Can Ballard Power Systems Survive Another 10 Years?

| About: Ballard Power (BLDP)


Ballard is considered the world leader in mobile fuel cell technology.

Ballard has had decades to prove and profit from commercializing its fuel cells.

Now Ballard is faced with the risk of its fuel cell technology becoming obsolete.

A new ultra low cost fuel cell that solves past fuel cell problems is being commercialized now.

Investors in current fuel cell companies should be aware of the risk this new technology brings to owning BLDP and other fuel cell stocks.

A new, patent issued fuel cell, that:

1) Runs on liquid fuels without the use of hydrogen gas.

2) Does not need bulky expensive reformers to convert liquid fuels like methanol into hydrogen.

3) Has eliminated the need for 65% of the raw material costs of most current fuel cells used today.

4) That does not need or use ultra high cost Platinum precious metal catalysts, or PEM membranes (both major expenses in Ballard style PEM fuel cells)

...has emerged, and may soon take the world by storm.

The horseless carriage, a car, replaced the stagecoach years ago. Diesel engines replaced steam engines on railroads. Ballard (NASDAQ:BLDP) has survived decades of major ups and downs, possibly because nothing better had arrived yet. That seems to be changing now.

PLUG, a BLDP customer, has recently done well in a niche market for replacing lead acid batteries with BLDP PEM fuel cells and PLUG interface hardware packages. But PLUG's recent success with Walmart forklifts may have had more to do with the 3X jump in lead acid battery costs (priced a lead acid car battery recently versus before 2009?) thanks to changes made in China starting in 2010, than it did with improvements in their fuel cells or the hydrogen infrastructure.

Forklifts are ultra-heavy and slow-speed devices, of limited range compared to cars and trucks. Lead acid batteries used in forklifts, are short lived. They last at most 5 years, and some as little as 2-3 years in heavy 24/7 warehouse use. So what I see in PLUG is a BLDP customer that found a perfect niche market at the perfect time, for what is about to become an obsolete fuel cell technology.

Ballard is also pursuing PEM Fuel cell demos and sales on buses. Buses are also heavy, bulky, short haul distance, frequent start and stop vehicles, in some ways similar to forklifts. Alstom (OTCPK:ALSMY)(based in Paris, a recent takeover target by GE) was operating a Euro zone funded study of buses that were fitted with BLDP fuel cells, that use liquid methanol as fuel, and that have reformers in front of the BLDP PEM membrane style fuel cells to convert the methanol into hydrogen on demand. Methanol fuel cells all use energy consuming methanol reformers to make hydrogen to power the fuel cells.

BLDP PEM (Proton Exchange Membrane) based fuel cells have been around for decades now. They have been top dog in the portable vehicle, and portable fuel cell markets for long enough to have been proven and to have become profitable, yet none of the major PEM fuel cell companies have turned a profit, some after nearly 30 years now, and none have captured any share of the automotive markets in spite of 100s of millions of dollars invested by Ballard and Detroit years ago.

The reason is they are still way too costly to build to compete with ICE (Internal Combustion Engines) engines, and the hydrogen infrastructure has yet to happen after decades of wishful thinking. Many including myself are convinced it will never happen. So those are two major nails in the BLDP PEM fuel cell coffin.

In my recent fuel cell manufacturing and market research I discovered that the PEM membranes needed for a BLDP fuel cell to power a car exceed the cost of an ICE engine. I also learned recently that the precious metals used in Ballard PEM fuel cells (platinum), cost more than an ICE engine for a PEM fuel cell large enough for a car. So two of the raw materials needed to run the BLDP PEM based vehicle fuel cell cost up to 2X the cost of an ICE engine. The PEM membranes also need costly, heavy, bulky bi-polar plates. Three significant barriers for BLDP and all other PEM fuel cells.

FCEL fuel cells are too large, operate at ultra-high temperatures using molten salt, and are too inefficient at producing electricity to compete in the vehicle applications. They produce almost as much heat as they do electricity. Thus their market is more focused on large Combined Heat and Power fuel cell stationary units.

Recently, a firm born of the same mold as BLDP, was issued a patent for a new fuel cell like nothing else on the market. The origins of this new fuel cell are from the same University that early BLDP legends like David Wilkinson, came from and returned to, University of British Columbia, home of one the best electrochemical research centers in the world.

The new patent issued fuel cell, the MRFC (Mixed Reactant Fuel Cell) (so new it is not yet listed in Wiki) eliminated the use of, or need for PEM membranes. Thus it eliminated the need for large, bulky, heavy expensive bi-polar plates that PEM membranes require. It has also eliminated the need for precious metal catalysts like platinum.

Lastly, it runs directly on common liquid fuels, such as formic acid (which is non flammable), potassium formate, borohydrides and now hydrazine is being tested, without the need for a reformer to convert the fuel into hydrogen gas. Another major reduction in hardware costs, and it eliminates the need for a very costly hydrogen infrastructure that it seems will never arrive. Note that Dihatsu is moving to hydrazine for use in a PEM fuel cell for vehicles. If the current MRFC fuel cell UBC university trials with hydrazine are good, Diahtsu will no doubt jump at the chance to use a 65% lower cost fuel cell for their hydrazine powered fuel cell vehicles.

This new start up is producing an MRFC fuel cell powered vehicle to be introduced in about 5 months.

David (OTCPK:MVTG) may soon slay Goliath (BLDP), or Goliath may soon buy or license David's improved MRFC fuel cell. The ultra low cost, durability and liquid fuel choice, versus hydrogen gas, of the new MRFC (Mixed Reactant Fuel Cell) fuel cell, could eventually hurt BLDP, PLUG and even FCEL over time. The company that owns the MRFC fuel cell patent is OTCPK:MVTG.

MVTG recently moved into an early revenue stage with Alstom paying MVTG to do R&D, and reported a nice gross profit the last 2 quarters, but MVTG has no fuel cell sales just yet. So MVTG is a high risk, potential high reward, early stage stock with tangible new, market disruptive fuel cell technology with a verifiable issued patent already, and more patents applied for. MVTG is also a potential buyout target. Alstom, who has had close ties to Ballard for over 10 years, is still tied to Ballard, and yet Alstom signed a 5-year commercialization and research deal with MVTG late last year. That begs the question of what Alstom's end run game plan is. I think a buyout is possible at about ten times the current stock price. BLDP could end up in a bidding war with Alstom.

BLDP, PLUG and FCEL however have large revenue streams, sales, and equally high ongoing investor losses, with massive never ending cash burns.

Data on annual Losses in Table 1 is from the last 10-K:

Table 1

Annual Loss (thous) 19,964 62,791 38,000 1,420
Shares outstanding Com.(thous) 131,689 143,959 253,924 60,750
Share price May 13, 2014 3.19 4.09 2.16 0.41
Market cap (MIL) 420 589 548 25
Stockholders Equity in last 10-K 71,646 -115,501 -12,000 -1,087
Stockholders equity per share 0.54 -0.80 -0.05 -0.02

Looking at the latest annual loss rates above Ballard is the only one that had a stockholders equity that was positive reported in the last 10-K. Ballard had enough equity to sustain the loss rate for 3.5 years. But even Ballard's annual loss rate was nearly 14 times higher than MVTG's annual losses and Ballard has had decades to try and turn a profit.

It seems to me that companies Like BLDP and FCEL who have had decades to reach break even, and whose losses grow in proportion to rising revenue, have a flaw in management. A failure to control costs. PLUG's annual loss rate was 3 times higher than Ballard's which explains why they raised about 150 million in cash recently, they needed 50% of that cash just to wipe out the debt, and losses from just one year.

I currently see high risk owning BLDP, PLUG and FCEL at the current, inflated rally prices, based on their history of losses, and especially with a revolutionary new fuel cell that promises to make all others obsolete about to make its public debut later this year in a vehicle, a fuel cell that is a leap ahead of anything else in the labs or on the market.

I see far less risk owning shares in the new MRFC fuel cell tech of the future, that has only a tiny historical cash burn rate (about 1-3%) compared to the others like PLUG and Ballard, and who is a buyout target (MVTG might be bought by Alstom), that will license the patents for revenue, rather than raise massive amounts of cash to build infrastructure to manufacture and market their products, if they are not bought out first. BLDP, FCEL and PLUG, and others could become licensees of MVTG, in which case they might survive, but it would devalue their in-house IP-making current values risky.

Looking at the current market caps of BLDP, PLUG, FCEL and their cash burn rates, and lack of stockholder equity, after decades of operation, versus the same for MVTG, my bets are long on MVTG and the MRFC fuel cell breakthrough. If I shorted stocks, I would be short the top heavy long-term heavy cash burners, BLDP, PLUG and FCEL. BLDP, PLUG and FCEL fuel cell stock investors should keep a very close eye on MVTG for early signs of how this story will end. To ignore history, is to risk being trapped while history repeats itself which could cost BLDP, PLUG and FCEL stock holders dearly.

Good luck with all your investments.

Disclosure: I am long MVTG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not long or short BLDP, PLUG, FCEL, Alstom nor will I take a position with in the next 72 hours.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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