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The Commodity Investor Q&A

By Matt Badiali, editor, S&A Resource Report
Wednesday, April 8, 2009

Q: Is geothermal power really a possible long-term solution? Is there an investment play in it? – M.G.
A: Of all the "green" energy sources out there, I like geothermal the best. It is the only one that can provide uninterrupted power... Solar power has one big flaw – night. Wind power has calm days. And hydroelectric power has drought.
Geothermal power taps the natural heat of the Earth, so you need an active or recently deceased volcano. (The western U.S. has a ton of power, just under the surface.)
You gather geothermal energy by drilling wells into hot rocks to bring up the natural steam or hot water. That water comes up to a heat exchanger, like your air conditioner. There, the heat from the ground vaporizes a "working fluid" like ammonia, which drives a turbine and generates electricity.
In 2007, I visited the Geysers Field in northern California, an active geothermal power plant. It's awesome: Giant pipes coming up out of the ground, wisps of steam floating on the breeze, and no noise... none whatsoever.
Unfortunately, this technology suffers from the same problem all the other alternative energies do – it's expensive. You can't build a geothermal plant that will generate electricity as cheaply as natural gas at the current price. So geothermal companies rely on government help.
The Obama administration plans to provide $6 billion in loans for renewable power generation and transmission projects. The Canadian government is kicking in another couple of billion, too.
With that kind of financial support and a potential market bubble along with it, geothermal power companies look like attractive speculations.
Here's a quick list of the geothermal companies listed in the U.S. and Canada:
Market Cap
Western Geopower
$53 Million
Sierra Geothermal
$11 Million
Polaris Geothermal
$27 Million
Nevada Geothermal
$39 Million
Market Cap
Ormat Technologies
$1.29 Billion
Raser Technologies
$242 Million
U.S. Geothermal
$47 Million

I'm excited about geothermal's potential. But I wouldn't risk any money you aren't willing to lose. When the success of a company relies on political subsidy (think ethanol), you're in a risky situation.
Q: You talk a lot about Freeport-McMoRan, but what about Teck Cominco? That seems like a better buy right now. – W.D.
A: Someday, we'll hold up Teck Cominco's strategy as the blueprint for what not to do during a commodity boom. This once-mighty mining company ran up debt and acquired overpriced assets that could sink it today.
For just the latest example... in July 2008, Teck bought Fording Canadian Coal Trust, a big producer of the coal used to make steel, and Global Copper, a tiny, grassroots copper project. Both copper and coal prices peaked in July.
According to Teck's annual report, management was simply going along with the crowd. Here is how the company explained it in the 2008 annual report:

The strength of rising expectations of a better life for people in many emerging world markets and the limited capacity of the industry to respond quickly on the supply side led most observers to conclude that resource commodities would be "stronger for longer" and that, after a couple of decades of relative stagnation, we had entered a new "super-cycle".
Isn't that what the management of said, too? These guys actually thought that, somehow, commodity cycles were over. They ignored 100 years of business history... This wasn't just bad management, it was criminally stupid. Teck bought up oil, gold, copper, coal, and other base-metal assets at the very top of the cycle.
Compare that to ExxonMobil, which stashed cash and bought back shares during oil's recent stratospheric rise. During that run, Exxon believed its own stock was the best investment to make. It was absolutely right. You never heard Exxon's management talking about the new oil economy or predicting $250 oil. You also don't hear the company blaming its peer group for leading it astray.
Teck, on the other hand, ran its long-term obligations (debt and otherwise) from a manageable $3.1 billion in 2006 to an unconscionable $11.3 billion by the end of 2008. The company took on $7.8 billion in short-term debt in 2008 as well. At the same time, its cash went from a nice $5.1 billion cushion in 2006 to just $850 million today.
Teck made all the wrong decisions: It bought expensive assets at the top... and now it's selling at the bottom. According to Canada's Globe and Mail, Teck plans to sell $2 billion in assets, restructure its debt, and issue more shares to prevent bankruptcy.
This is exactly the kind of behavior you don't want to see in your commodity investments... It's like watching a bunch of kids try to protect a sandcastle built at low tide. It's funny, sad... and the result is inevitable.
If you want to invest in a big commodity stock, stick to proven quality in management, like we see at ExxonMobil.
Good investing,
Matt Badiali

In The Daily Crux
Market Notes
Copper near a five-month high... up over 30% this year.
Grain giant falls... Archer Daniels Midland drops almost 10% after Citi issues "sell" rating.
Casino stocks hammered on revenue declines... MGM Mirage, Las Vegas Sands, and Wynn Resorts all down double digits.
Earnings today... Constellation Brands, Family Dollar, Shaw Group, WD-40.
Market Watch
Symbol Price
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
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
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
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%

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