Alterra Power Corp.

Updated February 10, 2017

Two important news items:

Updated September 9, 2016

There are two ways to make money investing in stocks: capital gains, and dividends.  With most stocks, it’s one or the other.  There is stock that will, I believe, end up providing both streams, and that makes it a great, relatively low risk investment: Alterra Power Corp.

Company Background

Alterra Power Corp. was incorporated in 2008, but is the end result of the merger of predecessor companies, one of which has existed for 40 years.  They build and operate renewal energy projects, including geothermal, hydro, wind and solar.    Their operations include:

  • two large geothermal plants in Iceland, owned through their 66.6% interest in their HS Orka subsidiary;
  • two run of river projects in British Columbia;
  • a wind generating operation in British Columbia; and
  • a wind farm in Texas.

The “jewel in the crown” are their operations in Iceland, which is a fascinating country.  Iceland is not covered in ice.  In fact, in the winter, it is warmer than most cities in Canada, with the ocean moderating the temperature to a low of only around minus 2 Celsius.  In the summer the typical high is around 15 C, so it’s a moderate client.  Iceland was formed by volcanic eruptions, and sits atop an active geothermal area, so Iceland can drill down to capture the geothermal energy.  That’s what Alterra does, through their HS Orka subsidiary, which supplies about 9% of the hydro power in Iceland.  But it gets better:

If you live in Reykjavik, Iceland’s only large city, the hot water that comes out of your tap is piped in from the geothermal fields 27 km away.  No-one has a hot water heater in their house.  They turn on the tap, and out comes the hot water.  The cold water is pure, and comes from underground sources.  There are no water treatment plants for drinking water in Iceland.  The by-product of geothermal energy production is a hot water brine, which is used to feed the Blue Lagoon, Iceland’s most famous tourist attraction.  In Alberta the waste products from the oil fields are an environmental disaster.  In Iceland they bathe in the waste products.

Ross Beaty

Alterra’s Executive Chairman is Ross J. Beaty, who also happens to own 32.2% of the shares in the company.  Yes, that Ross Beaty, a legend in mining and, by all accounts, a legitimate billionaire.  He made a lot of money from Pan American Silver, and continues to invest in many companies.  He can write big cheques when needed, so if Alterra needs to raise further equity, he will be there.  (He pumped $2 million into K92 mining, taking the entire financing, and he has interests in many other companies).

Having a highly respected industry leader with deep pockets as your Executive Chairman gives the company significant credibility, which should help attract analysts and investors, and that’s good for future stock price growth.

Who Should Invest in Alterra

You should buy Alterra if you want:

  • a green energy investment.  This is as close to a zero carbon emissions company as there is, and there is no scary nuclear stuff, so the green energy crowd looking for a place to park their money should love Alterra.
  • Diversification: Alterra has geothermal, hydro, wind and solar, so they are not reliant on any one technology.  They operate in Iceland, Canada and the United States, so exchange rate risk is well diversified.
  • Capital gains potential: After a period of time where they dealt with technical challenges, projects are now on-line and producing revenue.  The stock has responded well, jumping from the 45 cent range through the last half of 2015 to the first half of 2016, up to the 70 cent range recently.  There is significant potential as the market notices continued revenue expansion and project development.
  • Dividend potential: The company does not pay a dividend now, but this is a company that is, in a basic sense, a utility.  In many markets they have long term contracts with both a steady income and steady cost stream, so with stable income a dividend distribution to shareholders is a logical way to share the profits.  There are some hurdles to get over first, including cleaning up some debt, but once that is done a steady dividend would be an excellent strategy for attracting income investors, like pension funds, that want a stable income stream that is higher than the near zero rate they can currently earn on bonds. UPDATE September 9, 2016: Alterra will start paying a dividend in the fourth quarter of 2016.
  • Stable shareholders: The largest shareholder is Ross Beaty, who owns 32.2% of the company.  He is also the Executive Chairman, and there is no indication he has any plans to sell, so one third of the shares are not on the market.  That’s good, because it reduces the trading float, so if buyers start buying, the price can increase rapidly.
  • Potential for increased analyst coverage.  Currently there are only three analysts covering the stock.  It is very likely that at least one of the other Canadian brokerage companies will jump on board, and increased analyst coverage should be positive for the stock.
  • Potential New York Stock Exchange Listing: Alterra currently only trades on the Toronto Stock Exchange, and that is unlikely to change in the next year.  However, with the significant investment in the wind farm in Texas, U.S. operations will increase, so a listing in New York will be a logical strategy to attract U.S. investors.

The Risks

Alterra is not a no-risk investment.  Every bank in Icleand collapsed in 2008 and the currency crashed.  Debt levels are now moderate, but a crisis could happen again.

A volcano could erupt and destroy infrastructure.  The last big one was in 2010, Eyjafjallajökull, which shut down air traffic in Europe for three days due to the ash cloud.  Earthquakes are also common, although generally not severe.

There are only 330,000 residents of Iceland, and the economic boom that is happening there has caused employment shortages.  Many of the construction workers are imported from Poland and other countries.  It is very difficult to get a hotel room unless you book well in advance, and the airport, while new, gets crowded during peak times.  Food is expensive.  More infrastructure is required to accommodate future growth.

Significant capital will be required to build more clean energy projects.  As of June 30, 2016 the company had current assets of $31 million and current liabilities of $185 million, primarily due to $147 million of debt that matures in June 2017.  The company expects to be able to refinance that debt at favorable terms, but they haven’t done it yet, so that’s a risk.

Ultimately, this is a company that has never made money.  Ever.  Can they turn it around?  I think so.  I think it will be a solid company, generating a solid rate of return, with significant capital gains potential, but it’s not there yet, which makes now a good time to build a position.

You can follow recent blog posts on the Alterra blog post summary page.

September 9, 2016 update: Alterra consolidated it’s stock 10 for 1 to make it more attractive to institutional investors.  That’s good news.  Also, National Bank has raised their target from $8 to $8.50 per share, rating Outperform, which is also good news.

DISCLOSURE: I am not a company insider, or a reporting issuer.  I have no inside knowledge.  I am a guy who has done some research and written a blog.  Govern yourself accordingly.