Eco Investor June 2011

ASX 300 Companies

Many Stocks at 12 Month Lows

The downturn for many cleantech and clean energy securities began when the Carbon Pollution Reduction Scheme (CPRS) got bogged in parliament in the latter half of 2009. It continued when Kevin Rudd postponed the CPRS in April 2010. Few securities have recovered. For many, more than a year of share price declines has still not ended, and they are currently trading at 12 month or longer period lows. How long will the decline last, what other factors are at work, and which stocks have been the strong performers?

The first question has no easy answer. The most obvious circuit-breaker is the upcoming carbon tax, but Tony Abbott’s vocal and entrenched opposition to the carbon tax, and before that his equally vocal opposition to the Emissions Trading Scheme, seems to be nullifying any enthusiasm that could have been generated, including among share investors.

This Liberal Party negativity was amplified by new NSW Premier Barry O’Farrell retrospectively cutting the feed-in rate for existing systems, before being forced to backtrack. Another Liberal Party wet blanket wasWAPremier Colin Barnett reducing that state’s solar feed-in tariff rate.

Nor has Federal Labor’s cuts to many environmental programs in the May budget improved sentiment, and certainly not in the way that cuts to fossil fuel programs and subsidies would have done.

The decision by Germany to close its nuclear power stations is a huge win for clean energy, but perhaps Germany and nuclear energy are both too far away to have a big impact here.

Likewise, the UK’s decision to lead the world by reducing its 1990 greenhouse gas emissions by 50 per cent by 2025 is a big positive. But again, perhaps the UK and 2025 are both too far away to break the local short term malaise.

But the long term trend is clear. The German decision clearly vindicates the anti-nuclear stance of environmentalists over the decades. The German and UK changes are more evidence that the long term trend, both morally and technologically, is with clean energy. That’s a big positive.

But for local share investors, the question is how long do they have to wait for the trend to move back in the right direction?

At the moment enough local cleantech stocks are trading at 12 month lows to indicate that this is not the best time to sell.

The extent of the slump is extensive. Of the 18 ASX 300 companies followed by Eco Investor, six, or one third, are at or near a 12 month low. In contrast four are near a 12 month high. Likewise, of the 14 emerging companies currently trading, six, or over 40 per cent, are at or near 12 month lows, and only one is trading at a 12 month high.

The picture seems worse for micro caps stocks, with many also trading at close to year lows and few at year highs.

So it’s not a pretty picture and hasn’t been for over a year.

Apart from the postponement of the ETS, another Federal issue at work is the low price of renewable energy certificates. There are also individual factors affecting some industries and companies. And in some cases the causes are not obvious, and may not be related to specific news or other public information.

Of the six ASX 300 companies - Ceramic Fuel Cells, Dart Energy, Galaxy Resources, Infigen Energy, Tox Free Solutions, and Transpacific Industries, Federal issues have most obviously taken their toll on Infigen Energy.

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Infigen’s security price has been declining steadily from a two year high of $1.55 in October 2009. Apart from the troubled CPRS, the only other specific thing that happened around then was the release of its annual report a month earlier, but it has since labored under commentary that it still carries too much debt from the pre-GFC period, and its share decline was kicked along when it withdrew its US assets from sale, and with the disclosure that much of its cash flow is tied to debt repayments. The ETS postponement and low price of renewable energy certificates added to this mix.

Unfortunately for investors in this key clean energy stock, Infigen’s 12 month low is also its all time low and the pain shows little sign of going away in the short term.

Federal and State policy issues may also be behind the lows of the two emerging solar energy companies, Quantum Energy and Solco.

Over the last three years both companies share prices peaked in August and October 2009 respectively, when the CPRS was still possible and government enthusiasm for solar and the prices of renewable energy certificates were much higher. The three year fall for Quantum has been huge, from a peak of 42 cents to 4.6 cents. For Solco the fall has been less dramatic, from 15 cents to 8.5 cents.

Other factors at work for Quantum have been its movement from profit to loss, an ASX query about its low cash position, and its removal from the All Ordinaries Index.

Despite being exposed to the erratic State solar feed-in tariff rates, Solco’s fall has been less severe, perhaps because it has moved from loss to profit, although its December 2010 half profit was down on the 2009 half year, and it has had other positive developments in its business.

An industry specific issue may be at work with Dart Energy, as the potential environmental cost of coal seam gas if not done properly has become a public issue. Most coal seam gas stocks have felt the heat, which has gone up several notches this year as the Federal, Qld and NSW governments have also been drawn into the issue, and the ABC’s Four Corners program covered the issue.

Dart Energy’s share price held up well after its peak last October of $1.32, but has shown a noticeable decline since mid February when public concerns over coal seam gas went up a gear. Around this time it completed the acquisition of Apollo Gas, which had been prominent in public coal seam gas concerns. (Apollo and Dart were on page 3 of the Sydney Morning Herald on June 4 over the plan to drill in the inner city suburb of St Peters.)

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Not even elevation to the ASX 200 Index in March has halted Dart’s decline. The company’s pricing of its $100 million capital raising in April at 75 cents when the shares were at 86 cents seems to have precipitated another step down.

Some of the other companies are harder to explain. For example, Ceramic Fuel Cells has also been trending downwards since September 2009 when it was 30 cents, yet it has been making progress with the initial sales and rollout of its BlueGen units in Europe and Australia.

Galaxy Resources, too, has been trending downwards since September 2009 but more noticeably since January this year when its shares were $1.80. Apart from the March postponement of its Hong Kong IPO, it too has generally had positive news. After a very strong rise, Tox Free Solutions’ share price turned south in January 2010 and the trend has not been reversed despite good news including rising metrics, exposure to the WA mining boom, and a maiden dividend.

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Transpacific Industries has been declining since January this year. The main news was a new chief executive (a promotion for the chief financial officer who is also an experienced senior executive), and the company entering discussion with some unhappy shareholders who have threatened a class action.

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An easier fall to explain is that of Clean TeQ Holdings, which has a significant convertible note arrangement with an investor who has an arbitrage opportunity and appears to be converting and selling the shares no matter the price (See article in Emerging Companies this issue.)

With the benefit of hindsight it is clear how dramatically and how widely cleantech share prices have been affected by the failure of the Government to proceed with the CPRS.

Fortunately, the news is not all bad. Four ASX 300 companies and one emerging company are trading at or near significant highs - Lynas Corporation and Qube Logistics are at all time highs, APA Group is at a three year high, Envestra at a two year high, and Transfield Services Infrastructure Fund (TSIF) at a one year high.

APA and Envestra are gas transmission businesses and this part of the gas industry continues to do well. TSIF is subject to a takeover offer. Lynas Corporation is riding the rare earths boom, and an experienced team at Qube Logistics has restructured the business to great enthusiasm from the market.

Yes, it’s tough. But at least these companies show that even in these down times it’s still possible to profit from well selected environmental shares.





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