Alternative energy becomes a “story”
Prices of promising shares driven up sharply by investors
RECENT RESEARCH CONFIRMS that there are more than enough energy resources available in the world for many years to come, but it also confirms that the price for exploiting these resources will be high. In other words, high oil prices are here to stay – that’s a given, and business and investors must adapt accordingly.
Several new trends are emerging as a result, such as hedge funds and other major market players that are investing increasingly in promising companies that will hopefully make large profits from the development of so-called clean alternative energy resources. Uranium is one of the most important of these, and its importance is proved by the interest it is currently generating all over the world. More than 200 uranium companies have been listed on various stock exchanges over the past two years.
In the middle of last year, a fund called Geiger Counter, which focuses on uranium companies, was listed on the London Stock Exchange. The reason for this is, of course, the record levels reached by the uranium price over the past few years when it grew by about 1 100% to the current US$85/lb.
International bank group ABN Amro recently adjusted its forecast for 2007 from an average US$65 to US$95/lb. This is regarded as conservative, since 69 new nuclear reactors are currently under construction or in the planning stages.
Worldwide there’s feverish activity to increase uranium production. For example, America’s production last year increased by 53% to 4,1m lbs. Yet this accounts for only 7% of its own requirements.
In SA there are only two listed companies giving direct access to the uranium bull market. The most important is sxr Uranium One, which was one of the most exciting shares on the JSE over the past twelve months, with an increase of nearly 180%. The more speculative Simmer & Jack jumped 225%. It’s interesting that hedge funds also invest in these two.
However, along with the pressure exerted by higher oil prices, there’s increasing concern about global warming. Large industrial groups, which have in the past been seen as part of the problem, are increasingly supporting a move away from coal and oil as energy resources to cleaner alternatives. In addition to nuclear energy, other sources like hydroelectric power, wind, sun and the movement of waves are being looked at.
Russell Pullan, director of Nomura International’s New Energy & Clean Ventures division, says there’s a “phenomenal demand” for cleaner sources of energy. This is also reflected in sharp increases in the share prices of companies that promote a cleaner environment. For example, in London the price of ReneSola, a Chinese group, doubled in three months. It recycles silicon. That this kind of company has become highly fashionable is also shown by the fact that alternative energy shares are currently trading at price: earnings ratios of 20-40 times on the large markets. This compares with around 10 for a large European oil company.
UN Environmental Programme head Achim Steiner points out that the political will of the large industrialised countries is now much more in favour of developing alternative energy resources. Germany and Japan are already subsidising development work, and indications are that their example will increasingly be followed elsewhere, including in the emerging economies, such as SA.
For the first time, it’s also a real political factor in the US presidential elections, with a possible Democratic candidate, Al Gore, who last week won an Oscar for his film on global warming. The US is the main culprit emitting toxic gases into the atmosphere.
However, the expected sustained high oil prices, as well as the instability of several large oil exporters, also have other important long-term consequences. The European Central Bank points out that high oil prices are the main reason it could not reach its inflation targets for the seventh consecutive year last year. Its target is just under 2%.
Last year’s figure was 2,2%. About 2% is being forecast for this year, provided oil prices remain relatively stable at the current levels. For investors, the swing to cleaner energy resources is quite a “story” that could produce exceptional profits in the future. SA plays a very small role in this, and local investors will have to look to the overseas market to catch a ride on this wave, probably by way of specialised unit trusts. Large mutual fund managers like Fidelity (www. fidelity.com) and Vanguard (www.vanguard. com) offer energy funds, while alternative energy funds are available at www.gafunds. com and www.newalternativesfund.com.