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No. of Recommendations: 6
I listened to the Pacific Growth Equities presentation and am finally ready to buy AMSC. All I need to do now is pick an entry point.

I am convinced the Democrats will do what they say about alternative energy. The time is right because so many of these technologies are finally becoming cost effective. Wind is already there. Solar is still two generations away from prime time. Superconducting is starting to be cost effective in its first niche markets.

I am going into this with my eyes open. There are many deep pocket companies that are waiting for superconducting to hit stride. They will let AMSC build the first plants, try to get the chemistry right, make the hard first sells, and then they will enter.

I also heard a big no-no in the Pacific Equities presentation. AMSC is talking about being price competitive with copper at $2.00 a pound. Let me put that cost in perspective (and something that is time-stamped so you can believe what you are reading). Here is what I wrote on 1/8/2003 about the price of copper:

Copper is currently at $74.15 (January 2003 futures contract). Last quarter (Q3) FCX realized $.67 a pound for copper.

Four years ago copper was $.67 a pound. It could easily go there again because that was not the low price. It was on the rebound at that price. So, to be cost competitive, you need to look at the historic price for copper and then make your projections -- at least that is how I approach the subject.

My warmth toward AMSC is built on the fact that the wire needs today are so small (as the presentation is quite clear about). I wanted the company to have product. They do. I wanted the products to be through the first sell phase. They are and the ramp-up of sales to the wind vendor is just what happens when the technology is right. So, I see not only a technological advance but one that companies want to buy. Finally, the latest generation of wire is a major advance and will be the cutting edge for at least three years. So, the short-term technology risk (relatively speaking) is not very high.

AMSC is a Rule Breaker in my book. Insiders own 27% of the stock. The company dominates its niche. Realize that the quarterly revenue growth year-over-year was down 11.8% but that was during a switch-over to G2 wire:

The company is already telescoping that the revenue growth is ready to hit the hockey stick. The only place where this company really falls short of Rule Breaker status is earnings. This company is not going to turn EBITDA positive for a few quarters, but that is coming. Given a favorable regulatory environment (and, as I said, I do see the Democrats fulfilling their promises on energy) the door should finally be open in the USA for ramped-up R&D spending and government support for energy saving technology (where AMSC is sitting pretty).

I am not buying a flock of AE stocks. I do not see a lot of opportunities. I like Honda as the king of solar cells but that's a subject for another day.

If the Democrats want to reduce our reliance on foreign oil, one major option (since electricity is not oil-based) is to encourage plug-in hybrids. Let people draw cheaper electricity to cover their first few miles every day. It's an idea that is already cost effective. But, instead of the Cheney plan where you have to build a new power plant every week, you also improve the flow of electricity with superconducting wire (and efficient motors in the future) so the power can get to the people 1) more efficiently and 2) without having to dig up America or cover more of the landscape with ugly power lines.

As I said, AMSC finally makes sense -- and I hope it will build-up a lot of cents into my portfolio too. I thought 2006 was the make-or-break year and I think in hindsight that is what people will see. The hockey stick moment is here.

Just one person's opinion...

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Here, Here! Whatever happens to AMSC from a financial perspective, I think Greg Yurek will be remembered as the founding father of commercializing supercondutor technology. This guy's got perserverance. AMSC was founded in 1987, and has yet to make a profit. Can you imagine what it took, year in and year out, to round up the support it took to get to this point? All the technical hurdles that had to be overcome? Pretty amazing.
Just to be clear, the wind farm technology is not superconductor based.
I don't have much confidence in either political party doing what really makes sense ... they are very driven by special interest financial support. Ethanol from corn is a great example ... the farm lobby loves it but the economics are fuzzy.
It does seem to me that the senators from Mass could do thier state a favor by paying a little attention to the AMSC naval ship motor issue. Why tie that motor's future to just the DDG-1000? The motor should be a good candidate for retrofit into older fleets. Seems like a few phone calls could generate some interest in that idea somewhere in the Navy.
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No. of Recommendations: 7
The biggest negative news this week was the success of the Exxon/Chevron snow-job in California that led to the short-circuiting of an additional $4billion into A.E. That is a sad thing; an opportunity lost.

The single biggest prevailing wind in AMSC's favor is already blowing: the creaking - occassionally, cracking and bursting - electrical infrastructure; coupled with the 2005 energy bill that encourages reliability standards - and specifically endorses HTS as a thing to be evaluated.
(AMSC is not the only one to mention that we're on an upswing in electrical buildup, either. The DESC conference call also mentioned it repeatedly; and they have nothing to do with HTS).

As to copper - WD, I don't think you're taking the rapidly-growing China/India/+ others into account; which is the single biggest reason that we've experienced the growth in copper that we have. Even a recession that cut growth rates among those 2.5 to 3 billion people down to 'only' 5% or so, is not going to let copper collapse back down. I think that the probability of sustained below $2 copper - for years to come - is extremely low. Yet the cost of 2nd gen HTS is being driven relentlessly down by AMSC and its competitors.

Also remember, that it isn't just the cost of copper. Copper at $1 per pound still doesn't cut it in terms of re-wiring urban America through established underground conduits. Copper is no longer acceptable, longer-term; as energy use, per household, per customer, per person, only goes up, with each new gadget after gadget after gadget. (And since we're likely to even start adding cars to the grid with plug-ins..........utilities know better than we do: what replaces copper in those conduits has to be better, has to be more....and there are damn few other choices, in my view, at any cost. Once HTS gets down to be price-performance-competitive with copper, even the dumbest, most short-sighted utility exec won't have a choice. And that could come by 2010, only 3 years away.

More forward looking utilities -like LIPA; probably TVA, some others - won't wait for exact copper cost-competitiveness. Once HTS cable is certified and available, I think some of those guys will flat-out stop doing copper upgrading of what's in conduits now, period. Just from a demand standpoint.
(Case in point: Telecoms didn't wait for fiberoptics to be exactly cost-competitive with copper twisted-shielded pairs before starting to do most of their upgrades with fiber- right? Capacity going forward was the issue; not this week's exact penny-per-penny comparison with copper).

The problem is not whether there will be enough demand or customers; the problem is where will the wire come from. The 2008-2010 production capability estimate of 720k meters/year is only enough to build a few big supervars for a few utilities. (Seriously). They've already had two requests for quotes for 2m meters of wire each for the 2010 time period - just those two, alone, would take up the entire theoretical production run for 2010 and 2011, ASSUMING that the new, 10-cm wide process is a. on scheduled; and, b. flawless.

To add the other extreme in for clarity: as mentioned, building out the 350-mile Tokyo-Osaka line - if approved after 2010 (and it might be), would require well over 100m meters of wire for that one program; dozens of years of 2010 production capability - when we aren't even at the intermediate dec.07 production capability yet, which is one fourth that.

Assuming AMSC stays on top tech and production-tech wise - and I'm betting they will (they impress me) - they still will never be able to meet even a fraction of the post-2010 demand once the world excepts that HTS is 'real' - affordable - and available just as billions are flowing world-wide for infrastructure development.

Previously, AMSC and Sumitomo laid down their swords long-enough to cross-license themselves on 1-g wire technology. Once the following combination of events happen; i.e,
- commercial SuperVars prove themselves in the real-world (via TVA; cy 2007). AND,
- the first 2nd g production line is up and operating at 720k m/year at end of 2007......

then the only way to conceivably meet the orders that will come in will be to cross-license/sub-license/partner with several Really Big Guys. By the end of 2007 or shortly thereafter.
Potential guesses:
#1: Sumitomo. Reason: AMSC and Sumitomo are the best of enemies; they've been down this route before; and they both realize that a single program order in Japan could be One Hellacious Order (i.e, the maglev). JR would very much like to buy Japanese - in any form - if they could.
#2: China - china has more reasons than any country in existence to not only upgrade the electrical infrastructure it has - but to jump to a 21st century high-tech, efficient infrastructure as well. (Kinda like skipping the decades of phone land lines and going wireless directly, like they are doing). Among all the reasons is environmental. As the country with the fastest-growing environmental problem, anything that can cut coal use by 30% just by having an ultra-modern transmission infrastructure has got to be attractive for that reason, alone. Then there are lots of other reasons.
AMSC is already building an excellent reputation in China via non-superconducting power and grid tie products; its the fastest growing part of their order book. They've already sent some samples of 1-g wire to China; now they are deepening those relationships with an eye on the future. It is inconceivable to me that AMSC would not consider it absolutely necessary to somehow, somehow, establish a 2-g wire production facility arrangement in China, with someone. It would be nice to say that selected relationship would form the low-cost production base for the company world-wide; but actually, the demand in China could be so great for all the reasons we know as to totally sop up any production capability.

#3: Europe: I'm betting on a wire partnership with Siemens; again, not for the export market out of Europe, but just to handle demand within Europe.

And note: I'm saying all this looking primarily just at utility customers; with one possible nod to Japanese maglev. I'm not assuming a single war-ready Navy motor, or a single commercial ship motor, at all. The commercial order potential is totally dependent - IMO - on the US Navy; and the US Navy order is totally dependent on Congress not only funding the big, multi-billion dollar advanced surface ships; but then plus-ing them up to boot for HTS motors. That's two big 'if's' in a time - 2007 - when the Defense budget-- non_raq related - is going to have to be cut, somehow, somewhere.
i> It does seem to me that the senators from Mass could do thier state a favor by paying a little attention to the AMSC naval ship motor issue. Why tie that motor's future to just the DDG-1000? The motor should be a good candidate for retrofit into older fleets. Seems like a few phone calls could generate some interest in that idea somewhere in the Navy

I agree. HTS motors save fuel as well - something not-insignificant, in any ship they may make sense in, new or not. There is a rare opportunity here - not only in DC but in the Governor's mansion - for Massachusetts democrats to do something abslutely selfish, and feel 100* good about it. One of them will need to take the lead, however. Unless that happens......

There is a real danger to little AMSC if it doesn't do these wire/cable production partnerships before the real capacity crunch wave appears on the horizon. The potential market is so damn huge - almost unimaginably so - that if they don't 'take care of The Really Big Guy competition' by bringing them in-house sooner than later, the Big Guys may just chance potential court battles and challenge little AMSC to catch them and stop them, IP or no IP, as they chase after the billions and billions of, dollars.

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Great insight, as usual. I agree that too much demand too quickly is a definite danger for AMSC. They don't want to just be in the wire business either ... they will want a decent cut of the higher margin products that are made based on the wire.
On question about capacity: all the current projections are based on thier single existing production line. Should major demand materialize, why couldn't they just build as many copies of the entire production line as necessary? One production line produces 1M meters/yr, two production lines produce 2M meters/yr, etc. Once the process/technology is perfected, they should be able to reproduce it (at much less cost, also, because the learning curve is already absorbed).
Mass politicians should be falling all over themselves to make their state the "superconductor capitol of the world".
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jp: Excellent comments. Let me start, though, where I disagree.

As to copper - WD, I don't think you're taking the rapidly-growing China/India/+ others into account; which is the single biggest reason that we've experienced the growth in copper that we have.

As a Phelps Dodge owner, I would love to see copper stay at $2 levels. But, there is no shortage of copper deposits in the world or companies trying to bring them into production. Production will meet demand (probably in 2008) and, in a recession, exceed demand. Today's high prices do, as you state, come from the demand in China and India. But, high prices and high profits bring on new supply.

You, though, provide what I think should be the AMSC mantra. Instead of talking about $2 copper, they should be talking about maglev and motor opportunities and how they compare versus today's production. The cost of copper isn't the issue here. The impact of superconducting is changing our world and these applications are getting funding considerations.

So much for where I disagree...

There is a real danger to little AMSC if it doesn't do these wire/cable production partnerships before the real capacity crunch wave appears on the horizon.

I agree. I would add the name of Japan's Mitsui to your list. They have been mass producing nanotubes since the technology started needing mass production. Some would say they have been flooding the market too early in order to keep others out and prices down. They understanding of nanotechnology would make them an excellent partner. [I do not own shares in Mitsui.]

I also agree that China should be the focus of where wire plants are located. China is the leading producer of rare earth metals. Being close to the most critical resources and having a face-to-face relationship with these suppliers is critical. If these metals get into short supply because of demand, it's better to be in-country and close to the mine if rationing is a potential option. [Don't forget, China is a "managed" economy.]

Getting a wire partner is critical because it will probably bring an up-front fee for AMSC. Stopping the cost for building wire plants and turning it to in-house AMSC-labeled product development is critical. So is the development of G3 wire, something that probably won't be discussed publicly for another two years. I worry more about AMSC and G3 than any other thing.

Finding partners for motors and generators is needed for the very same reason -- up-front fees for AMSC and the company's inability to build product for a market this big. The company has done a good job of avoiding debt. It has allowed them to operate without a bank being a partner in day-to-day decisions. But, the time has come to realize that AMSC cannot meet the demand in these major markets. Having partners today would show that a build-out is possible and allow the partners to lavish the money on getting the superconducting message into the marketplace. With partner funding, hopefully AMSC could radically ramp-up R&D without having to sell any more equity.

The hockey stick demand point for G2 wire is probably already here. The company has its own product areas, like those at Power Electronic Systems. It has orders from OEM's for wire. If they do not find a partner to produce the wire, it probably means the company is trying to do too much with limited resources. Having a big backlog is just another way of saying you can't meet demand -- and that's not good if you are trying to displace established products.

If AMSC is successful without partners, shareholders will make a fortune. But the odds of doing that are slim. If they outsource, shareholders might still make a fortune but the risk to AMSC will be greatly diminished. It will be interesting to see how the company addresses this issue (expansion) in the Risk section of the next annual report.

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I agree; once one line is up and certfied, the second line should be easier, etc. etc. But look at the numbers: their first production line will be 720k m/year, projected for 2008 and 2009. If 10-cm is successful - two steps away - that raises things to over 2 million meters/year in 2010. And that's if the next steps are successful.

Yet that only would satisfy - in a year - a single order assessment request they've had from one customer alone the past year. Double it? Sure. Now you can handle two such customers - in one year. And neither of those are the Really Big orders Triple it? Ok - three customers a year.

As a practical matter, I don't think little AMSC could scale up dramatically enough to in any way shape or form meet the demand I think they are about to create. They will have to partner with some Big Guys, in a way that won't give a way the store.


On copper....I think, in a way, we may be in violent agreement. I don't think the cost of copper will be a real driving factor in utility upgrades in urban areas, in terms of transmission cables; and with respect to grid management and reliability, e.g, SuperVar.
SuprVar is the more obvious: grid reliability and sags have to be managed yesterday, much less going forward. If TVA continues to go ok with the operational units, screw the cost of copper; it won't enter into keeping a grid from crashing.

As far as transmission line upgrades in urban areas......... even if copper became free, it makes no sense to pull new copper through the conduits in NYC or elsewhere to replace burned out copper, as electrical usage per customer continues to increase. Can you see the headlines the next time Brooklyn goes down? Con Ed says: "Hey, sure, it couldn't handle the cpaacity; but do you realize how much money we at Con Ed saved by replacing copper with copper and not something more expensive?"

Hence...after LIPA et al hopefully proves out...say, by end of 2007?- the (limited) AMSC capacity will be totally taken up by meeting the increased demand of LIPA expanding their next test phase, and other utilities starting to follow suit----irrespective of the price of copper, I believe.

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WD, Great post that made me listed to the same presentation and come to the same sort of conclusion.

One slight concern is the large ammount of 1G stock on hand when the 2G product was made available. The latest 10K says they have 400,000 m of 1G wire in stock. That seems a large amount of all the 1G wire produced ever. So how come it is not sold? Were customers waiting for 2G or is there some sort of problem with 1G??

Any more thoughts on an entry price?

Tango on
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One slight concern is the large ammount of 1G stock on hand when the 2G product was made available. The latest 10K says they have 400,000 m of 1G wire in stock. That seems a large amount of all the 1G wire produced ever. So how come it is not sold? Were customers waiting for 2G or is there some sort of problem with 1G??

I had not noticed this 1G inventory with concern until your comment. Here is what the company says in the latest 10-Q:

As discussed in our May 1, 2006 Form 8-K, our recent success in the development efforts related to our lower-cost, second generation (2G) HTS wire led to a management decision in March 2006 to complete the transition of our HTS wire manufacturing operation from first generation (1G) to 2G HTS wire. As a result, all 1G wire production has been indefinitely suspended with near-term market needs for HTS wire to be met from more than 400,000 meters of 1G HTS wire inventory that is currently in stock. We expect this action will enable us to achieve our sales objectives for HTS wire while reducing operating losses and operating cash requirements for our AMSC Wires business unit.

Note how they mention the 2G is lower cost but the 1G is going to allow them to meet near-term needs and reduce their operating losses. It sounds like there is a big enough shortage of wire that they will be able to sell the 1G and get it off their hands. Since the form and function of the wire is similar, that is probably the sole factor (along with the shortage) that stops this inventory from being a write-off concern.

That said, nice catch Tango. If this wire is still around at the end of next quarter this will be a big concern.

As for an entry price, I use to tell me when to buy. I use the relative strength indicator (RSI), moving average convergence/divergence (MACD), and the 50 and 200 day moving averages to give me the entry point. The charts still look weak. My guess is that my entry point will be in the $9 area but I will post when I make my first purchase.

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Still seems a little strange to me. But happy to wait and see and monitor price and will look out for your purchase alert sign.


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The latest 10K says they have 400,000 m of 1G wire in stock. That seems a large amount of all the 1G wire produced ever. So how come it is not sold? Were customers waiting for 2G or is there some sort of problem with 1G??

The one-g wire issue is no longer an issue; it is an asset, IMO.

The decision was made earlier this year to stop 1-g production; live off of the inventory built up of 1-g for any orders that did come in before December 2007; and significantly speed up the move to 2-g, with the first major milestone being 720k meters/year of 2-g by end of cy 2007. Much (in fact, most) of the 1-g inventory was immediately written down as a loss as a conservative accounting measure:

In the fourth quarter of fiscal 2006, we recorded a $4,960,000 impairment charge to write down the value of our 1G asset group (consisting of equipment, patents and licenses), related to our decision to complete the transition of our wire manufacturing operations from 1G to 2G HTS wire, and to indefinitely suspend 1G HTS wire manufacturing.

Entering the 2nd quarter 07 - the quarter just ended - the company had 400k m of 1G inventory. As mentioned in last week's conference call, all but 85k m were previously written off; so every meter of that 400k m inventory above the first 85k m is pure profit.
In this past quarter, 2q07,

-- Received orders for nearly 150,000 meters of first generation (1G) HTS wire from various customers, including the Korea Electrotechnology Research Institute (KERI). KERI, based in Changwon, South Korea, will utilize 22,000 meters of 1G wire to begin a 10-year project focused on developing superconductor magnetic energy storage (SMES) systems.
That means that, with the 150k m of orders in 2q07 alone, 65k m will be booked as pure profit. That leaves 250k m of 1G wire inventory left on the floor in Massachusets - all of it already written off - unsold; but with 150k m sold in the last quarter alone, company said during the last conference call that they have a high confidence that they will have all of that remaining 250 k m sold - falling straight to the bottom line - by the time the 720k m/year, 4-cm line comes online by end of 2007. That seems reasonable to me.

We've discussed previously where we are on the supermachines front; particularly with respect to ship motors and generators. The utility super-var program appears to be at least six-months behind schedule (based on the original delivery date for the first TVA SuperVar of June 2006, now December); but, considering the game-changing nature of the devices, I'd almost say that they are 'only' six-months behind. Though those SuperVars were originally intended to be profitable - even using 1-g wire - the original agreement with TVA in 2003 apparently locked in costs that, I think, didn't allow or consider (from AMSC's viewpoint) the huge increase in raw material commodity costs that have occurred since then. TVA has committed to buy at least two more Super-Vars under the current contract; I think it is fair to assume that those, as well, will not be profitable, barring any further information from the company. However, considering the 'quality' of our power grid, how susceptible it is to disruption et al; I do anticipate that other utilities - slowly - will order SuperVars from 2007 onward as the operational units at TVA prove themselves. I think it is clear that the company will ensure that those units are profitable; whether using one g, or two g wire.
(My opinion: the post-TVA orders from other utilities for SuperVars will come slow enough that the company wll be use its new 2G, 348 wire optimized for rotating machine applications:
-- Achieved levels of magnetic, electrical, thermal and mechanical performance required for commercial electromagnetic coils utilizing a new three-ply, 4.8-millimeter wide 2G HTS wire that the company has branded as 348 superconductors. Electromagnetic coils are the core component of virtually all electrical products beyond power cables.).

Remember, SuperVars still use less HTS wire than, say, a large power cable wire order would. In fact, the last two SuperVars the TVA is committed to order may, by themselves , use up every single meter of the 250k m of 1G remaining on the floor (discussed below), depending on the power ratings of those last two units).

So I think the one-G will get sold; possibly sooner than we think. Remember, there's little risk in anyone buying some 1G and trying it out; the 2G - the real deal they would hopefully buy in the future - is a drop-in, plug-and-play replacement for any 1G that potential customers would test. Now we've discussed previously how this company might not be able to keep up with the demand once the whole 2G wire thing is perceived by utilities as 'real', at the very same time they are starting to do huge infrastructure upgrades. Those utilities likely to want to start laying real 2G stuff in a few years will also probably realize that; i.e, if they wait longer than necessary, there may not be any 2G wire to be had without several years' wait. That, coupled with the fact that 1G and 2G are functional clones of each other, is another reason to believe that in 2007 more than a few utilities would want to order some 1G wire for testing to get ahead of the curfe and to get in line for later 2G. In fact, it would not be inconceivable to me that they could have orders to sell all of the remaining 1G wire by 31march07, the end of this fy.

So whether via TVA fulfilling its SuperVar order commitment; or, utilities wanting to start the process of getting in line for HTS - I think the chances are better than 'good' that the 1G inventory will be sold off in 2007.

2G wire production is continously increasing; but, as the company has stated several times, they are keeping a majority (well over 50%) of 2G for in-house use; so any 2G orders you hear about are, by definition, only for a minority of what they are actually producing, at least until end of december 2007. That, coupled with the fact that 1G is an acceptable test wire in prep for someone buying 2G...and, that all the remaining 1G inventory is now being sold at a what leads me to say that the one-g wire issue is no longer an issue; but is, if anything, an asset.

One more thing: the company mentioned during the conference call that they are currently in discussions with LIPA for a follow-on order - let's call it LIPA Part B (as opposed to the 600m Part A cable being put into the ground right now) - that is ten times longer than Part A (approxmiately: at least 5 miles, versus less than half a mile for part A). That (potential) order, alone, cannot possibly be met with the remaining 1G inventory. That may explain why - in the same conference call - they made it known that, along with the 3 conduits they've just buried in Long Island (one conduit per phase of AC), they also buried a fourth conduit at the same time - to test a single phase, 2G cable.
So, my read is that the current LIPA/AMSC test plan is this:
- Finish burying 4 conduits, 600m long; 3 for a 1G cable; a fourth conduit for a 2G test cable.
- pull the three, 600m 1G cables through the conduits. First quarter cy 2007.
- Test that three-phase cable for X months in 2007.
If successful:
- Pull through the fourth conduit 600m of 2G-based cable. Test it for Y months. Latter half of 2007??
- If successful.......sign and finalize the agreement for plan B: an at least 5-mile, 3-phase AC cable made of 2G wire; since they won't have any 1-G wire left.

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