(The following story by Richard Blackwell appeared on the Globe and Mail website on August 16.)
TORONTO — Idling locomotives eat up a tremendous amount of fuel and pump out vast quantities of emissions. So why not run them using the same kind of hybrid fuel-electric technology that works so well in hybrid cars?
That’s the concept behind the hybrid switching locomotives designed by Railpower Technologies Corp. for use in and around the yards where freight trains are assembled.
Railpower rebuilds old engines by installing new, more efficient diesel motors, and adds banks of rechargeable batteries. In combination, the motors and batteries work like a hybrid car: The diesel motors run only when needed to keep the batteries charged, and the batteries run the engine.
It’s a great idea, but the Montreal-based company has suffered a series of operational setbacks that have pushed its shares down into penny-stock status after reaching highs above $6.50 18 months ago.
The company’s latest financial figures reflect the problems it’s been having keeping its head afloat. In the second quarter, revenue jumped more than tenfold to $37.3-million from $2.7-million in the year-earlier quarter. But its losses also leapt, to $33.7-million, up from $15.2-million.
Those losses included $15-million to deal with the recall of 65 of Railpower’s initial Green Goat series of yard switchers, which are being upgraded after a fire broke out in one of the units.
A more frightening issue for investors is the fact that the company’s cash position sank to a paltry $1.8-million on June 30. It has since jumped up above $20-million after the company collected on some accounts receivable, analysts say, but the cash crunch is so severe that the firm is actively looking for new financing.
“We are looking at all financing sources [and] have begun discussions with potential lenders, investors and governments in order to obtain subsidies, loan guarantees and other forms of financing,” chief executive officer José Mathieu – a former Bombardier Inc. executive – told analysts on Railpower’s second-quarter conference call.
Ever optimistic, Mr. Mathieu said the company is also beating the bushes to take advantage of what could be a huge market. There are 6,000 aging switching locomotives in North America, he said, and with fuel costs rising and regulators pushing for lower emissions, their owners will be looking for something better.
The company has also branched out to make hybrid power units for cranes used at container terminals. As many as 10,000 of those cranes could be upgraded, Mr. Mathieu said.
These products make sense conceptually, just as hybrid cars make sense, said Steve Turner, an associate at Vancouver venture capital firm Ventures West Management Inc.
The problem, he said, is that “this is a highly capital intensive business, and when you combine that with a technology that arguably moved too quickly out of the development stage into the commercial sales stage, you’re seeing the backlash of those two forces butting heads.”
Companies like Railpower need “tremendous financial resources” to build these kinds of products, Mr. Turner added, so any kind of setback can be a recipe for disaster. His prediction: Barring intervention from the Quebec government, Railpower will need to be acquired by a bigger company with deep pockets in order to survive.
Analyst Philip Tulk of PI Financial Corp. in Vancouver shares Mr. Turner’s misgivings, noting that Railpower’s order book has shrunk to 13 units, and competitors are gaining ground. He has a “neutral” rating on the stock, and a target price of 42 cents.
While there is a substantial market for the technology Railpower has developed, “there are too many moving parts here to get comfortable with it [as an investment],” he said. “We would recommend that only extremely risk-seeking investors go looking for this one.”
Marvin Wolff of Paradigm Capital Inc. in Toronto has a much more positive view, with a “buy” recommendation and a $1.50 one-year target on the stock price.
Railpower recently managed to fulfill a 98-engine order from Union Pacific Corp., he noted, and “that’s a heck of a feat. That’s a sign that this management knows how to manufacture and deliver locomotives.”
While he agrees the company needs to substantially build up its order book, Mr. Wolff said Railpower has a number of demonstration units with customers and these could translate into big orders over the next few months.
“I’ve got to believe their prospects of getting between 100 and 150 units in the order book by the end of the year seems pretty high,” he said, adding that the company’s current cash should get it beyond that point.
Mr. Wolff is projecting a 59 cent per-share loss in 2007, but says the company will come close to breaking even in 2008.