Pacific Ethanol: Taste for Leverage

Pacific Ethanol(PEIX:  Nasdaq) just received an extension to pay back a creditor only just three months after having renegotiated terms.  The action may make balance sheet conditions the first thing on investors and analysts minds when the company reports financial results for the June quarter on July 31^st after the market close.  There is likely to be more than just a few questions about solvency during the conference call to discuss financial results of the company in the June quarter.  

The news actually sent Pacific Ethanol shares higher.  Nonetheless, the stock of this storied ethanol producer has seen better days.  Presently the Pacific Ethanol shares trade well under a buck.  This is a long way from the stock’s historic pea on May 8, 2006, when a trader bid $4,672.50 for a PEIX share.  Of course, that figure reflects two reverse splits in 2011 and 2013, so at the time the peak stock price was actually quoted as $44.50. 

Those were heady times for renewable fuels companies.  Ethanol production had reached four billion gallons per year.  Bill Gates reportedly bought 25% of Pacific Ethanol shares, drawing crowds to PEIX as well as other ethanol companies.  Trading in ethanol companies led to the publication of an article entitled “The Ethanol Illusion” in the November/December 2006 edition of the Harvard Magazine, in which the author asked “Can we move beyond an energy policy running on hype and hot air?”    

Fanhua Targets Burgeoning Middle Class Chinese Consumer

  PRIME SERIES  


Fanhua, Inc. (FANH:  Nasdaq) is an insurance agency representing life, property and casualty products to China consumers.  Additionally, the Company provides claims adjusting services for insurance providers.  The company has its roots in two operations founded separately over twenty years ago and focused on car rental services and automobile emergency services.  A series of acquisitions and new business starts have helped form Fanhua’s insurance-focused business model. 

These strategic investments have given Fanhua the capacity to capitalize on a wave of change in the mainland China economy  -  a fast growing middle class.  Indeed, the Chinese consumer is in a state of metamorphosis.  Rising incomes have helped grow the middle class population group by seven times since the turn of the century.  With new found disposable income the group is purchasing cars and homes as well as providing for their future through education and savings.   Now consumers want to protect their accomplishments.  Insurance has become a key element in the evolving China economy.

Vanadium Developers Undaunted by Price Decline

After a frothy escalation during 2018, vanadium prices have leveled off in 2019, with European prices for vanadium pentoxide settling near $7.00 to $8.00 per pound.  When compared to peak prices near $28.50 in November 2018, it looks like the bottom has fallen out of the vanadium market.  Developers of new vanadium supplies are undaunted. 

It is important to appreciate demand trends to understand how vanadium suppliers could still be enthusiastic in the wake of such dramatic price.  As much as 90% of vanadium production is used in the world steel industry. As goes the steel industry, so goes vanadium demand.

Is Graphite Going Global?

China’s exports of the spherical graphite popular with lithium ion battery makers have been on the rise in recent months.  This includes both uncoated and coated versions.  According to industry research firm Fastmarkets, total exports from China were 26,168 metric tons in the first five months of 2019, compared to 22,555 tons in the same period of the previous year, representing a 22.5% increase.  With prices holding relatively steady, it could be concluded that the increase in production has been soaked up by increased demand from battery producers.

Looking further back into the supply chain, Syrah Resources (SYR:  ASX) recently signed an off-take agreement with Hong Kong’s Gredmann Group for natural flake graphite from Syrah’s mine in Mozambique.  Gredmann will be getting a total of 279,000 metric tons over a three year period.  Pricing was not disclosed. 

After becoming the largest producer of natural flake graphite in the world with its Mozambique project, Syrah has been a closely watched player in the graphite sector.  The entrance of such a large project into active production could have a significant impact on the objective of several companies around the world to produce meaningful supply of battery-grade graphite outside Asia.

Whiff on Uranium

The U.S. Administration took a swing at the uranium ball last week, but it is not clear if it was a miss and strike out or just a walk.  Some in the uranium industry are applauding a decision by the Trump Administration on the January 2018 petition by U.S. uranium producers Energy Fuels (UUUU:  NYSE) and Ur-energy (URG:  NYSE), requesting protection from uranium imports. The U.S. Commerce Department had investigated the petition under Section 232 of the 1962 Trade Expansion Act.  No new trade restrictions are being implemented at this time, but the Administration is establishing a working group to analyze U.S. nuclear fuel production.   A report is due back within 90 days.

The petitioners wanted U.S. nuclear power plant operators to buy at least 25% from U.S. uranium producers and cited unfair competition from Russia, Kazakhstan and Uzebekistan that make up the Commonwealth of Independent States (CIS).  According to the U.S. Energy Information Administration, in 2018, U.S. utilities bought about 40% of their uranium supply from CIS countries. 

Boiler Maker in Need of a Shot

A reserve split is in the works to keep shares of Babcock & Wilcox Enterprises (B&W) listed under the symbol BW on the NYSE.  The stock price of this storied environmental engineering had slipped below the Exchange’s minimum price requirements.  Ten shares will be melded into one beginning July 23, 2019. 

Reverse merger math alone will not solve B&W’s problems.  One hundred and fifty two years in business, B&W has been providing environmental technologies and services for energy and industrial customers since the company’s first boiler was sold right after the American Civil War.  The company boasts that Thomas Edison was one of B&W’s first customers.  Unfortunately, more recent relationships have been less than profitable and certainly less celebrated.  After reporting a string of losses and a deteriorating balance sheet, B&W leadership has had to take action.  

Warm Wind Blowing at Vestas' Back

A stream of impressive news has been delivered by wind turbine producer Vesta Wind Systems AS (VWS:  CO, VWDRY:  OTC) over the last few weeks.  Over the last two months the company has received orders for wind power turbines totaling 3,781 megawatts.  Customers in the U.S. appear to be quite shy, withholding their names and the final destination of the power projects.  Nonetheless, the more transparent European, Chinese and Brazilian customers provide a good view on how well regarded Vestas has become.

Business has been so good Vestas is opening a new nacelle and hub assembly factory in Chennai, India.  The company already has two production units in the area that will be combined and expanded in the new Chennai facility.  Vestas plans to begin production at the site by the end of 2020.  The company has 20 factories around the world that in providing good jobs can be used to leverage local support for its wind turbine products.

Holiday Wishes

INDEPENDENCE DAY

"We must be free not because we claim freedom, but because we practice it." 

William Faulkner

Wishing you and your families a safe and free celebration.

CRYSTAL EQUITY RESEARCH

Extraordinary Day!

The second day in July is of much import in the greater scheme of things.

It is a day that generates strong inspiration.   On this day in 1982 Larry Walters, a.k.a. Lawn Chair Larry, took flight in his homemade airship consisting of a lawn chair with 45 helium-filled weather balloons attached to it.  He stayed a loft for about an hour.  

It is also a day for commemoration.  On July 2, 1979, the U.S. Mint officially released the Susan B. Anthony coin, recognizing her successful efforts to gain the right to vote for women.  Although a one dollar coin never gained wide circulation, women have made considerable progress toward their rightful place in public affairs.

Another July 2 saw a different door open to a new future.  On a steamy day in 1857, the first passengers climbed aboard New York City’s first elevated railroad to ride between the Battery and Cortlandt Street in the Financial District.  It took longer to board and travel the distance by train than it took to walk, but what is progress without a little inconvenience.

For others it is a day of sweet celebration.  My daughter Adrienne was born on July 2^nd, arriving fashionably late by a day  -  at least according to the doctor.  Her father claims she came into the world howling and demanding to know who had taken her Wall Street Journal.  Yet as she has moved though the world, her interests have run far beyond the finance focus of her mother. 

Instead, she has made healthy food a priority and a profession, using a knack for math and science to master the chemistry of milk and cheese. She bakes bread and churns butter from scratch like a pro, despite being raised by a mother who can barely boil water. 

Beyond the usual parental pride that is a mother’s right, my daughter is also a valuable check on the environmental priorities that underpin the investment themes in this blog.  She avoids single-use plastic and chooses biodegradable and recyclable alternatives.   High standards for the foods she is willing to eat or the restaurants that are worthy of her business have sent us miles out of our way on road trips to find organic or locally-owned options.  Her support of regional agriculture over foods shipped long distance at much cost in carbon emissions, also yields interesting nuances in her personal and professional relationships.

Observing my daughter’s choices has provided a unique view on how an environmentally-conscience lifestyle can play out.  Yes, it is different than the lives displayed on popular television programs for our collective envy and emulation.  (Sshh! Because she does not have a television, she is unaware of the possible cultural deficiency.)  Nonetheless, she proves with great aplomb that it is possible to direct thoughtful consumerism toward a more stable, sustainable environment. Investors take note.  

Happy Birthday, Little Angel!

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.