could not sleep through another doubling of the stock
price.
If any play is for gamblers, this is it. But cards are stacking up
against First Solar.
Links: Picks #10,9,8;
Picks #7,6,5,4. Pick
#2 Finavera
Renewables
DISCLOSURE: Tom Konrad and/or his clients have long positions
in UGTH, SRA, RZ, NGP, ORA, UTX, FNV, GE, and a short position in
FSLR.
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.