Here We Go Again

You will be amused to know I bought a little more Borealis Friday – with money that . . . thanks to a lifetime of eating leftovers Charles would long since have trashed . . . I can truly afford to lose.

I paid only a dollar a share more than I did nine years ago, when we started all this (‘A Stock That’s Surely Going to Zero’).

Back then, at around $3.50 a share, the company had a total market value of barely $15 million; today, at $4.50, barely $20 million.

Granted, this is a lot better stock-market performance than GM or Merrill Lynch – or even GE – have turned in over the same nine years. (What a comment that is. Maybe I should just end this column right there.)

But with hindsight, it would have been smarter to wait until now to buy it (not that it will necessarily prove smart to have bought it now) . . . except that, as a practical matter, buying any appreciable number of shares (let alone a roundly ridiculous lot of shares, as I have*) would likely have driven the price a good bit higher.

*In Wall Street parlance, at least back in the old days of humans with eyeshades, a ’round lot’ was 100 shares. A ’roundly ridiculous lot’ is lingo unique to my own situation with Borealis.

Borealis stock – symbol BOREF – may certainly still peter out to zero someday. But consider where we are now versus nine years ago.

One thing that has not changed, to be sure, are the company’s extravagant claims and lack of any actual commercial production. This is a company that still has no sales.

But where once the company boasted a gigantic Canadian iron ore deposit no one had even visited in decades – and the price of iron ore was $27 a ton – today the company has a for-real mining partner that (to excerpt just a little from the latest press release) ‘has completed over 5,500 metres of sampling in 2008 that includes 706 metres from previous drilling. Hole RB-07-16 has returned a 12 metre interval averaging 45.56% Fe within a broader interval of 85 metres that averaged 29.91% Fe. The high grade intersection occurs in an area that was thought to be predominantly lower grade material (less than 26% Fe). High grade intersections such as this indicate the potential to increase the high grade zone intersected in the northern portion of C1’ – and the price of iron ore has quintupled.

This mining endeavor may ultimately not work out. But I am persuaded that the people involved are actual, flesh-and-blood mining professionals excited by the prospect they are pursuing. If it does work out, the Borealis take over the next decade or two, via its subsidiary Roche Bay, could dwarf today’s market valuation.

And where once the company’s Chorus Motor was just a lot of patents and projections, now it is even more patents – and a team working to retrofit all of Delta Airlines’ 737s with its Wheeltug™ motors. Quite a few serious professionals seem to have bought into the possibility that this is feasible (and that, if it is, it will be extended to most other kinds of airplanes).

This, too, may ultimately not work out. But if it does . . . same deal: The rewards could be huge.

And there’s more.

Consider (preposterously) the latest possibility: Chorus Cars. The company believes its motors could be just the thing for series hybrid cars. (“This is the simplest hybrid configuration,” Google informs me. “In a series hybrid, the electric motor is the only means of providing power to get your wheels turning. The motor receives electric power from either the battery pack or from a generator run by a gasoline engine.”)

Borealis writes:

The Series Hybrid approach is dominant for diesel-electric trains, and for things like cruise liners. Series Hybrids are also advancing for earth moving equipment, and even with Oshkosh’s line of military and refuse trucks.

Cars are a great fit with the Series Hybrid approach as well. Several small firms (Aptera and Spirt Avert to take two examples) are proposing and building Series Hybrid cars, promising mileage in excess of 50mpg. And of course the Chevy Volt also promises 50mpg in pure gasoline mode.

How can a car get much better mileage if it still uses an old-fashioned internal combustion engine? The answer lies in the difference between the *average* power draw, and the *burst* power requirement.

An internal combustion engine is sized for its *maximum* power production . . . those brief seconds of maximum acceleration. [C]armakers, aware that customers want to have a car that is fast off the mark, are wary of downsizing an engine too much, of making a car’s performance anemic. Think of the hostile reviews to very inexpensive, and underpowered cars like some of the old (and >40mpg) Honda Civics, or the Geo Metro. There is a safety angle here as well; a car that cannot accelerate rapidly enough to merge on the highway is not something most people want to drive. So engines have to be made for that “burst” requirement.

But electric motors are entirely different. The limitation for electric motors, especially a Chorus machine, centers around the *continuous* requirement; the amount of power that a car would be reasonably expected to use for an ongoing basis, such as cruising on the highway. And the continuous requirement is vastly different from the burst requirement: the Chevy Volt expects a continuous requirement of 45kW, and a burst requirement of as much as 120kW. We have seen other cars where the burst requirement is as much as 4x that of the continuous requirement.

Practically speaking, this means that the *average* power requirement for a typical sedan is perhaps 25-35 kW, but in order to gain market acceptance it needs to apply 150kW or more for a few seconds at a time. From a mileage perspective, it means that a *small* gasoline or diesel motor can give superb performance, as long as excess energy is stored in a battery or capacitor, to be called upon occasionally to meet burst requirements. The motor would be optimized and tuned for a limited speed and power range, which gives better efficiency (and lower emissions) than today’s automotive engines that have to operate at everything from 500 to 5000 rpm. Such a motor, sized like the 50-60hp of a Geo Metro, would easily generate 40+ mpg, yet still throw a medium or large car around with impunity.

A Series Hybrid approach allows a vehicle to use an engine sized for the average power requirement. In a Series Hybrid design, that engine does not drive a heavy mechanical transmission, but instead directly produces electrical power with an attached alternator. Whenever running, the electrical output drives the electric motors and/or charges a battery and/or capacitor bank.

That energy storage in turn allows for intermittent power that is 4-6x that of the continuous capability of the engine. Cars do not accelerate for very long, so 5-10 seconds of overload provides for a lot of torque, without making the engine large.

In our opinion, Series Hybrid car approaches are fundamentally correct in terms of the powertrain. We believe that where it falls short is in insisting on the “plug-in” approach that requires batteries that do not exist (and if they did would not be affordable), and hundreds of pounds of extra weight that those batteries would bring with them. As GM admits, the Volt is likely to top a sticker price of $45k — and a lot of that is the battery.

But the Series Hybrid approach can work, and work well. Eliminating the mechanical drivetrain has sizable benefits. So does optimizing an engine for a narrow speed and power range instead of designing an engine that needs to work well from 500 to 5000 rpm, at all kinds of power levels. And efficiency can indeed be excellent, without compromising performance.

The key for a successful Series Hybrid car lies in the electric motor. State of the art electric motors are permanent magnet (also called DC Brushless) designs that are super efficient and very elegant. The problem, as Oak Ridge National Labs discovered when reverse engineering the Prius, is that these motors fail at elevated temperatures, and so cannot be relied upon to work all the time. That is why Toyota and others use “parallel” or “dual” hybrid designs that keep the mechanical drivetrain, and the mechanical linkage from the engine to the wheels.

GM, like Tesla, uses AC induction motors that do not have the same thermal limitations — but they are oversized because the overload performance requires a larger, heavier, and far more expensive motor and drive electronics.

Up to this point, there has been no motor technology that met both the size and heat requirements of automobiles. Which brings us to Chorus.

☞ The profusely patented Chorus Motor purports to deliver tremendous torque in a compact, lightweight design.

Can it ever really meet the reliability requirements that would be required? Can it ever really be mass-produced economically? And in time not to be leapfrogged by superior technology?

Who knows? The conservative assumption: “probably not.”

But how do you value a long-shot?

Single-product drug companies are routinely valued at $500 million – even when management can’t really explain the biological mechanism by which they believe the drug works – in the hope that years of expensive Phase I, Phase II, and Phase III trials will prove its efficacy and ultimately lead to FDA approval. One such company whose shares I’m short is currently valued at $16 billion – roughly 1,000 times the valuation of Borealis. It does have other products (reporting sales in the last year of $798 million and a loss of $397 million); but a majority of the market cap is attributable to one hoped for – but, I’m told, biologically impossible – home-run drug. The drug failed to meet its “endpoints” in the Phase II trials just concluded, but is proceeding with Phase III trials anyway.

I’ve long-since given up on this kind of valuation for Borealis. (At $500 million, that would be $100 a share, which a few years ago I argued – and still believe – would be about right. If it worked out, people paying that price might make ten times their money; if it didn’t, they’d lose everything. Bets like that get made all the time.) For so consistently failing to deliver on its projections, Borealis has become the ultimate “show-me” company.

Fair enough.

And yet I have to think the bet – while still wildly speculative – is a lot better today, at $4.25, than it was nine years ago, at $3.50.

Tomorrow (I hope): How This Fits into the Bigger Picture (and What About Money You CAN’T Afford to Lose?)