However, the shares are up around 8% today on news from the company. So what’s changed and is the stock worth buying?

A good story

Most lossmaking firms have a good story and Velocys is no different. The firm is involved in plant that converts “low-value feedstocks,” such as natural gas, landfill gas or biomass, into premium products such as renewable diesel, jet fuel and waxes. It says its technology is protected by “several hundred” patents in more than 30 countries and is designed for smaller scales, combining super-active catalysts with intensified reactor systems.

Velocys tends to partner with other firms to establish standardised modular plants where the energy source exists and reckons its capabilities and extensive experience deliver a proven route to operation.

Today’s news is exciting. It signed a site option agreement with Adams County in Mississippi for its first US biorefinery to be located in Natchez, Mississippi. The firm says Adams County has offered economic development incentives estimated at the equivalent of $42m with the potential for additional incentives worth up to $15m via Mississippi’s Advantage Jobs Act and other statutory tax incentives. Adams County has also committed to pay around $4m relating to the land and upgrades to the site and local utility suppliers look set to bung in $1m to upgrade the site. On the face of it, the project looks well supported.

Ticking the boxes

Velocys says it chose the location for the new biorefinery because of an attractive regulatory and tax regime plus the availability of an abundant local supply of low cost forestry residue that will form the feedstock for the plant and transportation infrastructure that includes barge, rail and road. It also has accessible utilities, land that meets the criteria to support an industrial development such as space and terrain, and the presence of a local workforce skilled in servicing the forestry industry. Meanwhile the local community has facilities and amenities that will attract additional skilled personnel during construction and ongoing plant operations.

The 100-acre Natchez site became the preferred location after Velocys looked at operational, tax and incentive considerations relating to 12 locations over four states in the Southeast United States. None of that effort is wasted though because the directors reckon their analysis of the other locations “lays the foundation for future biorefineries.”

A route to profitability?

Meanwhile, the company says today’s announcement completes one of the work packages required for the US Department of Agriculture (USDA) loan guarantee application announced in June and the firm has started site permitting activities for the Natchez site. Chief executive David Pummell said in the announcement: “We look forward to updating our stakeholders on the progress of this transformational project in Mississippi.”

If this progress truly does prove to be transformational, we could see Velocys finally moving closer to profitability, so the firm could be worth your research time.

The post Should I pile into Velocys plc, up 8% today? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The renewable fuel specialist advised that revenues more than halved during the six months to June, to £234,000 from £509,000 in the same 2016 period. And pre-tax losses ballooned to £10.6m versus £7.7m previously.

Velocys was whacked in large part by the impact of sterling’s slide over the past year, and it advised that it “incurs much of its expense in US dollars and has exposure to the US dollar exchange rate.” As a result the firm suffered an exchange-rate-related hit to the tune of £900,000.

Release fuels investor fears

As well as being prepared for further currency-related woes down the road, investors are also worried about funding issues over at the Oxford business.

It tapped shareholders for £10m in May “to fund the pre-FEED (FEL-2) engineering study for the first biorefinery, to undertake a joint technology demonstration with our partner TRI, and to extend Velocys’ loan arrangement with ENVIA to support the plant in achieving steady state operations.” However, Velocys has advised that it will require additional funding to get its bio-refinery in the US up and running.

The City had already been expecting Velocys to chalk up losses before tax of £14.4m in 2017, but this forecast is likely to receive a hefty downgrade in the wake of today’s release.

And the very real possibility that the pound could continue to struggle, and more operational issues transpire that could whack revenue growth, may also cause the estimated loss of £6.8m pencilled in for 2018 miss to the downside.

In my opinion there is still far too much uncertainty circulating around Velocys right now, and as a result I for one won’t be investing.

Strap in and make a mint

Instead, I would much rather throw my hard-earned cash at industrial bolt and fastenings specialist Trifast (LSE: TRI).

Thanks to the hard work the Uckfield business has put into developing relationships with blue chip OEMs across the globe, and the strength of key sectors like automotive, industrials and electronics, the company continues to enjoy resplendent organic revenues growth in its territories. And Trifast is giving the top line an extra boost through its ambitious M&A strategy — it identified two targets in the first half but withdrew interest “due to their lack of strategic future-proofing” — and the vast sums it is investing in its existing operations.

In its latest trading statement the business advised last week that “our visibility and order pipeline remains very encouraging, whilst our balance sheet is strong,” and this encourages me that the firm can meet sprightly broker projections. Current estimates speak of a 20% earnings boost in the 12 months to March 2017, and an extra 3% rise for 2018.

I reckon Trifast is a great share pick right now given its robust sales momentum and successful self-help programme, not to mention its undemanding prospective earnings multiple of 16.3 times.

The post Why I’d ditch this falling knife to buy this small-cap growth stock appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Signs are abound that commodity prices are unlikely to make a rapid recovery. Slowing emerging-market growth, increasing global production of raw materials and a stronger US dollar all point towards further downward pressure on commodity prices.

BHP Billiton (LSE: BLT) has seen the value of its shares fall 44% since the start of 2015, as underlying earnings decreased by 52% in the year. But BHP has taken advantage of its low-cost production base to reduce the impact of lower commodity prices on profits by expanding production.

During the year, petroleum output rose 4%, iron ore production climbed by 14%, whilst copper production was broadly flat. In addition, the company has exceeded analysts’ expectations in cutting costs, which will lessen the impact of declining commodity prices.

Free cash flow generation has been comparatively resilient, having fallen just 26%. And this has meant that BHP has, so far, been able to maintain its progressive dividend policy. It raised its final dividend by 2% to $1.24 per share.

However, BHP’s dividend yield of 10.5% indicates that the market is not confident that its dividend is sustainable for much longer. The outlook for lower commodity prices means BHP is unlikely to match its cash flow needs for capital investment and ongoing dividend payments with incoming operating cash flow.

With earnings set to fall another 58% in 2015/6, its valuations are not cheap either. Although shares trade at a P/E of 9.9, its forward P/E is 24.0.

Rio Tinto‘s (LSE: RIO) dividend is in better shape, as it has a much lower level of indebtedness. Rio’s net debt to adjusted EBITDA ratio is just 0.64x, compared to BHP’s figure of 1.11. Rio’s profitability has also been less hard hit by the slump in commodity prices this year.

But one major drawback of investing in Rio is its much larger reliance on iron ore, which accounts for more than 85% of its underlying earnings. Its overexposure to a single commodity means Rio is more vulnerable to changes in iron ore prices. However, these risks should be offset by its more attractive valuations.

Rio Tinto is expected to see its earnings fall by 48% in 2015, but this still leaves Rio trading at a reasonable forward P/E of 12.1. Rio’s forward dividend yield of 7.1% may not seem as attractive as BHP’s, but it does seem more secure.

In conclusion, shares in BHP and Rio could fall quite a bit further if commodity prices continue to weaken. But, as BHP and Rio are low-cost producers and both have relatively strong balance sheets, further declines in prices would force their less competitive rivals out of the market, lending some support to future prices. And this should mean these two mining giants don’t have too much further to fall.

Unfortunately, the same could not be said for the gas-to-liquids (GTL) energy company, Velocys (LSE: VLS). Velocys, which is using GTL technology to convert relatively more abundant gas hydrocarbons into their more expensive liquid forms, has seen lower oil prices undermine its investment case for converting shale gas into petroleum products.

But Velocys is already adapting to changing business conditions. Many opportunities exist to produce high-value speciality products, such as waxes and lubricants, even with lower fuel prices. In addition, GTL technology can take advantage of low-cost feedstocks, including waste and landfill gases, which have no current use, as they have until now been uneconomic to process.

Shares in Velocys are very volatile, but if its technologies are found to be commercially viable then the potential rewards of investing are enormous, too.

The post How Much Further Can Shares In BHP Billiton plc, Rio Tinto plc & Velocys plc Fall? appeared first on The Twelfth Magpie.

More reading

• The only FTSE 100 stock I own right now

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

EVRAZ

Roman Abramovich holds a 30.80% stake in EVRAZ (LSE: EVR), a vertically integrated steel and mining company. He first invested in the company back in 2006, when he bought a 42% stake for reportedly $3 billion. His stake is now worth less than half, as falling steelmaking margins led to three consecutive years of losses.

With almost half of its revenues coming from Russia and Ukraine, the company has been particularly hard hit by the falling value of the Russian rouble and the Ukrainian Hryvnia. Foreign exchange losses in 2014 totalled $1.01 billion, with the group recording a net loss of $1.28 billion in the year.

However, the weaker Russian rouble also meant operating costs were lower, which boosted operating cash flows. This helped the company to reduce net debt by $720 million to $5.81 billion.

Shares in EVRAZ trade at a forward P/E ratio of 6.2. We could see a return to dividend payments, if net debt continues to fall and underlying profitability improves. But, market conditions in the global steelmaking industry have worsened in recent years and the company faces additional political risks given its sizeable operations in Russia and the former Soviet Republics. 

AFC Energy

AFC Energy (LSE: AFC) is a developer of low cost alkaline fuel cell technology, in which Abramovich now has a 13.31% stake in. The billionaire bought an additional 744 thousand shares in the small cap company to increase his stake from 11.14% in October 2014.

The company has aspiring growth plans to produce fuel cell systems for generating clean energy from hydrogen. AFC has secured two major deals this year, looking at the potential development of large scale fuel cell generation sites. News of the deals sent its shares 341% higher year-to-date.

CEO Adam Bond has set an ambitious target of achieving 1 GW of capacity under development by the end of 2020. But, with the technology so new, it is difficult to be confident about future demand for a technology that is so dependent on subsidies, and where there are many alternative technologies.

Future profitability is also difficult to predict, as there are few comparable firms. The company, which is yet to make a profit, has net cash of just £4.9 million. Further investment needs could mean the company would need to raise new equity. Investing in the future of energy supply is certainly very high risk, but the potential returns could be enormous.

Velocys

Abramovich has been increasing his investments in Velocys (LSE: VLS) over the past year, and now owns a 21.29% stake in the gas-to-liquids (GTL) energy company. His stake in the small cap company was just 6.15% last year.

GTL technology has attractive growth prospects in the US, given the relative abundance of shale gas, and disconnect with liquid fuel prices. Although the falling oil price has hurt Velocys shares, the longer term fundamentals remain broadly intact.

Velocys is looking to build its first commercial GTL plant in Oklahoma, and has a pipeline of further projects. But, the company will continue to make losses in the medium term as R&D costs are very high. Although a high risk investment, the potential success of near term project execution presents a very real opportunity.

The post Should You Follow Roman Abramovich In Buying EVRAZ plc, AFC Energy plc & Velocys plc? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.