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U.S. Geothermal – Still No Short-Term Catalysts On The Horizon

Summary US Geothermal continues providing decent financial results. This year the company demonstrates some progress in taking two geothermal projects, WGP Geysers and El Ceibillo, closer to their production phase. However, in my opinion, setting COD (“Commercial Operation Date”) at 2Q 2018 (El Ceibillo) and 3Q 2017 (WGP Geysers) is going to be a challenge for the company. I believe that currently US Geothermal’s shares are overvalued against its peers. On November 23, 2015 US Geothermal Inc (NYSEMKT: HTM ) published its 3Q 2015 results. Below I am commenting on these results. I am also covering the last developments at the two most advanced geothermal projects. Year to date financial results The table below summarizes year to date financial results: Source: Simple Digressions and the company’s reports As the table shows, the results reported by the company in the first nine months of 2015 were comparable to those reported last year. However, a 17.5% increase in book value is worth commenting. To remind my readers, I consider book value as one of the best performance measures of any company. Simply put, if a company is able to increase its book value in the long-term, it means that it has built its value. Let me show how HTM was building its value: Source: Simple Digressions and the company’s reports Note: to calculate HTM book value I have excluded two issues, which distort it in the long-term: Accumulated other comprehensive income (AOCI) – it is part of the equity section of the balance sheet, representing accumulated unrealized gains and unrealized losses, such as cash hedges or currency translation adjustments. Every year or quarter this item fluctuates, very often quite much. What is more, AOCI depends on exchange rates, interest rates and other issues, which the company does not control. Therefore I have eliminated AOCI from my calculations of book value. Non-controlling interest – because non-controlling interest represents the stakes other entities hold in the company’s consolidated assets I have excluded this issue from my calculations. Because non-controlling interest is excluded from my calculations, the final figure demonstrates book value attributable to the company’s shareholders. As the chart shows, HTM increased its book value attributable to its shareholders from $0.66 per share at the end of 2012 to $0.80 per share at the end of September 2015 (an increase of 21.2%). In my opinion, it is a big plus – US Geothermal, increasing its book value in the long-term, behaves like a classic utility company. Operating results The table below presents basic operating results: Source: Simple Digressions and the company’s reports As the table shows, year to date US Geothermal reported slightly lower electricity generation and slightly higher operating expenses than in the same period in 2014. After taking a closer look at each operating facility I came to the conclusion that the main factor, standing behind higher operating expenses, was the Raft River’s performance. Raft River, located in Idaho, is the smallest HTM’s power plant, in terms of generation capacity (9.4 MW). Since the beginning this facility has been lagging behind other two plants. However, this year this underperformance is particularly striking: (click to enlarge) Source: Simple Digressions and the company’s reports As the chart shows, this year each megawatt hour, generated by Raft River, delivered only $4.94 in operating income (I call it “Netback”). Other plants, San Emidio and Neal Hot Springs, delivered $61.19 and $75.66, respectively. In its 3Q 2015 report the company explained that there were two reasons standing behind this underperformance: 371 lost hours during two unplanned outages (according to my calculations, these outages were responsible for the lost revenue of $196 thousand) Higher operating costs due to turbine repairs and wage increases – year to date these additional costs were $361.5 thousand (turbine) and $142.3 thousand (wages). I think that technical problems, experienced at geothermal facilities, happen sometimes. However, granting wage increases to the crew when the facility is in trouble is not, in my opinion, the best practice. Projects under development US Geothermal has four projects classified as “Projects under development”: El Ceibillo Phase I, San Emidio Phase II, WGP Geysers and Crescent Valley Phase I. Of these four projects, in 2015 the company was developing mainly two of them: WGP Geysers and El Ceibillo. Below I am commenting on these developments. WGP Geysers In April 2014 the company acquired the so-called “Geysers project”. To remind my readers, this project is located in the Californian broader Geysers geothermal field, the largest producing geothermal field in the world. In June 2015 the company completed a flow test program of the three production wells. These tests confirmed that wells were operational but to achieve a planned long-term capacity of 28.8 MW, two or three additional production wells should be reopened (the company does not need to drill new wells). In other words – before any geothermal company takes a decision on eventual production, flow tests have to be performed to establish resource viability. US Geothermal completed such tests and announced that two or three additional production wells were needed. In my opinion, it is an important message. It seems that the company is approaching a production decision on WGP Geysers – if such is the case it could be a game changer. However I have some doubts. The company estimates that production at Geysers should start in the third quarter of 2017. In my opinion, it will be a challenge to meet this timeline because HTM must, for example, open two or three production wells, connect its property to the grid, sign a power purchase agreement, find financing for its project etc. All these issues need time so the two-year time frame, in my opinion, seems to be very optimistic. El Ceibillo, Guatemala US Geothermal used to postpone a commercial operation date (COD) of El Ceibillo many times. Fortunately, since the fourth quarter of 2014 the company has been confident that this facility should start its operations in the second quarter of 2018. On October 13, 2015 HTM was granted the concession agreement for the El Ceibillo development. To remind my readers, the previous concession expired this year so now the company is once again formally allowed to continue development. Currently the company is in the middle of it. In 2014 it completed a nine hole temperature gradient drilling program (an initial part of any development). This year HTM is performing flow tests – one well (EC-2A) confirmed that there is a commercial resource at El Ceibillo but at least two additional wells are needed to extend the resource area (drilling at the first well, EC-3, started on October 29 ). Summarizing, the company is at its intermediate stage of development at El Ceibillo. In my opinion, setting 2Q 2018 as a COD is going to be, similarly to WGP Geysers, a challenge. Equipment purchase On November 9 the company announced it acquired equipment for the construction of three binary geothermal power plants. This equipment was acquired at a significant discount to its cost. According to the company: “We paid $1.5 million, which is approximately 5% of the equipment’s original cost, a saving of roughly $28 million. This equipment gives us the ability to expand our megawatt output at our existing portfolio of advanced stage development projects at significantly lower cost, and in much shorter construction timeframes” The equipment is supposed to be applied to the Crescent Valley and San Emidio Phase II projects. The initial market reaction was very positive – on November 9, the company’s shares closed 8.9% higher than on the previous day. Well, in my opinion, the equipment acquisition is surely a positive thing in the long-term – the company should save a lot of money and time at the construction of Crescent Valley and San Emidio II. The management did a very good job, indeed. However, in the short-term this message means nothing – the company has just bought some equipment, which will be stored as inventory, waiting a few years to be applied. Additionally, this equipment will be accounted for as inventory and disclosed at cost ($1.5 million). However, the most paradoxical thing is the fact that when both projects start their operations, the company will be allowed to recognize depreciation charges attributable to only $1.5 million. Putting it differently, an excellent managerial success, due to accounting and fiscal rules, will be converted into lower depreciation charges and higher taxes in the future. Valuation To demonstrate US Geothermal’s market valuation I have calculated the Enterprise Value / EBITDA multiples for a few geothermal energy stocks. The chart below, depicting these ratios, was taken from my article on another geothermal company, Polaris Infrastructure. As the chart shows, currently the company’s shares are trading at a multiple of 12.3, which means that they relatively overvalued against its peers: Summary US Geothermal continues to provide descent financial results. However, due to large non-controlling interest component, HTM shares are relatively overvalued against its peers. In this article I have covered two projects, which are approaching production phase – WGP Geysers and El Ceibillo. Year to date some progress towards putting these projects closer to production has been evident. However, in my opinion, to meet time frames set by the company is going to be a challenge. Therefore I am sustaining my previous thesis on US Geothermal – there are still no short-term catalysts to lift the company’s shares. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

5 Broader Emerging Market ETFs Surging This Quarter

Emerging market investing has gone dour recently on slowing growth, a potential decline in foreign direct investment on a likely cease in cheap money inflows from the U.S. (post lift-off), a stronger greenback and slouching commodities. No doubt, this time around, emerging markets are more hardwearing to the Fed blows than they were in 2013 when taper talks resumed, but threats of underperformance still persist. Investors should note that several market researchers hinted at weak global growth for the coming years and cut their estimates. For example, the Organization for Economic Cooperation and Development (OECD) slashed global growth estimates twice in three months . The organization now projects that the global economy will expand 2.9% in 2015 and 3.3% in 2016, down from the prior guidance of 3.6% for both years. For the emerging markets, protracted slowdown in the largest region China has been a huge concern and its ripples in the other parts of the bloc are souring the sentiments over the region. Moreover, China accounts for a gigantic portion of the global commodity market. Thus, a long drawn out weakness in this economy has weighed heavily on commodities. This in turn dealt a blow to two other commodity-rich emerging markets, Brazil and Russia, which are now facing recessionary threats. IMF expects the Russian economy to contract 3.8% this year and 0.6% in the next, while Brazil’s economy is expected to shrink by 3% in 2015 and 1% in 2016. However, the OECD expects both the struggling economies to return to growth by 2017. Within the bunch, India seems to be a winner, though it has its share of problems in the form of political complexity and the resultant delay in application of pro-growth reforms by Prime Minister Narendra Modi. In such a backdrop, iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) has added about 6.6% so far this quarter (as of November 20, 2015) after the MSCI Emerging Market Index lost about 19% in Q3 – the largest quarterly retreat in four years – instigated by the Chinese market upheaval, per Bloomberg. But investors should note that not all emerging market ETFs have delivered lower than 10% gains so far this quarter. In fact, Chinese ETFs returned superbly after the stock market rout in Q3 when the market had a bloodbath. Several China ETFs, especially A-Shares ones, returned more than 20%. Several Latin American ETFs too have given stellar returns, some on political hopes while others on compelling valuation. However, since particular country-ETF investing looks risky in the present market backdrop, which might not sustain returns at any point of time on any single issue, below we highlight a handful of broader emerging market ETFs that have given impressive returns even in a tough operating environment. Broader market options appeared better picks as the strength of one economy often compensates the weakness of the other. Emerging Markets Internet & Ecommerce ETF (NYSEARCA: EMQQ ) – Up 23.5% The Internet and e-commerce industry is developing fast with the increased use of social networking sites and online trading as well as the growing adoption of smartphones and other mobile Internet devices. So, this product has more to do with technological expansion in the emerging markets rather than reflecting the slowing potential of those economies. In fact, EMQQ can succeed on the back of a fast-expanding middle class population of emerging nations. This $11.7-million ETF considers companies from Asia, Latin America, Africa and Eastern Europe. Country-wise, China takes the highest allocation in the fund. EMQQ charges 86 bps in fees and is up 23.5% so far in the fourth quarter (as of November 20, 2015). First Trust BICK Index ETF (NASDAQ: BICK ) – Up 16% This $8.3-million product considers securities from Brazil, India, Mainland China and South Korea. The recent rally in the Brazilian market following its Congress decision to cut on government expenditure to boost the waning economy favored the fund. The product charges 64 bps in fees. WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (NYSEARCA: XSOE ) – Up 14.3% The $2.2-million fund can entice investors having less faith in the state-owned emerging market companies, but still intending to tap the region’s growth story. According to the issuer, the MSCI emerging market index generated 80% less returns than the U.S. markets over the past five years and this was due to the anemic performance of the SOE. In terms of geographic exposure, China (23.5%), South Korea (16.5%) and Taiwan (10.9%) have a double-digit exposure each. The fund charges 58 bps in fees. Guggenheim BRIC ETF (NYSEARCA: EEB ) – Up 12.9% As the name suggests, the $90.6-million fund considers BRIC (Brazil, Russia, India and China) economies. It charges 64 bps in fees and is heavy on IT (up 25.44%), while energy (19.30%), financials (17.38%) and telecom (12.9%) round out the next three spots. SPDR MSCI Beyond BRIC ETF (NYSEARCA: EMBB ) – Up 11.6% The $2.5-million ETF put double-digit weight in South Korea, Taiwan, South Africa and Mexico. The fund has returned over 11.6% so far in Q4 (as of November 20, 2015). Original Post

A Taste Of Turkey ETF Before Thanksgiving

The great quote ‘what’s in a name?’ by William Shakespeare probably falls inappropriate in some cases. Let us say why. Thanksgiving is just around the corner, and demand for turkey is high. While turkey is good only for a blessed dinner, investors can give special attention to a specific country named ‘Turkey’ on Thanksgiving – for any insightful investing opportunity – thanks to the similarity in name with the bird turkey, which is a must for most Americans on the special day. For those investors, we would like to dish out the economic and the stock market outlook of the equities and ETFs of Turkey. The timing is also apposite as the pure-play Turkey ETF, the iShares MSCI Turkey ETF (NYSEARCA: TUR ), has gained about 2% in the last one month (as of November 23, 2015), though the product is down about 23.8%. What’s Behind the Recent Bullishness? The Turkish market has been enjoying a bullish stretch recently thanks mainly to political hopes. Its ruling Justice and Development Party (AKP) won a surprising majority in this month’s election to rule till 2019. The significant win put an end to the months-long political unrest and boosted the demand for risky assets in anticipation of a stable government. In fact, consumer confidence in Turkey also leaped post AKP’s win. Economy Edges Up This once-woebegone economy is also sending positive vibes on the economic front. In October, its government doled out the Medium-term Economic Program and the Financial Plan for 2016-2018, wherein softer growth targets were mentioned but increased spending on social policies and defense areas was also hinted at, per Organization for Economic Cooperation and Development (OECD). Investors should note that the Turkish economy, normally known for its wide current account deficit, recorded the ‘ largest surplus in six years’ in September, breezing past both year-ago number and analysts’ expectations. Persistently weak oil prices and a soft import demand led to this jump. Notably, slumping oil prices is vital to the Turkish economy as the country imports more than 90% of oil for about 70% of its total energy needs. Imports fell 24.4% in the month – the steepest monthly plunge in five years – which in turn lowered trade deficit. Sky-high inflation – the key botheration in the Turkish economy – eased in October after hitting a four-month high in September. Turkey’s central bank guides inflation at 7.9% at the end of 2015 and at 6.5% in 2016. The economy stepped up in Q2 and grew 3.8% year over year, beating market expectations. The growth rate was the best since the first quarter of 2014 thanks to strong domestic demand . In the first quarter of this year also, the growth rate came ahead of forecasts. As per OECD , the economy’s GDP is likely to increase from 3% in 2015 to more than 4% in 2017 on abating political upheaval, improving job growth and a falling Turkish lira which in turn will boost exports in association with a global economic recovery. Lira has lost about 17.5% so far this year (as of November 23, 2015). Deterrents Despite this optimism, the market is exposed to risks. A spike in geopolitical crisis at the southern region, terror attacks in the Middle East and the related entry of refugees are huge threats to the economy, per OECD. Moreover, the Fed is preparing for a lift-off, though gradual, in December. This will lead to a flight of capital from the Turkish economy and weaken the currency further. In any case, the Turkish lira is one of the worst-performing currencies this year. Further weakness in the currency will put pressure on the country’s huge oil imports, exaggerate foreign exchange outflows and lead inflation to jump. Lira’s decline has already lowered the average Turkish income from more than $10,000 to around $9,000 . If this trend continues, it would be tough for Turkey to emerge out of this vicious cycle. All in all, though tensions persist, things are slowly turning for the better. Considering both pros and cons, investors should take a closer look at the Turkey ETF before investing. Below we highlight the key details of the fund. TUR in Focus The ETF follows the MSCI Turkey Investable Market Index and provides a pure play exposure to 76 Turkish stocks. The fund is highly concentrated on its top 10 holdings which make up for nearly 60% of assets. Financials dominate the fund’s returns with less than half of the portfolio while industrials and consumer staples take double-digit exposure in the basket. The fund has amassed around $359.6 million in its asset base and trades in solid volume of about 360,000 shares per day in average. The fund charges 62 bps in annual fees from investors and yields 2.59% annually (as of November 23, 2015). TUR has Zacks ETF Rank #3 with a ‘High’ risk outlook. Technical Look If we take a closer look at TUR, hopes for a surge find some basis. From a technical perspective, TUR is poised for a surge in the coming weeks. Its short-term moving average (9-Day SMA) is above the mid-term average (50-Day SMA), suggesting near-term bullishness. Further, RSI is close to 50, meaning that the fund is about to slip in the oversold territory and might reverse the trend anytime. TUR trades at a P/E (ttm) of 10 times, lower than the broader emerging market fund, the iShares MSCI Emerging Markets ETF’s (NYSEARCA: EEM ), P/E of 11. Original Post