ADA-ES Waiting For The Squeeze

| About: Advanced Emissions (ADES)

Leading clean coal technology company ADA-ES (NASDAQ:ADES) announced outstanding first quarter results last week. The continued monetization of the company's 28 refined coal facilities is back on stride, as the company closed on its 5th monetization contract in February. The company's growth trajectory continues to keep shareholders satisfied. First quarter revenue rose 274% to $68.31 million from the year-earlier quarter. The majority of their proliferation is from the company's Emission Control division whose revenue was up more than threefold from a year ago. This growth is a result of the federal Mercury and Air Toxics Standards (MATS) rule that organizations must comply to. While net income is still at a loss, the losses switch to gains as each refined coal facility is monetized. That red to green metamorphosis was proven this past quarter by the $12.2 million of positive cash flow generated by the company.


Based on the monetization structure, ADES benefits by receiving upfront deposits of approximately $1/ton to $3/ton, which is accretive to cash (example: 6 million ton facility may generate about $9 million in upfront deposits). The upfront deposit is essentially prepaid rent for using ADES equipment. 40 million tons of coal processed, in aggregate, should generate up from approximately $50 million to $100 million (average estimate is around $70 million) in upfront cash deposits to ADES. As of the close of the quarter, ADES has 5 of their 28 refined coal facilities monetized. The company expects to monetize 8-9 facilities by the end of 2013. This monetization rate is significant; before the refined coal facilities are monetized they are each costing ADES $10-12 million per year. Once monetized that cost instantly switches to a profit of $14 million plus per year. That is an impact of $25 million to operating margins, and it will meaningfully improve profitability throughout the year. An additional 19 units are expected to be monetized in 2014 and 2015.

Pulverized Coal

ADES has a new refined coal technology called M-45-PC, where they have achieved Section 45 qualified emission reductions for pulverized coal boilers. A pulverized coal boiler is an industrial or utility boiler that generates thermal energy by burning pulverized coal (also known as coal powder or coal dust). The benefit of the pulverized coal technology allows a facility to double the tonnage of refined coal per year. ADES has 12 facilities that they are planning to use the M-45-PC boilers in. With pulverized coal coming online, the cumulative amount of tonnage that this business can do has virtually doubled, from 60 million tons to almost 110 million tons, which effectively doubles the value of the business.


Shorts have flocked to this stock because ADES loses money running the RC units until they sell and monetize them. The company generates tax credits, so until they sell the units and convert the credits to cash, it doesn't look good on the books. The company is creating value but it looks like losses until it is converted to cash. The tax credits that their refined coal facilities generate expire in 2020, which is a long way out for someone to carry a short position. Environmental regulation will be even stronger as the years go on, so the chance that the tax credits will not be renewed are slim.

To summarize, ADES is turning cash flow positive at a faster clip than anyone imagined and the company will be profitable this quarter. Their emissions control business is going gangbusters. I am expecting a major short squeeze to occur in this stock similar to the squeezes that have occurred in the great Elon Musk companies TSLA and SCTY. Average trading volume in the stock is 78k while short interest is 568k which will take 12.679 days to cover. In my opinion this stock doubles from here, and should be trading around $60 per share.

Disclosure: I am long ADES. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.