The economics of the Faulkner 1 geothermal plant continue to be adversely affected by lower than anticipated power production and a forecasted gradual temperature decline. The Company (Nevada Geothermal) is currently further stimulating and testing five wells, as well as re-modeling the reservoir to update its forecast of power production. The Company presently believes the most reasonable power production forecast is 35 MW (net) declining approximately 2.5% per year. If there is no improvement in this forecast the Company will not be able to meet the terms of its loan with EIG Global Energy Partners (EIG)…READ MORE.
My Take: This is the risk that one takes when investing in mico-cap stocks. The reward is high and so is the risk. In small companies, you typically have a big bet on a one trick pony. If that pony performs, great, otherwise watch out. Nevada Geothermal is in a world of hurt because their geothermal production facility is failing to perform as not only expected, but required.
Financing is the name of the game when starting a new business. Where is the capital going to come from? Some companies require more capital than others to operate. In the case of geothermal energy production, a very large amount of capital is needed for site evaluation, development, production and operations. One could say the process is front-loaded. The bulk of the costs are incurred to get the metaphorical plane off the ground.
In Nevada Geothermal’s case, they were able to get out from under some of the weight of their loan expenses from a grant from the Department of Energy last year. With new lines of funding came new requirements, such as having to have their facility perform at a certain level. Without performance, not only does the ability to produce power to pay their debtors come into question, but the ability to meet the basic terms of their contract. Not good when your company is focused on a specific technology at a specific site.
To Nevada Geothermal’s credit, they have a handful of other sites that they plan to develop. Yet, if funding disappears and their current operation can’t perform to the level needed, how will these future sites be developed? You end up seeing that not many options exist. Further stock dilution?
On top of all of this bad news you have a geothermal industry that is pretty beaten down. With the recent retreat in energy prices, alternative energy sources become much less attractive in the eyes of investors. Premium energy sources look good when energy is selling at a large premium. Couple this with the fact that Washington continues to talk about cutting programs to reduce the budget’s size, which isn’t good for an industry (alternative energy) that generally has been able to capitalize on various forms of government subsidies in the past few years.
The bottom line here is that any small company has tremendous risk associated with it. It takes skill and some luck to get off and running. Everything must line-up, or one broken cog can muck up the whole system. Don’t shy away from small companies, but understand the inherent risk and do not allocate more of your portfolio dollars than you can stand to lose.
Disclosure: No Position