Tim Treadgold: Briefcase - Green is good times coming

High oil prices are doing wonders for the share prices of oil producers, which makes just about every stock in that sector worth a look. But, the forces propelling the oil price may also be a game-changing event for an almost forgotten sector of the market, green energy.

Investors with reasonably long memories will shudder when reminded of green energy, a package of ideas that covers everything from tidal and solar power to landfill gas and wind.

Until now, very few of these green energy ideas have come close to passing the critical business test of profit. In other words, most belong in a drop-out commune somewhere near Nimbin or Nannup.

Times, however, area-changing because the technology behind green energy is improving, the trade-off equation of the green price v the oil price is narrowing and financial disasters such as the famous Solid Waste and Energy Recycling Facility (SWERF) at Wollongong are being seen as good examples of trial and error – at least we know not to go down that road again unless someone else has $160 million to burn.

The trick for investors with an eye for the trend – and never forget that the trend is your friend when it comes to investing – is to separate the loopy from the potentially lucrative.

Briefcase, as ever, gives no investment advice. You're all big enough to make your own decisions. With that all-purpose denial, there are few stocks worth looking at because they have learned the lessons of loopiness and realised that a business must be run as a business and not for lifestyle.

Solco, which received a mention here a few weeks ago, is an example of a company which headed off down the loopy road with a dream to use solar power to produce clean water. In theory, a fabulous idea which may, one day, prove to be a winner. In the meantime, the real business injected into Solco makes boring, plain vanilla, always-make-a-profit, solar-powered hot water systems.

Case study number two of a business which has tried hard, and struggled, but which now has a hard-nosed financial partner to switch the colour of the accounts from red to black is a business called Novera Energy.

Floated a few years back, Novera (ASX code NVE) has been a bit of a dog, rarely trading north of 30 cents a share and, until late last year, struggling at a lowly 15 cents – when life started to change thanks to a link-up with the Sydney money-machine, Macquarie Bank, and a bold expansion of its green energy business in Britain.

A new business called Novera Macquarie Renewable Energy (NMRE) has been established on a 50-50 basis between the bank and Novera. Into the joint venture has gone a portfolio of projects assembled by Novera, plus a portfolio of green energy assets acquired from the British company, United Utilities. The package of assets is valued at $301 million and includes landfill gas, a small amount of hydro power, plus coal-seam methane.

The grand plan, which has received virtually no publicity for Novera in Australia, is to lift capacity from its current 107 megawatts to 128MW by 2006, operating at 55 different sites. In theory, it should all be profitable – and a nice shade of green.

Barclays Bank is a believer in the deal, having tipped $231 million worth of debt into the JV, while Novera and Macquarie have contributed $40 million each. A long-term power sales deal has been signed and highly-regarded Sydney-based economist Don Stammer is chairing Novera, and brings a degree of stability not normally associated with an alternative energy business.

In a more conventional business, but still wearing the tag of re-emerging is Austminex, a gold explorer which has had limited success since floating in late 2000. For a few happy weeks in late 2003 the stock traded above 20 cents before subsiding back into the sub-10 cents doldrums – which is where it remains today, perhaps unfairly.

Over the past few years Austminex (code: ATX) has been pulling together a deal that covers much of the best ground around the historic goldmining centre of Coolgardie. The biggest step was taken earlier this month when it announced plans to acquire the mill, tenements and other assets of Herald Resources and Leviathan Resources and to combine these with its existing operations in the area.

In effect, Austminex sees itself as the Coolgardie consolidator, while achieving the economies of scale that come from owning the tenements and a mill that can process an estimated resource and reserve of 1.4 million ounces of gold.

Said quickly and it sounds easy, though the history of Coolgardie is that not much comes easily with the ground known for its rich, but small, gold deposits.

Austminex chief executive Kate Hobbs plans to spend the next few weeks bedding down the Herald and Leviathan deal, raising the cash to complete the acquisition and shutting down the Three Mile gold processing plant while the new, and combined, business structure takes shape.

She says one of the problems with the existing Three Mile operation, and the reason it has been running at a high cost, is because the mill performs badly when only "half full". After a period of closure the plan is to reopen and run the mill flat out, processing ore from the newly acquired mines and from projects such as Austminex's own Dreadnought and Mount operations.

If all goes well, and the gold price holds up, Austminex could be on a winner. The immediate hurdle is to complete a fund-raising to pay off the acquisition, possibly by a debt and equity raising, followed by a listing on London's Alternative Investment Market, or through a joint venture with a North American gold company which has been attracted by the Coolgardie consolidation concept.

As all that comes together it is reasonable to expect a few serious investors to take a fresh look at Austminex and forgive the past lacklustre performance.

"A politician is an acrobat. He keeps his balance by saying the opposite of what he does." Maurice Barres.