NASDAQ Boots Ener1 (HEVV.PK) And Taxpayer Loses Again

Energy companies that got federal loan guarantees are dropping like flies.  Why, just yesterday I blogged about the collapse of Beacon Power and the stimulus money it wasted.  BTW, I may have underestimated the total amount BCON actually borrowed under the loan guarantee.  Today we see another federally-backed company, Ener1 (HEVV.PK), getting delisted from NASDAQ because its financial statements aren't trustworthy.  Here are some highlights of this marvelous winner's recent operations. 

The Ener1 subsidiary that got the DOE grant, EnerDel, spent $53mm in taxpayer money to employ 253 people, costing $209,486 per stimulus job.  The company now employs 33 people, for a total program cost of $1,606,060 per job.  The stimulus jobs just keep getting more expensive.  That's what's funny about government procurement; a fixed-dollar contract drives up per-unit costs as the contractor discovers just how difficult it is to provide back-end support.  Just ask Lockheed Martin about their success with the F-35 . . . but I digress.

The news for taxpayers keeps getting worse with DOE's loan guarantees and grant programs.  At least Uncle Sam isn't the only institutional investor who's in the hole; Aspire Capital Fund threw $2mm down the tubes in August.  I hope this latest flop has the decency to change its name from Ener1 to something more appropriate, like Ener0 or EnerNothing. 

Full disclosure:  No position in HEVV, ever.

Alpha-D Update 10/31/11

Well, it sure didn't take long for GDX to start its climb back up.  Its rise triggered the covered calls I had written in both my accounts, so I bought back the entirety of my holdings today and renewed the covered calls. 

It's funny how I've had to repurchase my GDX holdings at slightly higher prices than the exercise prices at which they've been called away.  The cash flow I get from the covered calls pretty much makes up for that, so all-in-all I'm committing pretty much the same amount of capital to my GDX position every month.  It represents my gold hedge against the U.S. dollar. 

Those are the only change for today.  The news out of Europe alternates between brief euphoria at each new non-solution to sovereign debt and despair when reality returns. 

The Limerick of Finance for 10/30/11

MF Global looks for forced sale
Plunging share price has turned buyers pale
This thing might unwind
Some big firm wouldn't mind
It can buy select assets, then bail

Beacon Power (BCON) Bankrupt, More Federal Loan Guarantees Wasted

Uncle Sam needs to get out of the investment management business.  He just can't pick a winner.  Beacon Power Corp. (BCON) filed for bankruptcy today.  A quick look at the company's financial results shows us why this company has never been out of trouble.  SG&A spiraled wildly out of control starting in 2008.  If this was the result of a huge sales effort, nothing came of it as sales never regained the $1mm threshold the company had before SG&A exploded. 

A company that had very little debt up until 2009 was now emboldened to assume $25mm in debt in 2010 thanks to its success in getting DOE on board.  The good news is that BCON did not exercise the full amount of the loan guarantee (actually only about $3.4mm as noted on page 102 of their 2010 annual report), so the total loan loss to the taxpayer is far less than $43mm.  The bad news is that the loan guarantee came after DOE had given the company a Smart Grid Stimulus Grant of $24mm in November 2009.  This grant was supposed to fund a second flywheel energy storage facility with a 20 MW capacity.  That second plant never got past the site selection and environmental impact phase of its development.  Way to go, Beacon. 

Throwing good money after bad money isn't good enough for the federal government.  Beacon never even met the loan guarantee's covenants that were designed to safeguard recovery value for DOE.  For example, on page 22 of its 2010 annual report, Beacon states that it was obligated to "put its technology into escrow" (patents? or hard assets?) so that DOE could assume control of the 20 MW plant if Beacon couldn't make it work.  The plant is nonexistent, so there is no escrowed technology for DOE to recover.  The company contributed $26mm of its own cash and in-kind assets to the flywheel project (page 34 of the 2010 annual report), but there is no indication that those assets were escrowed specifically for DOE.  It seems likely that other general creditors will recover the remaining value of the assets pledged to support a project DOE underwrote with a loan guarantee. 

Way to go, Uncle Sam.  The federal government was so eager to prove that stimulus money was effective in building a green economy that it apparently couldn't even write a loan guarantee that would recover something if it all went kaputsky.  Read Beacon's annual reports before the corporate website disappears.  Somebody please prove me wrong. 

Full disclosure:  No position in BCON, ever. 

The Haiku of Finance for 10/29/11

People spending more?
Yet income isn't growing
What can't go on, won't

Cowardly Banks Now Scared Away From Debit Fees

Maybe those noisy protesters from the so-called 99% are having an effect on the system already.  Banks that are too big to fail are getting too scared to charge more fees.  Chase and Wells Fargo are backing off plans to assess more fees on debit card transactions.  BofA hasn't budged yet, probably because they're in such terrible shape and will have to have their corporate fingers pried away from their new fee plan once the boardroom gets sufficiently terrified.  A bank in that much trouble must have either a pretty high pain threshold, extremely tone-deaf management, or a billionaire investor like Warren Buffett who assures them they'll be bailed out now matter how many new fees they assess.  Oh, wait, that's right, it's the last choice.  Okay, that explains it. 

Doesn't Berkshire Hathaway still own WFC too?  And isn't JPM historically a Rockefeller family franchise?  If so, they and other "healthier" banks will figure out more devious means of financial repression.  Depositors need to read the pop-up windows every time they log into their accounts from now on, because failing to click "No Thank You" on one  may result in the assessment of some stealth annual fee for non-acknowledgement. 

Full disclosure:  No positions in bank stocks at this time. 

Market Goes Nuts Over Last-Ditch Euro Debt Deal

Today's big news out of Europe was hardly a surprise but the market acted like it had never been priced in.  An agreement to draw a firebreak around Greece's debts using French and German money has been obvious for days if not weeks.  Maybe sellers are finally glad they found one last group of gullible buyers onto whom they can offload some equities before everything is shredded. 

I give my readers credit for being intelligent, but the odd few might need an explanation of my sarcasm.  The EFSF as presently constituted is still too small to backstop anything beyond a bailout of banks holding Greek sovereign debt, even with principal writedowns.  Any further deterioration in Greek state finances, or even further hints of trouble with Spain's or Italy's debt, will overwhelm the EFSF's ability to respond in time.  European governance is too fractured to reach a broader bailout agreement, and the European Central Bank is too weak to backstop banks unilaterally or flood the market with liquidity. 

This means that any further bad news at all from Europe will require the U.S. Federal Reserve to immediately offer massive dollar swap lines to shore up the euro and its member states' various underwater banks.  The future of European unity now rests with Washington.  Europeans have done all they can for themselves, once again. 

Early Look At Living Systems Behind Occupy Wall Street

Examination of any nascent insurgency requires documentation of the living systems giving it sustenance. 

The organization that used to be known as ACORN no longer formally exists, but its staffers have formed the nucleus of new groups such as New York Communities for Change.  The NYCC now supports the Occupy Wall Street movement with fundraising and staffing. 

The Left's own Mother Jones describes how labor unions provided early support for the Occupy movement.  Other blogs have reported on how labor union activists were apparently brought in by bus and paid to appear in Occupy events. 

A story this big deserves an ironic cant.  Goldman Sachs pulled out of a fundraiser for a credit union when it discovered Occupy Wall Street would be an honoree.  GS does not share any target markets with that credit union so concern over anti-trust collusion should not have been a deal-breaker.  It is safe to say that GS is not part of the living systems support structure. 

First Solar (FSLR) CEO Out - Is There Hope?

First Solar (FSLR) has seen better days.  A shake-up in the CEO's chair was expected given the company's share price performance, down to the low 40s from over 170 in less than a year.  The stock's fundamentals now look compelling from a deep value standpoint:  a single-digit P/E ratio, low long term debt, positive FCF, five years of ROE growth.  The most recent quarter's nose-dive in net income is a cause for concern, but fortunately they don't have to worry about competing on price because their cost of production is low enough to compete with even China's state-subsidized solar makers. 

A brief word on FSLR's core technology is in order.  First Solar has the distinction of being the first solar (okay, pun intended) manufacturer to produce solar panels at a cost of $1/watt.  The key to their success has been the use of cadmium-telluride.  The price of cadmium has been deregulated since the 1950s, its worldwide supply sources are geographically diverse, and there is a growing market for recycling cadmium in the U.S.  Tellurium, although not a rare earth element, is so rare in geological availability that the U.S. government has difficulty estimating its worldwide production.  If resource availability will ever constrain First Solar's ambitions, falling tellurium supply will be the main culprit.  Tellurium is largely a byproduct of copper mining and the world price of "Dr. Copper" has fallen this year in response to slackening world demand.  The long-term outlook for tellurium is not rosy, as Jack Lifton has noted in this article addressing FSLR's ambitions.  No matter how compelling a value FSLR may appear based upon financial reports, the realities of geology will govern its future.

Full disclosure:  No position in FSLR at this time. 

Updating The Alpha-D For 10/24/11

I didn't need to make many portfolio changes this week.  My covered calls on FXI and GDX expired unexercised.  I renewed my covered calls on FXI to expire next month.  With GDX, I sold my calls in my IRA to expire this Friday, and in my taxable account I sold them to expire next month. 

My intent in splitting the GDX expirations was to capture a larger cash premium in my IRA with a lower strike price that is much closer to the current market price of GDX.  I needed a shorter expiration date to minimize the possibility that volatility would spike and sell away the GDX holdings.  My GDX holdings' value is below the most recent price I paid to recapture them after they were sold away (thanks to covered calls) some months ago.  Part of the challenge of a covered call strategy is maintaining the underlying stocks as a long-term investment while minimizing capital gains from selling them and avoiding capital losses from repurchasing them. 

I continue to hold several California muni bonds that will mature next year.  I am considering putting some cash into TIPS but I must complete some analysis first.  Individual TIPS may not adjust in value quickly enough to keep pace with high inflation, but a TIPS bond fund or ETF may be able to keep up.  I'll let you know which vehicle I choose (if any) once I've figure that out.

The Limerick of Finance for 10/23/11

There's not enough cash to save Greece
The markets will not be at peace
Italy's next to go
Then yield spreads will blow
Taxpayers, hold onto your fleece

The Haiku of Finance for 10/22/11

Germany's tax cut
Could derail Euro-summit
Chaos reigns right now

Frankish Kabuki Presages Euro Debt Non-Solution

It sure looks like the Frankish ethnic cousins - France and Germany - have pretty much settled on an uneasy compromise for injecting fresh capital into the EFSF.  France had wanted it to act like an insurer but Germany said "nein" to that, so the fund will likely remain only a liquidity provider.  That takes care of Greece for the time being, with short-term melt-up rallies aplenty coming for stocks on both sides of the Atlantic.  Maybe France will see the light behind limiting the EFSF's firepower once it considers how its sovereign credit rating is getting trashed. 

The bad news is that the continent's bad debts are now obviously too big for a Greek-sized rescue fund. Germany has drawn the line at any further rescues beyond Greece.  Italy and Spain, when and if they fail to make sovereign debt payments, are beyond the EFSF's reach.  China will not bail out Europe; it has too many insolvent banks and municipalities at home to shore up.  The U.S. may provide a repeat of its massive swap transfers, but if Europe's collateral (that's the euro, folks) dissolves the Fed will have to create untold amounts of new dollars to shore up its own balance sheet.  That giant sucking sound you'll hear will be the sound of non-U.S. institutions running to dispose of their dollars.  No foreigner wants to hold a devalued dollar.  Rushing to drop a devalued currency can very well launch hyperinflation for Americans holding no other asset besides U.S. dollars. 

Enjoy your weekend! 

Nota bene:  I am long FXI and GDX (which I have held for diversification purposes) and a few California state muni bonds.  I hold a lot of cash right now because I believe this European situation will result in a very serious downturn in may equity markets. 

Evolving Gold (EVG) Exploring In The West

Evolving Gold (EVG.TO and EVOGF.PK) is prospecting in several well-explored areas.  Their challenge is to bring several years' worth of effort to fruition. 

The company's recent financial history deserves scrutiny.  They closed a private placement in July 2010 for $15.6mm and apparently burned through it in about a year.  Goldcorp owned 19mm shares worth $0.82 a share at that point.  EVG secured their most recent private placement in August 2011, receiving $5.8mm.  This placement valued the company at $0.56 per share (not counting warrants, which at an exercise price of $0.75/share have no value at present).  The investors keeping this company alive with cash infusions are expecting progressively lower valuations, which is no surprise given the company's operating history.  Appointing a new CEO in March 2011 was a necessary step in retaining investor confidence and keeping their drilling programs on track. 

Several years' worth of exploration efforts in multiple properties have yet to result in independently verified assays or a 43-101 compliant report.  The lack of confirmed 2P reserves makes it impossible to establish a firm valuation for this company.  The delays in confirming announced discoveries seem to to stem in part from an inefficient drilling program.  EVG's most recent investor presentation emphasizes vertical drilling, yet the Carlin trend's geology is so well-known that vein locations can probably be estimated more accurately than EVG has done so far.  Talented drillers can drill at slants to intercept multiple veins with one bore hole; it isn't clear whether EVG has ever considered slant drilling in any of its properties, let alone the Carlin trend.  Their recently completed airborne radiometric and magnetic surveys of their Rattlesnake property should have been completed long ago, so the company's plan for renewed drilling is long overdue.  Agnico-Eagle must be wondering if its commitment to fully fund exploration at Rattlesnake is worth the cost. 

The viability of the Rattlesnake property is worth a mention. Photos of the property reveal a varied topography of multiple hills and spurs with 40-degree inclines.  EVG claims Rattlesnake's ores have plenty of oxides that will allow for efficient gold separation through heap leeching.  The only suitable place to locate a heap leeching pond is a plateau that looks to be several miles from the primary drill intercepts, so the logistics requirements of trucking ore a few more miles will add costs to any operation.  JV partners like Agnico-Eagle will need to know this before committing to development. 

EVG investors will need patience.  The firm has been operating for over four years and needs to show results.  One thing they can do immediately is commit to wisely using cash.  They closed their last fiscal year with $8.7mm in cash and now seem to have about $6mm on hand.  Most of that $6mm seems to have recently arrived from the August private placement mentioned above.  Did they completely spend their March cash balance in eight months?  Keeping exploration costs under control will be imperative, because they will have to raise more private placements in 2012 to complete the surveying they should have done in the first place prior to drilling holes.  They should also consider the cost of future purchases of mineral rights from those private landowners in the Carlin-Humboldt project who are not yet fully on board with development.  A bet on an exploration-only company is a bet on managerial talent.  Management should take a page out of other junior miners' playbooks and investigate whether its properties sit astride geothermal vents.  Leasing some property to a geothermal developer can provide them with cash flow they'll need to survive. 

Full disclosure:  No position in EVG at this time. 

The Haiku of Finance for 10/19/11

Franconian pact
Two trillion euro rescue
Fed swap lines stand by