Naikun Wind Energy Group (TSX: V.NKW, Stock Forum; 30 cents)
www.naikun.ca
> Net cash: $8 million (20 cents/share)
> Shares outstanding: 40 million
> Stock market valuation currently assigned to its wind energy project: $4 million.
Naikun was the top-traded stock on the TSX.V Friday after receiving a critical environmental approval from the Federal government. This company has spent the past five years and more than $30 million on project planning and environmental review studies in hopes of creating Canada’s first offshore wind energy field off the coast of British Colombia. (IF) the company can secure an energy purchase agreement, they would be in a position to start construction within two years. The project is planned between the B.C. mainland and Haida Gwaii - https://en.wikipedia.org/wiki/Haida_Gwaii.
Educated gambling
The last major hurdle for Naikun from an environmental perspective was crossed Friday. However, they still need someone to buy the power they could produce and someone else to financially backstop it. If neither occurs, this is likely dead money. If both occur (and they would typically occur in tandem), the upside potential for this stock is dramatic. Realistically an energy purchase agreement and subsequent financing could value Naikun well in excess of $100 million ($3 per share or more).
The problems faced by an investor are whether this could occur in months or years. Literally this becomes educated gambling. If the cash burn remains controlled, the downside should be limited to cash value of 20 cents while the upside significant triple digit gains.
Past history
B.C. Hydro was accepting applications for clean power projects and throughout 2008 and 2009 NKW was hoping to be part of that. On March 31, 2010, they were cut from that list and told the project was no longer under consideration. The stock collapsed from 59 cents to 28 cents and drifted towards 10 cents (they had already taken a beating following the financial collapse in late 2008).
British Columbia’s energy program set a target of electricity self-sufficiency by 2016. The Naikun wind project could power some 130,000 B.C. homes and displace 450,000 tonnes of greenhouse gas emissions per year if used instead of natural gas.
The power from this project would also eventually replace over 20,000 tonnes of diesel that is required to provide power on the island of Haida Gwaii. Naikun has formed partnerships and working relationships with the Haida Nation, the Lax Kw'alaams First Nation and the Metlakatla First Nation.
If cut from B.C. Hydro, why “could” this time be different?
1) Nuclear fears in Japan. Yes they built on a giant earthquake fault (which many question), but this was enough to put fear into everyone around the world concerning nuclear power. Now in Japan there are concerns over food and water contamination. These nuclear fears leave few alternatives. Hydro has a giant geographic footprint and is not available in most countries where water is already a concern. Coal is the leading choice but has giant emission concerns, while solar makes sense but cannot be economic on a large scale. This leaves wind as one of the best alternatives along with natural gas.
2) A year ago Naikun still needed federal approvals when B.C. Hydro was awarding power contracts. Many thought this project would not receive Federal approval so it made sense that B.C. Hydro looked at it as pre-mature.
4) On the mainland nearby they are putting in a multi-billion dollar LNG (liquefied natural gas) project at Kitimat – www.kitimatlngfacility.com. This LNG facility will not only be a huge consumer of power, but it is directly associated with the petroleum industry, which is always looking for ways to improve their “green” image. This project is owned by oil and gas giants Apache, EOG, and Encana. With the earthquake in Japan, that country will need to increase their dependency upon natural gas, and before the nuclear problems they were the largest importer of LNG. Dramatic LNG demand will also occur in China and India.
5) Between Edmonton and Kitimat will be the Northern Gateway project (www.northerngateway.ca). This is a multi-billion dollar Enbridge project involving a new twin pipeline system running from near Edmonton, Alberta, to a new marine terminal at Kitimat. It will be used to export petroleum and import condensate. Enbridge is another company in desperate need of some “green.”
Carbon tax credits for big oil
Giant oil companies in the United States are buying into large-scale wind projects because they receive tax breaks to shelter their enormous profits. These are associated with Carbon Offsets and Carbon Tax credits. They essentially offset their green-house gas emissions with green projects that generate power from wind. It looks good on the balance sheet and is good PR.
For reference:
a) https://en.wikipedia.org/wiki/Carbon_offset
b) https://en.wikipedia.org/wiki/Carbon_credit
c) https://www.wind-watch.org/documents/two-oil-companies-use-wind-farm-tax-breaks-to-shelter-profits-from-income-tax/
d) https://www.vpr.net/news_detail/89937/
e) https://www.luther.edu/sustainability/education/maren/?story_id=315105
f) https://en.wikipedia.org/wiki/T._Boone_Pickens
Many giant oil and gas companies around the world do not have the best corporate image. Investing in green projects like a giant offshore wind farm (in one of the greenest regions of the world), could make them look VERY good. Not only would they receive valuable carbon offsets, but it is a tremendous boost to their image.
Canada is home to some of the world’s largest oil companies and in this Kitimat region alone, we have Enbridge, Apache, AOG and Encana. There are many reasons that justify the B.C. government backing this project and buying power from it, but the oil companies alone should (or could) be looking at this project as a great way to boost their green profile.
Management
Naikun has a blue-chip management team and board of directors lead by Michael O'Connor - President and CEO. Previously, he was Project Director for Vancouver's Canada Line Rapid Transit Project with SNC-Lavalin, where he was responsible for the design, construction and commissioning of the $1.7-billion transit project before the 2010 Winter Olympics. He also served as President and CEO of BC Transit.
Unknown risks
1) What would the final cost of power production be? Even if BC Hydro was prepared to consider a power purchase agreement, they would only be prepared to pay XX dollars per MWh. Without knowing the specific economics of the project, it is one of the two primary risks.
2) I believe there may be an item in the BC Energy Plan that could limit the carbon credits available to independent energy producers. This could affect the outside involvement of larger energy companies. Unfortunately I do not know the details of this and it is a very complicated structure that hopefully Naikun will address publicly in the future.
These two items in particular are something we would want to see the company publicly address either in a press release or on their website. It would help reduce overall risk for existing shareholders and potential new investors.
Conclusion
Friday 14 million shares traded hands at an average of 29 cents and Monday another 7.9 million averaged 37 cents. This dramatically increased the cost base from the past year but still far below 2008 and 2009 levels. The range in 2009 was 40 cents to 80 cents, and 2008 it was 40 cents to $3.80 (where the large financing was done above $3). The stock traded between $1 and $2 prior to the financial collapse in late 2008.
The run on Friday likely cleaned out many old shareholders who were tired of waiting, but currently the stock is in the hands of short-term traders. Many investors will be tucking it away for the reasons I mentioned in this report, but short term the volatility will likely continue.
These are tough to try and catch after big news (if it ever comes) so a person needs to have patience and a high degree of risk tolerance. Personally I believe the risk/reward is strong when the project itself carries a valuation of only $4 million.
There is an excellent overview of the project and the company from 2009 that is still very relevant:
https://www.naikun.ca/pdf/NaiKunBookLR.pdf
Also good video overviews here: https://www.naikun.ca/news_media/videos_images.php
Disclosure: Danny Deadlock owns 35,000 shares of Naikun Wind Energy Group (TSX: V.NKW).