The World's #1 Renewable Energy Network for News, Information, and Companies.

Holiday Shopping Deal on Geothermal Shares

Holders of Ram Power Corp. (TSX:RPG, OTC:RAMPF) on November 26 (the “record date”) recieved valuable coupons as the result of the company’s rights offering, announced November 18th. Just in time for the holidays, these coupons, or “rights” can be used to buy additional shares of Ram Power for 8¢ Canadian per share any time before 5:00 p.m. on December 23rd. (Disclosure: I am long Ram Power stock.)

Holiday shoppers looking for more traditional gifts will be able to raise a little cash by selling the rights on the Toronto Stock Exchange, where they are listed as RPG.RT.  Since they began trading on November 25th, they’ve traded between ½¢ and 1¢.  Shareholders will have received one right for every  share of Ram they owned; each 4.5 rights allows the purchase of one share of Ram at 8¢. 

Why The Bargain

The reason for the extreme couponing at Ram Power is the company needs cash.  While its main project, San Jacinto-Tizate in Nicaragua, is currently operating at reduced capacity while its contractors are working on a remediation project expected to bring its production up to somewhere between 59MW and 63MW of net electricity output.  The remediation is expected to be complete in mid December, with results from testing in mid January, after which Ram will be eligible to receive distributions from the project.

The low 59MW production estimate will easily be enough to keep Ram from having to default on its project loans (they need at least 55MW,) but as long as the net output is below 65MW,  $2.95 million of Ram’s Project equity must remain in a maintenance reserve account, and maintenance contributions will be increased by $0.2 million per quarter for every MW of capacity below 65 MW (net.)  Ram will be eligible to receive distributions if there are available funds from power sales after the reserve increases and the original Project distribution requirements are met.

Without any other operating projects, Ram did not have the cash to meet an upcoming corporate debt payment at the end of December.  Unfortunately the offering was delayed until a few days after Ram’s third quarter earnings announcement.  When a company needs money quickly, they usually have to raise it on very unfavorable terms to existing shareholders, and that prospect led the stock to sell off between the quarterly earnings report and the rights announcement.

As it was, a rights offering of this sort is about as shareholder-friendly a way as possible to raise needed cash.  Instead of outside investors buying the stock at a discount and immediately dumping it on the market, existing shareholders are given the opportunity.  As I mentioned before, if they are not willing or able to come up with the additional cash, they can still monetize the opportunity by selling their rights in Toronto.

A Guaranteed Successful Offering

Two provisions of the rights offering ensure that the company will be able to raise the full C$5.3 million targeted by the deal  First, holders of rights will be able to exercise an “additional subscription” privilege on a pro-rata basis to buy shares which would have been available under any rights which are not exercised.  Ram has also arranged for standby purchase agreements with Dundee Securities, Newberry Holdings International Ltd. and Exploration Capital Partners to purchase any shares which are available but not issued subject to the rights offering.  The fact that these large, sophisticated investors, including Ram’s investment bank and an affiliate of one of its largest investors are willing to backstop the deal is one more piece of evidence that it’s a good deal for investors to participate.

Company for Sale

Because it looks unlikely that the remediation program at San Jacinto-Tizate will increase capacity enough to allow Ram to resume distributions and fund its ongoing overhead and corporate debt payments going forward, Ram has is also “Exploring strategic options,” which is management speak for “the company is for sale, all or in part.”  In addition to making the December interest payment, the funds from the offering should be sufficient for Ram to complete its remediation project and find a bidder for the whole company, or just San Jacinto-Tizate and its other projects.

With about C$50 million of Earnings before interest, tax, and depreciation (EBITDA) increasing with inflation, Ram would be worth about C$600 million if trading at the same (12x) multiple as mature power power producers on the TSX.  That number includes no value to its development projects.   Ram will of course not receive a 12x multiple, but a 7x to 9x multiple, such as discussed in the recent earnings call does not seem out of line.  Adjusted for  liabilities and the dilution from the rights offering, a 7x multiple would result in a value for Ram at 24¢ a share.  The 9x multiple would result in a value of 51¢ a share.  Note that Ram’s high debt makes this number very sensitive to the selling price, and a sale at 6x EBITDA would leave only 10¢ per share for equity holders.

A buyer would probably be able to achieve some cost savings by no longer running Ram as a stand-alone business. Reducing management and listing costs could amount to as much as $3.5 million annually, or another penny a share at the 7x EBITDA multiple.

Because it looks unlikely that the remediation program at San Jacinto-Tizate will increase capacity enough to allow Ram to resume distributions and fund its ongoing overhead and corporate debt payments going forward, Ram has is also “Exploring strategic options,” which is management speak for “the company is for sale, all or in part.”  In addition to making the December interest payment, the funds from the offering should be sufficient for Ram to complete its remediation project and find a bidder for the whole company, or just San Jacinto-Tizate and its other projects.

With about C$50 million of Earnings before interest, tax, and depreciation (EBITDA) increasing with inflation, Ram would be worth about C$600 million if trading at the same (12x) multiple as mature power power producers on the TSX.  That number includes no value to its development projects.   Ram will of course not receive a 12x multiple, but a 7x to 9x multiple, such as discussed in the recent earnings call does not seem out of line.  Adjusted for  liabilities and the dilution from the rights offering, a 7x multiple would result in a value for Ram at 24¢ a share.  The 9x multiple would result in a value of 51¢ a share.  Note that Ram’s high debt makes this number very sensitive to the selling price, and a sale at 6x EBITDA would leave only 10¢ per share for equity holders.

A buyer would probably be able to achieve some cost savings by no longer running Ram as a stand-alone business. Reducing management and listing costs could amount to as much as $3.5 million annually, or another penny a share at the 7x EBITDA multiple.

In addition to the advantage of simply buying the shares at 8¢, there are also significant benefits from the optionality inherent in the rights.  For example, a Canadian shareholder not planning to participate in the offering can still take advantage of this opportunity to maintain his or her position.   Rather than selling the rights, he or she could sell 1/4.5 (or 2/9) of his or her shares (as long as they sell for more than 8¢), and then buy them back by participating in the offering in three weeks.  This reduces the risk of loss in the event the stock declines, while maintaining the full benefit of any increase in the share price.

Conclusion

The Ram Power rights offering is the most shareholder-friendly way possible for this company to raise needed cash.  Since Ram has also put itself up for sale, and is worth between 25¢ and 50¢ per share, investors who are able should participate in the rights offering and the additional subscription privilege, unless the stock falls below 8¢ before December 23rd.  If it does fall that far, they should buy the stock instead.

Disclosure: Long RPG.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

This article was first published on Forbes.com on November 30th and AltEnergy Stocks and was republished with permission.

Lead Image: Holiday scene via Shutterstock

RELATED ARTICLES

Coutresy KOPA Solar

Image Gallery

Coal plant

US Clean Power Plan Will Double Coal Plant Closures

Jim Snyder and Tim Loh, Bloomberg

A new government analysis of President Barack Obama’s signature effort to fight climate change affirms what critics suspected: the proposal could further weaken an already battered coal industry.

Renewable energy jobs

Global Renewable Energy Employment Surges 18 Percent to 7.7 Million

Andrew Burger, Correspondent Ongoing growth in renewable energy investment and deployment is creating jobs worldwide — and lots of them. This job growth is helping governments address a fundamental economic problem plaguing developed and developing cou...

Renewable Energy Is Beginning To Power Africa

Andrew Burger, Contributor According to the International Energy Agency, sub-Saharan Africa will require more than $300 billion in investment to achieve universal electricity access by 2030. Committing more than $7 billion in U.S. government support ...
Tom Konrad is a private money manager and freelance writer focused on Peak Oil and Climate Change as investment themes. He manages portfolios for individual clients and is Head of Research for the JPS Green Economy Fund (http://jpsgreeneconomyfund...

CURRENT MAGAZINE ISSUE

Volume 18, Issue 3
1505REW_C11

STAY CONNECTED

To register for our free
e-Newsletters, subscribe today:

SOCIAL ACTIVITY

Tweet the Editors! @megcichon @jennrunyon

FEATURED PARTNERS



EVENTS

Renewables and Mining Summit and Exhibition

African mining leaders are seriously exploring new energy solutions to s...

Energy Storage USA 2015

Energy Storage USA is the leading conference in the United States focuse...

GEA Geothermal Energy Expo 2015

Every year, the Geothermal Energy Expo® hosts the world's largest ga...

COMPANY BLOGS

Net Zero Energy Efficient Buildings and Geothermal Heat Pumps

As the U.S. market for green building design and construction evolves, ...

California Solar Installations Put 6 Gigawatts of Power Online

That’s according to figures from the California Independent System...

Geothermal Earth Day Visual: Shaping Environmental Solutions

Earth day 2015 is an important point in history for the environment. Mem...

NEWSLETTERS

Renewable Energy: Subscribe Now

Solar Energy: Subscribe Now

Wind Energy: Subscribe Now

Geothermal Energy: Subscribe Now

Bioenergy: Subscribe Now  

 

FEATURED PARTNERS