Raser Technologies: Financing, Dilution Continue to Be an Issue for Now

An email from David regarding Raser Technologies (RZ):

..I wonder if you can find the time to respond to my request for your take on a stock which may be out of your area of expertise - Raser Technologies. Obviously the bulk of your research goes into biotechs, but I'm wondering if this one passes your "smell test," and what you think about the sector as well. It fits well into the green-tech, Obama trend but since the stock has trended down for some time, I'm wondering if to forget about it or see its current price as a buying opportunity? And in general what do you think about the sector - including stocks such as US Geothermal (HTM) and Nevada Geothermal?..

VFC's Take: Regarding Raser Technologies, it passes my 'smell test' as a long term speculative buy, however - mainly because of financing - the company has a long way to go before I'd be ready to call it a solid investment.

The alternative/green energy sector is a great one to be in right now, in my opinion, but there are quite a few companies out there that are all developing the same technology; meaning that the hard part will be finding the ones that have the best potential to succeed and then being invested in them before/if they start to make it to the big time.

Raser certainly does have a lot of potential technology wrapped up in the company, but like all other companies looking to get ahead in this sector, they don't have the financing to go-it-alone. If a big player doesn't come on board in a big way, then Raser - like others in the sector - is going to have to continue to depend on government grants to survive, or even take advantage of some of the 'stimulus' money that was to be destined to support 'green energy' initiatives.

I do like the potential of this company; if Raser can find a way to bring its technology and ideas to market on a large scale, then investors will be very satisfied over the long term, in my opinion; however, for the time being I think that financing and dilution are going to continue to be an issue.

However, it is possible that Raser can make a splash this year if its first geothermal plant (Thermo No. 1) is deemed a success. The plant, according to recent public releases, should be running at full capacity by the end of fiscal year 2009. The company has stated that revenue from electricity sold to Anaheim, California has been already coming in since the Spring, but I still think the plant - let alone the company - is a long way off from profitability, so any spike in price would be met with dilution.

As always, do your Due Diligence on this one. I think that the risk/reward profile is decent enough if you have a long term outlook. Government money is going to be pouring into this sector for years to come, so any one of these developmental energy companies that looks to have an edge could be the ones to benefit most.

Also, a buyout or licensing agreement by/with a larger power/energy supplier is also a possibility.

Disclosure: No position.

Comments

[tc1:]

The great thing about geothermal and companies like RZ is that they're not really in competition with each other, because their leased lands can all supply geothermal power to utilities who have a mandate to supply more and more power from renewable energy. So you'll not see anything here like AAPL vs MSFT or this company vs that company in this sector. In short, everyone can be a winner here if they get the upfront financing-- and a FAR GREATER amount of financing will now be available to geothermal companies than ever before, thanks to Obama, a Democratic-led Congress, DOE Secretary Chu, and PPAs from electric utilities.

In this sector, you've got the established "grandfather" company, Ormat (ORA), which supplies equipment and services to the juniors, and the several juniors. The latter are looking quite viable, some of them, like Raser Tech and Nevada Geothermal, already having brought on line the first of their several (and more?) planned geothermal power sites.

Many of us are betting that Raser Tech (RZ) will eventually get sufficient, secure funding to bring online their several geothermal sites, since they hold very valuable lands in the Western USA rich with untapped geothermal power.

It can be said that RZ (along with some of the other geothermal juniors), now finally has powerful, supportive allies -- the new political establishment trying to wean us off fossil fuels and the electric utilities wanting that baseload (24/7) alternative "clean" energy (cf. the intermittent solar and wind energy).

Disclosure: long RZ, Nevada Geothermal, Ormat, US Geothermal, and Magma. This sector is going to have HUGE growth over time.

Oct 28 10:46 AM

[Jack Yetiv:]

I agree with both the article and the comment, with one potential significant disagreement with the author. He suggests that financing is a big issue. On that we agree. Where we disagree is that he considers financing to be very risky, and I do not believe that to be so (I do realize the market disagrees with me, given that NGLPF has dropped 25% in the past few trading days and RZ has dropped 40% in the past couple of months).

The reason I do not see funding to be as major of a doubt as the author is because of the currently-available 30% investment tax credit. To see how it works, check out the NGLPF press release about 2 weeks ago. NGLPF has applied for a $58 million tax credit against their recently constructed Blue Mountain geo plant. As I understand it, if the certifications have been completed (and NGLPF completed those before applying) and the paperwork is submitted correctly, these credits are paid within 60 days, which in NGLPF's case will be in early December (they submitted the app Oct 9).

Wouldn't most people consider the very-likely influx of a $58 million GRANT (not a loan) in less than 45 days from today to be meaningful financing for a company with a market cap under $100 million?

Although the above comment addresses NGLPF, I believe RZ is working on a similar application for its Thermo plant. Keep in mind that this program is not limited to one plant--in fact, it can be repeated as each plant achieves the necessary milestones

Jack Yetiv

Oct 28 11:13 AM

[tc1:]

Great clarification, Jack, about the 30% investment tax credit.

Oct 28 11:30 AM

[H.J. Huneycutt:]

Good analysis. I agree with almost everything you said and I've been following Raser for about a year.

Of all the companies in the cleantech sphere, I believe Raser has the most potential for long-term investors; but financing has become a really big problem for them.

It's almost guaranteed that there will be further dilution and that's going to depress the stock even more; the only question is how long and how much.

The dilution creates a lot of issues for buyers. First off, it's difficult to tell how profitable this company can be within the next 5-10 years (assuming it survives) even without the dilution factor; but with the dilution factor, it feels like you're wandering around in the dark on this issue. It's completely possible that RZ is only worth 20 cents per share when all is said and done; it's also possible that it's worth $20 per share. It just depends on how much dilution is forthcoming and where the company is priced when it comes.

At the very least, you have to hope (if you're a RZ shareholder) that RZ is able to find ways to finance things until they can start producing some revenues of note, which might attract investor interest and at least make the "dilution" more accretive than it might otherwise be.

But RZ is the very definition of a speculative investment. As far as speculative investments go, it's not bad. They are in the best sphere of alternative energy (IMO) and they have powerful allies in Washington. If they are successful, they also have a massive moat in the particular area of geothermal they are working in.

Even if RZ becomes insolvent, it's possible that some big player sees enough power to buy them out.

Oct 28 02:15 PM

[tedfoo:]

As an unfortunate shareholder of Raser, nursing a 60% loss, maybe I can add something. They are my speculative play in my portfolio from early this year. I've sold off everything else for profit a couple months ago, and now this is the only stock I own.

I'm waiting for something to happen with RZ, but it's only good at going down. I think if you have no position with them, you can wait to buy some, and I would suggest 70 cents may be a good entry point (provided it gets to 70cents without more bad news occurring). They must get their Thermo 1 power plant up to full 10 MW capacity by the end of the year. While this power plant will not bring them to profitability, it does prove they can build a functioning power plant with their unusual approach at geothermal. With the proof of concept plant, they will surely land power purchase agreements, where municipalities fund a large portion of the plant building up front in exchange for cheaper green power. It appears the the South Cal PPA is on board for a 40 MW project, but I suspect they're waiting for the proof of concept plant to prove itself before inking the deal. Raser has a ton of MW land they can develop, and as the article discusses they have no capital, and right now are short on investor faith after their Thermo 1 debacle. Again this is why it is critical Thermo 1 get to 10 MW if they wish to stay in business.

Why haven't I sold? Well there's another half of the Raser business which could be the home run ball and come out of the blue. They also developed/own an electric motor, which is very powerful and has the ability to be used in large vehicles (trucks, SUVs, military). Their proof of concept - the 100 mpg hybrid hummer has been successful. They have yet to convert this motor into revenue, and it's largely been forgotten. I find it very interesting that hummer now being owned by China has numerous news articles talking about developing an electric hummer. Hummer ceo on fox business news said they were in extensive talks with an unnamed electric powertrain company about making the hummer a hybrid. Raser is desperate to sell this motor technology or license it out at bargain prices, and I think the new China owners are desperate to find a niche in the burgeoning electric hybrid sector with a truck. Any sort of revenue stream coming from the motor technology business would turn this company and the share price around in a heartbeat. It's a long shot, but I'm not going to sell for a loss now. What are lottery tickets for anyway?

Oct 28 05:33 PM

[Jack Yetiv:]

Keep in mind that the hybrid powertrain that RZ has showcased in the Hummer could be used, with slight modification, in most SUV's and trucks. That covers almost 50% of the automative market in the US.

Also, as I mentioned in my previous comment, it seems quite likely to me that RZ will be able to apply for the 30% tax credit on its Thermo plant in the next few months, and possibly even before this year is out.

Given the potential of the hybdrid powertrain and the better than 50:50 likelihood that RZ will get a tax credit on Thermo, I think there is more upside potential to downside potential on RZ.

Jack Yetiv

Oct 28 09:43 PM

[Heyya:]

First of all, the geothermal market itself - excellent. The technology is proven, it has many advantages over other renewable energy technologies (it has a very small footprint, so not as many impacts or NIMBY), it will soon be receiving loans from DOE, and it has the general support of BLM.

Out of the many geothermal companies, I think Raser is the least likely to succeed. I advise against investing in them. Ormat is the most successful and profitable company and also does not rely on loans and the difficult-to-get financing as much as all the others. Ormat (ORA) is the best and safest investment, but I also like the growth and profit potential of Nevada Geothermal (NGLPF) and Magma (MGMXF), and to a lesser extent HTM.

Disclosure: I work in the geothermal industry, and I am long Ormat (ORA), NGLPF, and HTM. I like Magma, but have not invested in them yet as do not trust the stock price yet.

Oct 29 02:21 PM

[mike57:]

I have stuck with RZ since with them since they were trading at the 10. to 11.00 range and have added with the shares so far down . Yes, it is a risk/reward play but I sincerely believe in what they have to offer to the industry, geothermal and automobile. I enjoyed reading the other post.

Oct 29 03:05 PM

[1reward:]

RZ does not manage its investments or loans correctly at all. The top dogs of the company spread the money to themselves and continue their rhetoric of how in the future, soon, by years end, getting close, about to finish thermo 1, and so forth, but never succeeding. A real company makes a product for profit. This company has done neither. They depend on loans and the government to stay alive just long enough to fill their pockets. Geothermal = ethanol. For all the money invested, there is no way to make a profit. More effort than reward. Geothermal energy has not been proven to be cost effective for profit yet. Name me a company in the Geothermal industry that can supply and profit like any other energy sector? Geothermal=bust.

Oct 29 03:40 PM

[Steve Pluvia:]

RZ

Oct 30 11:56 AM