The case for traditional and alternative energy space integration

Written by Marks@Tiburon Monday, 04 January 2010 07:03

At the December Copenhagen conference on climate change rapidly approaching, all eyes will be on America and China, the world’s two biggest greenhouse gas polluters, which combine to account for 40% of global carbon-dioxide emissions. Their commitment and leadership during the talks will be critical for laying the framework and principles for establishing a successor to Kyoto.

Whilst international agreements are undoubtedly important, the likelihood of targets being hit and the globe being saved will be just as dependent (if not more so) on the specific carbon reduction policies adopted by individual countries. With all nations embracing the adoption of renewable and alternative energy, but at different speeds, Tiburon Partners has recently launched a UCITs III compliant global long/short equity fund focused on alternative energy and natural resources to allow investors to benefit from these dynamic trends.

Tiburon Terra focusses its fundamental based investment process on identifying companies expected to benefit and/or suffer from environmental and climate change issues. Tiburon believes the long/short approach is best suited to take advantage of regional and sub-sector valuation discrepancies and will help protect investors capital during potential declines in what has been a highly volatile sector.

Rather than following the “green only” route the mandate of Tiburon Terra encompasses natural resources as well as renewable energy. We believe the two are inextricably linked - alternative energy is, afterall, only another way to produce electricity albeit in a cleaner fashion than that produced by coal or natural gas. Consequently Tiburon Terra will also take advantage of arbitrage opportunities that arise between renewables and companies in the natural resource sector. In addition, specific resources are fundamental to the development of renewable energy - rare earths or the technology metals are essential for the development of electric cars, smart grids, wind turbines, nuclear reactors, solar panels and environmental purification processes.

With China likely to contribute 63% of total global incremental emissions by 2020, its participation is a must to make a meaningful difference in emission levels even if the rest of the world cuts unilaterally. One of the key routes China will have to follow in reducing its carbon emissions is by reducing its coal consumption. This has clearly provided the impetus for China’s unprecedented thrust towards nuclear and renewable energy. Opportunities to exploit this are clear: we believe there is a good arbitrage between stocks like Yingli Green, a low cost PV solar module manufacturer, on the one hand and Shanghai Electric, a power generator heavily reliant on coal fired generation, on the other. Both stocks are trading at roughly the same projected P/E multiples in 2011. So too with nuclear: as an alternate form of energy that will provide an increasing share of incremental base-load generation in China, India and the rest of Asia, we believe stocks such as Dongfang, Cameco and Silex are all exciting prospects.

China is also central to rare earths or technology metals. Not only is it the dominant supplier of these rare but vital elements but it has proved to be acquisitive when new deposits have been identified outside its borders. Chinese entities have taken minority stakes in Australian mining groups Lynas Corp and Arafura Resources with predictable results for the stock prices.

We believe that electric vehicles will play a transformative role in transportation and may account for as many as 1 out of 10 new cars sold globally in 10 years. However, instead of investing in an over hyped and overvalued hybrid car battery maker like BYD, which trades at an eye watering 76x next years earnings, we have invested in Galaxy Resources which provides Lithium Carbonate, the mineral essential in the manufacturing of lithium-ion batteries for electric cars, for a more modest 12x earnings once mine production is stabilised.

Clearly the renewable concept has been around for some time but with targets set for 2020 it has in the past been consigned to the pending tray. Now however it is gathering momentum and is investible. Forget the idea that oil has to go back to USD150 before these new technologies and applications become viable: the major alternative energy technologies (wind and solar) have advanced meaningfully down their cost decline curves whereby they are either at (in the case of wind) or very near (in the case of solar) grid electricity rates. These technologies have already been embraced by major corporations and have moved mainstream and Tiburon Terra is well placed to capitalise.