Manage your expectations
Given the shenanigans of the last couple of days of the Copenhagen conference I thought that you might like to see the attached note that I sent out a couple of weeks ago. Our message was simple: manage your expectations. Whilst we were cynical about the effects of realpolitik we are positive that the general direction of policy is clear, even though the pace of it may be more unpredictable, and, most important of all, there are very good investible ideas out there from which investors can make money.
Several of these play a part in our portfolios, Copenhagen notwithstanding.
Allegations that scientists have been cooking the numbers on climate change appear to be stoking scepticism about man’s contribution to global warming. It is of course right and proper that Nigel Lawson and others are determined to hold the scientific community to account. Good luck to them.
Whatever the outcome of these investigations however, it seems clear to us that the faster we reduce our reliance on burning of fossil fuels the better. We believe that there are now a significant number of investible propositions for investors who share our view and want to capitalise on the opportunities.
Our Asian funds currently have a meaningful part of its portfolio in the sector, some of which are described below. We also have a dedicated renewable and alternative energy fund, Tiburon Terra.
Of course the shenanigans in Copenhagen and the work of bodies such as Lord Lawson’s new Global Warming Policy Foundation are fascinating and clearly important but don’t forget that there is good money to be made in the meantime.
Extract from Tiburon Taipan report:
Renewable energy will be an investment theme for the foreseeable future and we are very attuned to some recent developments that have the potential to revolutionise energy production and go some way to reducing the speed at which homo sapiens rapes the planet. The five areas we would highlight, all of which are represented in the portfolio are underground coal gasification, wide band photovoltaic cells, platinum, uranium enrichment and LEDs.
Underground coal gasification is not a new concept, but the first attempts over the last 50 years or so in Russia and the U.S. were dogged by (avoidable) environmental issues and many people now ignore the possibilities. Yet it is now possible to safely burn coal deposits underground that are too thin and/or deep to mine conventionally with a minimum of capital expenditure or environmental risk but with a far greater overall efficiency than by any form of conventional mining. Like coal bed methane, this is a sector in which vested interests tend to denigrate, not because it doesn’t work but because it threatens their business model. Buy before the sector gets proper coverage.
The second technology is less commercially advanced, but has the potential to triple the efficiency of conventional silicon (silicon/silicone?) cells by accessing the ultra-violet and infra-red sectors of the electromagnetic spectrum as well as the visible portion. Again, existing players in the industry with no intellectual property downplay the possibilities. We regard it as a cheap and potentially very profitable option.
Many of our investors will be aware of our positive views on platinum, and the 50% upward move in the Rhodium price this month is very supportive of the underlying supply / demand picture. Rhodium is mined with Platinum and Paladium in small quantities and used in autocatalysts. There is no investment demand, and jewellery use is de minimis. The price surge is a clear manifestation of a supply shortage of all of the Platinum Group Metals, possibly not surprising with Chinese auto sales rising at significant double digit rates and with some western world production being turned back on after the scrappage schemes exhausted excess inventory. If you think Gold is a little bit too popular at the moment, Platinum looks a better bet.
Despite all the high hopes for renewable energy it is unlikely that wind and solar are going to plug the demand/supply gap for power and save the world too. Nuclear is going to play a major part and with supply from decommissioned Soviet warheads scheduled to dry up in the next couple of years a technology that improves the efficiency of the enrichment process of uranium is certainly eye catching. Using lasers rather than the conventional centrifuge the technology, discovered by an Australian company and now licensed to GE is unappreciated by the market.
We are also intrigued by California’s decision to ban the sale of energy inefficient televisions. The point here is not that California can ring-fence its appliance market – it can’t – but it sets an important precedent for other jurisdictions to follow, and is a massive shot in the arm for the new generation of higher picture quality and lower power usage LED-lit televisions. This market is showing explosive growth at present, and as the volume of LEDs rises, the costs fall. This speeds the day when the cost of replacing conventional fluorescent and incandescent lighting with LEDs becomes economic, and at that stage the market will go truly parabolic. The current bottleneck is in the supply of reactors to produce the Gallium Nitride wafers, a market currently dominated by Aixtron of Germany (a snip at 60x earnings, up 380% this year). Luckily there are some new entrants to this market in Korea, and we find opportunities in these names as well as the chip fabricators in Taiwan which are seeing strong growth in a market where ownership of intellectual property is as important as access to capacity.
