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The Commodity Investor Q&A

By Matt Badiali, editor, S&A Resource Report
Wednesday, August 26, 2009

Q: You've said startup expenses make wind and solar uneconomical. Can you clarify? – J.M.
 
A: If you believe television commercials, darn near every car Chevrolet builds gets over 30 miles to the gallon. We should all run out and buy a new Chevy... for the environment.
 
It's a transparent marketing trick. Take the new Equinox, Chevy's midsize SUV. It will get 30 miles per gallon – but only if you buy the four-cylinder engine model and only drive it on the highway. Driving in the city knocks the mileage down to 21 miles per gallon.
 
Wind and solar companies make similar claims... and like the car ads, these "green power" advertisements are far more compelling than the truth. We need to be aware of the tricks, because green power is the next big bubble. If we can separate fact from fiction, we can make a lot of money here.
 
Let me show you what I mean with an example...
 
Canada's biggest alternative-power generator, Canadian Hydro Developers, generates 496 megawatts of wind and hydropower... theoretically. If its claims were true, it could power almost 400 average U.S. homes for a year.
 
In fact, this $720 million company's power supply is terribly inefficient. In the first quarter, the company only operated about 27% of the time from January to March. That means its true generating capacity was just 133 megawatts.
 
When we break down Canadian Hydro Developers' sales, we see that it earns about $82 per megawatt hour (which is one megawatt of energy supplied for one hour). That works out to about $720,000 per megawatt of capacity (hours per year multiplied by $82 per megawatt hour).
 
The company claims it will install another 185 megawatts of power this year. However, by its own estimates, those power plants will only produce about the equivalent of 66 megawatts of power. In other words, those new plants' planned efficiency is 37%... and will probably be much lower.
 
That puts the company's total paid power generation for this year at just under 200 megawatts. The company spends, on average, $8.5 million to build one paid megawatt of wind power and $4.8 million to build one paid megawatt of hydropower.
 
At $720,000 per megawatt of paid power generation, new hydropower plants will take almost seven years to pay for themselves. New wind plants will take almost 12 years to pay for themselves.
 
As you can see, the company must spend far more money than it will recoup in the near term. Canadian Hydro Developers' long-term debt soared 275% in three years... from $224 million in 2005 to $839 million today. That's about 10 times its estimated earnings for 2010, which is too high for my taste.
 
In the end, it's not the gas mileage advertised or the megawatts on the marquee that matter. It's about how the car or the power plant performs every day.
 
If you crunch the numbers and only buy the best companies, you can make a fortune in green energy. If you believe the hype and invest in the best commercials... you'll get what you deserve.
 
Good investing,
 
Matt




In The Daily Crux
Market Notes
Manufacturing giant 3M hits new 52-week high.
 
Virtual banks surge higher... MFA Financial and Hatteras make new highs, Annaly not far behind.
 
Major Indian automaker Tata Motors at a new high.
 
Latin American banks Banco Bilbao and BanColombia spike 8% to new highs.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1224.71 +0.3% +11.4%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.19 -0.6% +7.2%
Euro 1.34 +1.4% -11.0%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%