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Get on board and fasten your safety belt

You don’t get on a roller coaster without expecting to be jostled a bit

By PAUL BRENT

You don’t need the environmental passion of former U.S. vice-president Al Gore or the bankroll of Texas oilman-turned-wind power-promoter T. Boone Pickens to invest in the clean technology sector.

But you do need a strong stomach, financial experts advise. It’s a wildly volatile sector that includes everything from alternative energy to waste reduction and pollution abatement. Most of the companies in the clean tech field are at the leading, often bleeding, edge of technology and carry all the risks associated with young companies competing in newly emerging industries.

“You don’t get on a roller coaster without expecting to be jostled a bit, and this sector is early-stage,” warns Duncan Stewart, president and chief investment officer of Duncan Stewart Asset Management Inc., which last year launched the country’s first clean tech fund for well-heeled private investors.

Although clean tech has huge potential, very few of the companies pay dividends. “It is not like they are trading at eight times earnings; they are trading at 28 times earnings,” Mr. Stewart says.

“This is going to be a volatile sector. It is going to be susceptible to not merely changes in market sentiment, but changes in oil prices; further, it is also going to be sensitive to government regulation” and the granting or elimination of subsidies in some cases, he says.

Even correctly predicting the future is no guarantee of market success, Mr. Stewart says, citing the case of uranium’s surprising slump despite sky-high oil prices. Uranium, the power source for nuclear reactors, is a “clean” source of energy (greenhouse gas emission-free at least). Yet “uranium has gone down 50 per cent while oil has gone from $60 [U.S. a barrel] to $120. Uranium, which should have gone up too, has dropped by half,” Mr. Stewart says.

“Even with perfect knowledge, you can’t necessarily predict how markets are going to react,” he concludes.

With these caveats in mind, what can a want-to-be clean tech investor do to cut the risk? A number of things, actually.

Mr. Stewart advises investors to not be dazzled by the promise and potential of companies in the sector but to scrutinize them with the same rigour that they would apply to any stock. This means looking for some sort of track record, measurable revenue, strong management, a demonstrated trend to profitability if there are no profits currently and favouring those trading at “non-ludicrous multiples,” he says.

“What I’m looking for are companies that, even if they weren’t clean tech companies, I would be interested in looking at: they have depth of management, they have more than $10-million in revenues. These are real companies, they have usually been around for five years plus.”

Mr. Stewart’s clean tech holdings include:

  • Xantrex Technology Inc. (XTX-T), a Vancouver-based maker of power inverters to store and convert electricity from unconventional sources such as wind turbines and solar panels for integration into electricity grids;


  • RuggedCom Inc. (RCM-T), a Woodbridge, Ont., company that makes networking products such as switches and routers for harsh environments like power stations, and;


  • 5N Plus Inc. (VNP-T), a Montreal-based producer of high-purity metals and compounds for electronic applications, most notably solar energy.


The fund manager is also willing to make exceptions to his rules. For example, one of Mr. Stewart’s favourite plays is Timminco Ltd. (TIM-T), a Toronto-based producer of specialty metals which has become a clean tech darling thanks to its process to make low-cost, solar-grade silicon for use in solar panels. The company doesn’t have the five-year track record in silicon production, but the sought-after material has become Timminco’s bread and butter.

In its first-quarter results, released in May, sales grew more than 11 per cent to $47.6-million, thanks entirely to the silicon side of the business where sales increased more than 45 per cent, to $34.7 million. Revenue at its magnesium group, meanwhile, slumped nearly 32 per cent, to $12.8-million from a strong year-ago quarter, because of foreign-exchange changes and increased competition.

But Timminco’s overall bottom line has improved. It lost $600,000 for the first quarter of 2008, compared with a net loss of $3.1-million in the first quarter of 2007. It reported a net loss of $18-million, or $0.20 per share, for 2007, compared with a net loss of $46.2-million, or $0.62 per share for 2006.

For Timminco investors, there has been plenty of good news in 2008. Perhaps the biggest news was its deal to supply solar-grade silicon to Q-Cells AG, the world’s largest maker of solar cells. (That deal has since been extended to 2013, from 2010.)

Timminco also completed a solar-grade silicon production facility with annual production output of 3,600 metric tons and increased its company-wide capacity for the in-demand material to 14,400 metric tons of annual output, based on market demand and customer acceptance of product. In the first quarter, it shipped 100 metric tons of solar-grade silicon at an average selling price in excess of $60 per kilogram; it forecasts its cost production will run between $10/kg and $15/kg going forward.

Timminco’s stock jumped following the May results release to a high of $35.69 a share, compared with an August, 2007, low of $4.10 a share. It currently trades around $22.50, or about 13 times forward earnings.

That’s just one example. There are plenty of less-established clean tech plays for investors to consider.

For example, there are now nearly 100 clean tech companies listed on the TSX Venture Exchange. And the exchange recently added clean tech as one of five sectors in its annual ranking list of Top 50 performers. In the clean tech group, the three leading companies for 2007 were:

  • Zongshen PEM Power Systems Inc. (ZPP-X), a Chinese maker of electric bikes;


  • Questor Technology Inc. (QST-X), which makes incinerators to burn waste gases; and


  • Naikun Wind Energy Group Inc. (NKW-X), which plans a wind farm off the coast of British Columbia.


Zongshen, which recently announced the election of MI Developments executive and former Liberal MP Dennis Mills to its board, has seen sales of its e-bikes soar along with gasoline prices. It booked a first-quarter 2008 profit of $269,922, compared to a year-earlier loss of $139,014, while sales jumped to $6.5-million from $1.8-million in 2007. It sold 23,413 e-bikes in the first three months of this year, compared with 6,458 in the first quarter of 2007, and said it expects to sell 260,000 bikes this year.

Over the past year Zongshen shares have zigzagged. In August, 2007, they traded as low as $1.35, reached a 52-week high of $4.14 last October, and recently have traded in the $1.70 range.

Calgary-based Questor, a stock market star last fall, has also fallen back to earth. A penny stock throughout the year, it is currently trading at 35 cents a share, near its 52-week low of 33 cents and well off its high of 82 cents. It recently announced a small first-quarter loss of $65,048, compared with a year-earlier profit of $128,478, because of lower revenues and higher overheads. Revenue for the quarter was $626,093 compared to $959,648 in the same quarter last year.

While it saw a slowdown in the key Alberta oil and gas business, Questor noted more domestic and international interest for its incineration technology, which has meant “an overall increase to requests for proposals and to incinerator sales orders received” and additional revenue in its second and third quarters, the company said.

Questor rang up 2007 net income of $1,977,383, compared to profit of $1,195,614 for 2006. Total revenue for 2007 was $9,228,982, up from $3,223,454 in 2006, based almost entirely upon a $6.6-million (U.S.) contract.

As for Naikun, in April the company hired SNC-Lavalin executive Michael O’Connor as president and CEO. He is currently project director for the $1.7-billion Canada Line Rapid Transit project being built for the 2010 Winter Olympics in Vancouver. Naikun has no earnings to examine yet, as it is proposing to build Canada’s first offshore wind project in Hecate Strait off the northern coast of British Columbia. The 320-megawatt project is currently under development for submission in B.C. Hydro’s 2008 Clean Energy proposal call, with a November deadline.

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