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David Kempton: 3 stocks for the power revolution

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David Kempton: 3 stocks for the power revolution
 

As markets hit all-time highs and investors worry over the impact of the impending Budget on Alternative Investment Market inheritance tax reliefs, taxes on second homes and the VAT threshold on small businesses, it might seem an odd moment to focus on the global threat of climate change.

Yet any regime ignores the risk at its peril. Last week’s announcement that carbon dioxide levels in the earth’s atmosphere had surged to a record high, up 50% over the last 10 years’ mean, to a level not seen for 800,000 years, underlines the danger.

Images of the impact of climate change have never been so powerful. Hurricanes Harvey, Irma, Jose, Maria threatened the lives and property of millions of people, and some regions may never recover.

In Japan, rainfall exceeding two inches per hour has increased by 30% in the last 30 years, threatening the greater Tokyo area, the most populous metropolitan area in the world, where some districts are already below sea level. 

It seems an appropriate moment to review three stocks involved in the power storage systems of the future which I have previously mentioned in this column. These are ITM Power (ITM), which makes hydrogen for fuel cells, Bacanora Minerals (BCNB), which mines the lithium used in lithium-oxide batteries, and RedT Energy (RED), which makes batteries from vanadium, an element once used to strengthen swords.

Hydrogen potential

ITM, which I highlighted in September,  supplies the equipment to make hydrogen on site, allowing a car to be fuelled for a 300-mile range in three minutes. Recent news has highlighted the potential for hydrogen, especially in lorry fleets, buses, trains and industrial equipment. It’s clearly significant that JCB owns 12.4% of ITM.

The advantages over lithium-ion batteries clearly include speed of refill and no impact on the electricity grid, other than the initial impact on the electrolyte to produce the hydrogen which is not at peak times. 

Currently, ITM has development contracts with Honda, Toyota and Hyundai and, imminently, with a large German manufacturer. ITM has just raised £29 million in an oversubscribed placing for working capital for the £20 million existing contracts. Another £20 million is in advanced stages of negotiation and a further £180 million is in the pipeline.

General Motors has announced that, starting in 2020, it plans to invest $85 million (£65 million) into mass production of hydrogen cells, in partnership with Honda, for consumer vehicles.  Toyota already sells its small Mirai fuel cell car in the US and is now testing larger fuel cells for commercial vehicles, including 18-wheeler trucks, But with only 40 public fuelling stations in the US, there is clearly a long way to go.

Microsoft plans to use fuel cells at their power hungry server farms, which could double energy efficiency.  Data centres worldwide draw 1% of all global electricity and are ideal for power generation from fuel cells, with demand rising fast as the world population becomes increasingly technology savvy with big data and Alexa controlling our smart home appliances.

Disappointing progress

Bacanora, which I first mentioned in April with the shares at 89p, is now trading at 95p. It has been disappointing, and other lithium miners have performed better, but I’m happy to stay with it.

I know the management and have confidence in their proven ability to make the company into a world-class lithium carbonate producer.  Located in Mexico, with easy port access, Japan’s Hanwa has taken 100% of the first year’s production.

If you want an investment in lithium-oxide batteries, UK quoted Bacanora looks a good opportunity, but, as ever, don’t bet the farm on a mining stock, still two years from production, but of such a scale that high quality lithium could be produced for 180 years. 

RedT Energy has been a disappointing investment.  I first mentioned the stock as one of my disruptive early-stage picks for 2017, but it has been disappointing. I sold when the shares fell to 7p, triggering my 20% stop loss rule, only buying back after recent events. The shares are now back over 10p and look interesting again. Having met the chief executive last week, my enthusiasm for the company is strongly rekindled.  

RedT designs and manufactures vanadium redox-flow batteries for grid scale use. The batteries can store hundreds of megawatts of energy, probably charged by renewable sources to accommodate peak demand at times when it is not being generated. Its only real competitor is Chinese and I understand that RedT is now the only real provider outside China.

RedT boasts €16 million (£14 million) from customers in the final stages of selecting its products and €323 million of projects in the pipeline. With €13 million cash and a market cap of £75 million, it is unlikely to make a profit until 2019, but thereafter should be in a very strong position to exploit the massive potential markets.

Flow batteries will never be manufactured small enough for mobile electric vehicle use – that will be the domain of the fuel cell or the lithium-ion battery, which degrade very quickly with use (illustrated by mobile phone batteries’ 18-month effective lives, whereas a vanadium flow battery will last 20 years) and hence unsuitable for large-scale industrial use. 

Stocks of the year

I should comment at the end of the third quarter on my three ‘stocks of the year’ I wrote about in January.

Medical components business Avingtrans (AVG) is up 17%, online estate agent Purplebricks (PURP) has risen 160% and RedT is level.  I continue to hold them but have top sliced Purplebricks.  All qualify for inheritance tax relief if held for the requisite two years; hold them in an ISA and there’s also no capital gains tax or tax on dividends. As ever, run your profits and cut your losses at 20%. This doesn’t always work and went wrong for me with RedT, but statistically it is significantly the safer course.

One more thing: look out for new float ContourGlobal, suppliers of electricity from thermal and renewable sources in Europe, Africa and South America, in an initial public offering which will get away with a near-£2 billion price tag.

David Kempton is non-executive chairman of Hawksmoor Investment Management and a non-executive director of Impax Funds Ireland. He is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies. He may have an interest in any of the investments which he writes about.

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