Cleantech companies are exploring—and exploiting—the connections between many sectors of the energy, infrastructure and other industrial markets. Dallas Kachan, principal of cleantech research and consulting firm Kachan & Co. in Vancouver, points to the emergence of “clean” mining as an important investment theme for 2012. In this exclusive interview with The Critical Metals Report, Kachan shares some companies using green techniques to improve their bottom lines.
The Critical Metals Report: Dallas, can retail investors make money in the near-term in cleantech companies or should they be more focused on the long-term?
Dallas Kachan: If you had asked this question three months ago, my answer would have been different. Recently, cleantech stocks have outperformed the broad indexes and investors have made money in cleantech investments in the short-term.
Three indexes in particular, the Australian Cleatech Index (ACT), the Clean Edge Indexes (CLES) and the Cleantech Index (CTIUS) are all outperforming the NASDAQ and other benchmarks, largely because cleantech did not have much farther to fall. Companies have taken a battering in recent months. With the recent rise in oil prices, investors have started to remember the alternative energy sector.
What’s more, the cleantech umbrella is much wider than renewable energy. Transportation, air, water, waste and heavy industry also contribute to the increase in the cleantech index.
TCMR: Roughly how much was invested in cleantech in 2011? And how does that compare with previous years?
DK: We have followed the flow of venture capital in cleantech since 2006. The data show that while 2011 was a difficult year for cleantech company valuations, it was a great year for cleantech venture capital investment. A total of $9 billion (B) was put to work in 2011, up 13% from the previous year and higher than any other year in history with the exception of 2008, back in the heyday of solar and biofuels. Cleantech mergers and acquisitions (M&A) reached record highs in 2011, with 391 transactions worth $41.2B and 153% growth over 2010.
TCMR: With that amount of venture capital coming into the sector, does the U.S. government need to continue to subsidize the sector while it finds its feet?
DK: Neither the U.S. nor any other government needs to pass more subsides to encourage cleantech innovation. Governments shouldn’t be in the business of using taxpayer money to make technology bets. Instead, governments really need to pass aggressive mandates and standards, like renewable portfolio standards, that mandate a certain percentage of power from renewable sources by certain dates, and then step back and let the private sector figure out how to achieve them. Or, mandate efficiency or emission standards for coal-powered plants and let the private sector figure out how.
TCMR: If you could make that recommendation, what portfolio percentage would you recommend?
DK: I would take a cue from a jurisdiction like California, which is pursuing 33% of its power from renewable sources by 2020. That’s an aggressive number. Anything over 40% does not feel achievable in the short term, because renewable sources are not ready for baseload power at this time. Arguably nuclear and natural gas are can play that role, but those quickly become political discussions.
TCMR: What role does China play in these cleantech venture capital investments?
DK: China is receiving a small but growing percentage of global cleantech venture capital. Starting in 2009, China accounted for almost three-quarters of all cleantech IPO proceeds worldwide, and that still roughly remains the case today.
Asia is the top region for cleantech M&A activity, averaging around 30% of the total. Europe is also around 30% and North America has about 26%. So China has become an important global cleantech powerhouse, already dominating manufacturing in many important cleantech subsectors such as solar and wind.
TCMR: Nonetheless, China produces more power from coal-fired plants than any other country.
DK: It is fashionable to point to China as the world’s largest polluter. At the same time, China has put more money and more brainpower into solving the pollution problem than any other country. For instance, the amount of stimulus funding China has allocated to clean technologies, including water, waste and other non-energy cleantech infrastructure, is four times that of the U.S. ($221B vs. ~$60B). China has also taken a very aggressive stance in pursuing next-generation nuclear technology. That is encouraging.
TCMR: What other encouraging signs do you see coming out of China?
DK: The “Rising Tigers, Sleeping Giant” report from the Breakthrough Institute claims China, South Korea and Japan have already collectively passed the U.S. in the production of virtually all clean energy technologies. Over the next few years these countries will out-invest the U.S.
In addition, China makes decisions quickly, unencumbered by a democratic process. Last January, China announced intentions to build a 2 GW $5B concentrating solar thermal plant. Bill Gross, CEO of eSolar—the company whose technology was selected—recounts that, in the time it took the U.S. Department of Energy to complete the first stage of an application review, China approved, signed and started construction on a project that is 20 times bigger. Things happen fast in China.
TCMR: We watched oil rise about $106 a barrel (bbl) recently. What would a sustained run above $110/bbl mean to the cleantech space?
DK: Cleantech falls in and out of favor with retail and institutional investors as oil prices ebb and flow. When oil prices drop, cleantech falls out of fashion. As they creep back up, cleantech becomes in demand again.
The biggest single issue has been the high upfront capital costs of renewable energy. It is hard to raise the magnitude of money needed when finances are scarce and investors are short-sighted and risk-averse.
TCMR: In addition, a number of these plays have not proven profitable even with verbal power purchase agreements.
DK: Most solar and wind firms have struggled to stay profitable. Overcapacity in the renewable sector has resulted in massive pricing pressure. While that pressure is driving a more rapid move to grid parity, it erodes margins. In the long term, these price drops are good for the economy, the environment and the uptake of the product. But they are a significant negative for near-term corporate profitability.
TCMR: What advice would you give retail investors looking to add cleantech exposure to their portfolios?
DK: Although competing interests may be delaying investor’s financial returns in cleantech, the sector’s three fundamental drivers are sound.
First, the world is running out of the materials we need to sustain modern life. The supply-and-demand issues related to water, food, energy and resources are only going to get worse. Plus, the infrastructure to deliver them is under stress.
Second, countries are increasingly seeking resource independence, and as the supply-and-demand deltas get bigger, you’ll see more nationalism and protectionism.
Finally, even though it’s taken a backseat of late, climate change is a very real issue.
TCMR: How would retail investors get exposure to each of those themes?
DK: A good strategy might be to take a long position in any of the cleantech indexes: the ACT, CLES or CTIUS. They are broad indexes that attract an array of companies that will offer investors a certain amount of insurance. Buying exchange traded funds that track these indexes would be a safe way to enjoy returns in the cleantech space without having to do in-depth due diligence on individual companies.
TCMR: Looking at small-cap equities in cleantech, what are your investment themes?
DK: Each December, our company issues annual predictions for the year ahead, and for 2012 our first theme is betting against energy storage. Energy storage made headlines as the subsector that received the most global cleantech venture investment in Q311. That was driven by large investments in stationary cell fuel makers Bloom Energy and ClearEdge Power. We do not see any more investments of that size on the horizon. Of the 60 or so companies vying for this tiny market, many are selling at zero or negative gross margins.
The main reason we are not bullish on the storage sector is that smoothing the intermittency of renewable, solar and wind power might soon lose importance. We believe that utility-scale renewable power storage might be less necessary if utilities embraced other ways to generate clean, base-load power. We believe base-load power options will start to include new, safer forms of nuclear power or natural gas turbines powered by renewable natural gas. All of these promise to be less expensive than solar and wind when you factor in the expense of storage systems.
TCMR: OK, that is one theme. What is another?
DK: A second favorite theme we’re watching for 2012 is increased venture investment, M&A and public exits in the water and agriculture space, specifically what is called “’solutions to produced water.”
Until recently, only cleantech industry insiders were talking about water as an investment category, and it remains a small percentage of the $9B dollars we talked about in cleantech venture investment. However, industrial wastewater is driving growth in today’s water investment. Two of the top VC deals of Q411 focused on oil-and-gas water solutions.
Regulations aimed at making hydraulic fracturing, or fracking, less environmentally destructive will spur innovation and water-related investments in 2012.
TCMR: How does this technology work?
DK: Produced water is created by most hydraulic fracturing. There are more companies than ever bringing new remediation technologies to bear to try to clean up this produced water. In some cases, they are trying to remove and recycle metals and other dissolved solids and repurpose them as revenue streams.
TCMR: So, instead of just pumping produced water into a basin, it would be recycled and reused, for example in oil sand plants where steam is used to separate the oil from bitumen. Is that the gist of it?
DK: Yes. And in the case of fracking, the goal is returning clean water back to the ground water. Many companies are chasing what they believe are commercial opportunities.
TCMR: And what is your third theme?
DK: We expect to see more clean mining companies in 2012. After centuries of environmental effects ranging from toxic emissions to tailings ponds, mining is slowly cleaning up its act.
Why? Because new, clean technologies can increase industrial efficiency and lower mining companies’ power needs. They can even help reduce water requirements and remediate the mines of years past. That can translate into cost savings for mining companies.
Companies to watch here include American Manganese Inc. (AMY:TSX.V; AMYZ:OTCPK; 2AM:FSE), which has developed a lower power process intended to use only about 6% of the energy required by the high-temperature roasting process of conventional manganese production. It also intends to reduce its water requirements by using nanofiltration and precipitation to remove contaminants.
TCMR: Are those processes the primary reason to invest in American Manganese?
DK: We recently published an in-depth report looking at American Manganese and its process developed for its Artillery Peak resource in Arizona. We looked at the company’s probability for success based on a technology assessment and market supply-and-demand perspective. Our findings were cautiously optimistic that the company stands to have an impact in the global market for manganese given its net opportunity.
TCMR: How much does the price of manganese affect the share price of American Manganese?
DK: Well, we need to remember that the company is not yet in production. Its target for production is 2014.
Our investigation suggested that prices for manganese could be heading up given global supply-and-demand issues and what China, the world’s leading producer of electrolytic manganese, is expected to do in terms of consolidation of its production. Rising prices for electrolytic manganese spells better and better things for American Manganese, as long as the company can keep its production costs as low as currently planned.
TCMR: As far as its position as the only manganese project in America, what does that mean for the company?
DK: If American Manganese becomes a significant North American producer of electrolytic manganese and electrolytic manganese dioxide, it could potentially also do so at much lower costs for North American-based customers, which could make it very attractive for North American companies to do a lot of business with American Manganese.
TCMR: What are some other companies in this subsector?
DK: In toxin remediation and resource recovery, I would watch BacTech Environmental Corp. (BAC:CNSX; A1H4TY:WKN) and REBgold Corp. (RBG:TSX.V), which are using bacteria that the companies claim is harmless to humans and the environment to liberate precious and base metals from difficult to treat ores and tailings.
The process provides the bacteria with optimal conditions in closed reactors, according to the companies. Bactech and REBgold say they can oxidize sulfides in as few as five or six days, a process that normally takes many years in nature. The recovery of these materials allows Bactech to offer mine tailing remediation services at no charge to governments and for REBgold to pursue interests in gold mines and operations in Australia, Tasmania and China.
BioteQ Environmental Technologies Inc. (BQE:TSX) of Vancouver, Canada, is one of the handful of companies specializing in acid mine discharge. The company has built 14 industrial water treatment plants ranging in size up to 23,000 cubic meters a day. It has sites in Canada, the U.S., Mexico, Australia and China.
TCMR: Basically, BioteQ collects the water runoff at existing mining operations or past producing mining operations, and separates the water from the various heavy metals. Is that right?
TCMR: With its 14 water processing facilities around the world, what is its growth plan?
DK: The last time we spoke with the company, we were told it was focused on execution and keeping its head down.
TCMR: Do you have some parting thoughts on the cleantech space?
DK: I would restate the three drivers of cleantech I mentioned earlier. First, we are running out of materials we need to sustain life as we live in on earth. Second, countries are pursuing resource independence now more than ever. Third, climate change is not going away. Those three points are a great reminder that the demand for cleantech products and services is not going away anytime soon, short-term economic issues notwithstanding.
TCMR: Dallas, thank you for your time and your insights.
For more clean energy investment ideas, go to The Energy Report.
Dallas Kachan, managing partner of Kachan & Co. is former managing director and executive editor of the Cleantech Group, credited with coining the term cleantech and founding the cleantech investment class. He is author of 400+ cleantech articles and reports, a regular speaker at cleantech events worldwide and is cited widely as a cleantech market dynamics and technology expert.