On June 21st, Finavera Wind Energy (TSXV:FVR, OTC:FNVRF) announced the ratification of the sale of its Tumbler Ridge and Meikle wind energy projects to Pattern Energy with 99.63 percent of votes cast in favor (a two-thirds majority was needed).
The result should have surprised no one, given that the sale was essential to Finavera’s liquidity and ability to fund its operations. After shareholder, stock exchange and regulatory approval, Pattern will forgive C $9.3 million of Finavera’s debt. Shareholder approval is now complete, exchange approval is expected this week, and regulatory approval should be complete by early September (see below). Pattern is also providing a credit facility which will allow Finavera to continue its operations.
The company’s board of directors was also approved, although not with the same 99+ percent of the votes. Roughly a quarter of the votes for Finavera’s four directors were withheld. According to Finavera’s CEO Jason Bak in an interview, a large block of the votes withheld from the directors were because one larger shareholder and creditor, Sprott Power Corp., was registering its disapproval that it was not going to have a $900,000 loan repaid sooner. That loan and Sprott’s two million share stake in Finavera arose last year, when Sprott was considering doing a deal with Finavera, but instead ended up buying assets from Shear Wind, Inc.
Going forward, there are a number of milestones needed to complete the Pattern transaction and to realize the value of Finavera’s stake in the Cloosh Wind Project in Ireland. If both are completed, most likely in mid- to late 2014, I calculate that Finavera will have between 32 and 44 cents of net cash on hand. Bak promises a shareholder vote as to the use of this cash: should it be returned to shareholders as a dividend, or used to invest a new opportunity. The timing of the vote will depend on when Finavera is able to present shareholders with a specific investment opportunity, and will likely precede the completion of the Pattern asset sale.
The next milestones for Finavera will be:
Value on Financial Close of Pattern Deal
Given the different possibilities, I decided to do a quick scenario analysis of the possible outcomes for Finavera, and look at what that means for Finavera. To be conservative, I not only considered the two options Bak thinks are likely (Super-Miekle or Meikle and Tumbler) but also considered a couple possibilities which he considers very unlikely.
With regards to Cloosh, I gave a 10 percent probability that something will go horribly wrong, and Finavera will not receive the final C $9.3 million payment or be able to sell its residual stake. In reality, even if something goes wrong at Cloosh, Finavera should be able to recover some value from this very advanced project, but I wanted to be conservative. With regards to Miekle and Tumbler, I gave a 5 percent probability to building only 114 MW at Miekle and none at Tumbler Ridge. Bak says that the wind regime has now proven strong enough at Tumbler that this is no longer an option being considered, but I decided to throw it into the mix anyway, with a 5 percent probability. I then gave a 45 percent probability to the Super-Miekle option, which Bak considers most likely, and a 50 percent probability to the Miekle and Tumbler option. This is again conservative, as I gave the higher probability to the less valuable scenario.
The results are shown in the chart below:
In my calculations, I assumed 37.5 million diluted shares outstanding, C $22.6 million in liabilities, C $2 million in current assets, and C $3 million in operating expenses before Finavera receives the final payment from Pattern.
The positive result from the Annual General and Special Shareholder meeting had begun to lift Finavera off its low, only to be reversed by two days over cratering stock markets on Wednesday and Thursday. Although there is always considerable risk in small companies like Finavera, even discounting next year’s expected cash holdings of C $0.35 per share by 50 percent gives a value to Finavera today of C $0.175. Today’s 14 cent share price looks likely to double (or more) over the next 18 months, as Finavera completes the milestones above.
Disclosure: Long FVR, SPZ.
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.
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