I wrote a number of articles on dispositions on MicroCapClub earlier this year. The thesis, in short, was that very small companies generally do not strive to get smaller. Quite the contrary, they need to grow to achieve economies of scale and spread the costs of management and public ownership across a greater revenue base. When they choose to shrink by shutting down or selling a division, something is up. It might well be worth an investor’s time to figure out just what’s motivating management to shrink their already too-little company. Case studies on Broadway & Seymour, Clearfield (CLFD), and Asure Software (ASUR) illustrated some of the things to look for such as the remaining segments financials, changes in beneficial ownership that might be forcing the change, smart money acquiring from dumb money, insider buying, net operating loss carry forwards, and even poison pills to preserve NOL’s. In this article I introduce another disposition situation without telling you how it ends. Because I don’t know yet. If you can see how its going to end, maybe you can still make a lot of money or avoid a dead money situation.
Before we get to the interesting situation, let me note that the final month of the year is the time to buy dispositions. They almost invariably have a disastrous past. Tax loss selling drives them down beginning in late November and into the early weeks of December most every year until they turn their operations around. If you miss them one year you may get a chance to buy again the next. They’ll dip in December even if there’s already signs of a turn around in the financials. I start my buying generally around the 2nd week of December when from my experience the long-time loser nanocaps bottom. Definitely be finished acquiring before Christmas as they start their way back up in the final week of the year.
Alter NRG Corp (NRG.TO, ANRGF recent price $0.35) was incorporated in February 2007. In April 2007, they purchased Westinghouse Plasma for $29 million financed by a $35 million IPO at $2.25 a share. Alter NRG also owned Fox Creek Coal which was sold in September 2011 for $5 million. I presume they owned a coal operation to couple with their plasma torch to gasify coal. They’ve also owned and recently divested GroundHeat International and Clean Energy which were geothermal operations. Clean Energy lost more than $27.6 million between its acquisition in 2009 and sale in 2012 for $5 million. GroundHeat also lost money before it was divested. All told, Alter NRG has lost more than $92 million since it’s founding. Generally, a company that has lost lots of money for years doesn’t excite investors and the current market price reflects that history. The opportunity lies in the divesture of these money-losing businesses, the change in management, and the focus on the remaining emerging business that is showing signs of success.
Westinghouse Plasma, which years ago was part of CBS Westinghouse, is the remaining business. It’s technology helps to dispose of garbage. They don’t bury the garbage, they don’t burn the garbage, they “gasify” the garbage. Westinghouse Plasma has been around a long time. Their plasma torches, in fact, have been used in Japanese gasification facilities for over a decade. Island countries like Japan don’t have space for landfills so garbage is either incinerated or gasified. Westinghouse is far and away the leader in plasma torch gasification technology with numerous patents and knowledge developed over years at their Pennsylvania R&D demonstration plants. The total R&D spend developing the technology exceeds $120 million. Plasma torches raise the garbage to temperatures approaching that of the sun and separates materials into their constituent molecules. Garbage is fully gasified at these high temperatures, even the metals. Plastic and paper will gasify into a plasma consisting of hydrogen, carbon, and oxygen among others. The resulting “syn gases” can be separated in huge processing plants and used for various purposes. Carbon monoxide, for example, can be combusted into CO2 and the heat released used to produce electrical energy. Hydrogen can also be combusted for energy, sent into large scale fuel cells to produce electricity, or harvested to power future cars. Metals and other solids may be settled out into harmless slag that may go to a landfill or used in road building.
R&D efforts in recent years at the Westinghouse demonstration facilities in Pennsylvania has improved the efficiency and increased the scale of their gasifier technology. The plasma torch in the Tees Valley facility under construction by Air Products is capable of gasifying 1000 tons of waste per day while generating about 49MW to power 50,000 homes. This is much larger capacity than their decade-old facilities in Japan with improved efficiency as well. Westinghouse plasma technology has been around for decades but only now are mass-scale power generation plants being built. Even with the improvements, garbage in the US will continue to go primarily into landfills. Garbage gasification is economically viable where high population density makes landfills impossible or too expensive. The gasification facility relies on “tipping fees” to accept the garbage as well as revenue from the power generated and any gasses harvested to make money.
England has high population density and S&P 500 member Air Products & Chemicals (APD) is currently building the Tees Valley facility and conducting the engineering plans for an adjacent second facility. The plan is for Air Products to build five facilities in total in England. These are $400 million facilities with about $20 million each in revenue to Alter NRG for the plasma torch gasifiers and engineering services. Many of the emerging market countries are also crowded and have a growing need for power. Alter NRG has SMS infrastructure as a customer with projects in India and the middle east. Wuhan Kaidi is the customer in China with 100 sites identified to convert waste into power and ethanol. PGP Terminal has purchased a site license in the Czech Republic and Slovakia. This technology is potentially big business for years to come for Alter NRG. Every planned facility is a multi-year process of engineering plans followed by government approvals, however, and there can be no assurance that the facilities will ever be built.
Revenue to Alter NRG consists of site licenses to use their plasma-torch technology and engineering services both of which are fairly high margin. Equipment sales that are low-margin are expected to be the bulk of the revenue, however. In the contracts with Air Products and fortune 500 company NRG Energy is an option for Alter NRG to invest along side their partner up to 25% of the cost of the plant. This option is exercisable after all government regulatory approvals are in place making the investment much lower risk. Air Products has locked in long-term contracts for tipping fees and electrical power and project a return on investment of 12% for their Tees Valley plant. This should be reliable income for the life of the plant and Alter NRG has the option to invest up to $100 million in each of Air Products five planned plants. Alter NRG declined to invest in the Tees Valley plant but is currently putting in place investment vehicles to benefit from this option on future plants. In fact, the company founder, Mark Montemurro, stepped aside in 2011 to bring in the current CEO Walter Howard. Walter Howard stated “I have built a career financing energy projects” and in 2012 he was busy creating a structure for investment options in the annuity-like returns of these waste-to-energy projects. Considering the hundreds of millions Alter NRG can invest in these predictable return projects, the options to invest alongside Air Products may be worth more than the business of providing the equipment. This may turn out to be as much a financial services company providing a vehicle for infrastructure investment as an industrial equipment provider. This aspect creates the potential to make quite a few multiples on this $22 million market cap investment.
When a founding CEO steps down and plans the sale of the assets he acquired himself he’s probably got a reason. There’s probably a reason a number of knowledgeable insiders have added significant shares to their holdings in 2012 also. They believe the remaining business has good prospects. New CEO Walter Howard believes the Tees Valley plant is a paradigm shifter for what has admittedly been a slowly received gasification technology. His comments from the 2nd quarter earnings release include the following:
“Late last year we announced the sale of a full-scale gasifier to a large Fortune 500 Company which I believe was a major commercial tipping point. The Tees Valley project is providing us the opportunity to substantiate our technology and engineering in a very big way – not only to Air Products and Chemicals, but to the industry as a whole.
It is a paradigm shifting project in many ways:
- It is at a much larger scale than previous projects, taking approximately 1,000 tonnes per day of household waste.
- This is also a meaninful project for the energy sector as a whole producing 49MW, which is enough electricity for 50,000 homes.
- It is using a more advanced power generation system, through its combined cycle configuration, which provides greater energy efficiency and cleanliness.
- It is being advanced by a well respected industry leader.
- This project has provided the tipping point that has brought us many opportunites that we intend to translate into shareholder value. We are the clear industry leader that provides a solution to both large-scale waste management challenges, but also our increasing need for energy”.
A recent financing transaction will dilute shareholders. Russian billionaire Roman Abramovich is purchasing 30.8 million shares at $0.325 pending shareholder approval. Abramovich has involvement in waste to energy projects through recent investments in England based Waste2Tricity. He also recently invested in England-based AFC Energy which makes low-cost fuel cells for large scale applications. An additional 3.4 million shares are being issued to a large investor at the same price. This transaction hasn’t close yet but likely will later this year. This will raise the share count to approximately 104 million and the market cap to over 35 million. The dilution is very unfortunate but the Abromovich investment may have strategic value. AFC Energy’s fuel cells can produce electricity from hydrogen more efficiently than combusting it.
The balance sheet is substantially debt-free with some cash and the company owns shares in publicly traded Bellair Ventures (BVI) acquired in the $5 million sale of the geothermal business. Revenues are $8.5 million in the first 9 months of 2012 and are rising as the Air Products and other customers projects are advancing but the company is still not yet profitable. It’s not clear to me if the $10 million financing from Abromovich was necessary to finance existing operations or simply strategic to finance new fuel cell integration research. I suspect customers that are investing $400 million in a plant want to see some cash on the balance sheet of their key suppliers.
So what’s the downside? Well, maybe this technology does not get widely adopted and all the opportunity in China, India, and Eastern Europe never comes to fruition. Maybe Alter NRG burns through the cash on their balance sheet. Shareholders will still likely salvage at least a portion of their investment in a sale of the technology perhaps directly to Air Products or a supplier to Air Products. Management states that Air Products has changed everything and I think that may be true for investor downside protection in particular.
In summary, this is a still somewhat speculative investment but insiders have shown confidence both with share purchases, the company founder’s resignation of his CEO role, and the strategic decisions to abandon other businesses to pursue the remaining one. The share price reflects the company’s disastrous history rather than their potentially very bright future. Investors that can tolerate risk may be well rewarded.
Finally, thank you to MicroCapClub member Shaun Noll for pointing out this disposition situation following the earlier articles on that topic. I own a material position in Alter NRG stock acquired primarily this December.
[Alter NRG Investor Presentation]
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