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Advanced Emissions Solutions (NASDAQ:ADES) is Courage & Conviction Investing’s top stock idea – he explains why he’s tripling down on it. This is an abridged version of our recent conversation, Small Cap Alpha, Commodity Danger And Advanced Emissions Solutions With Courage & Conviction Investing.
Transcript
Rena Sherbill: Courage & Conviction Investing runs an investing group on Seeking Alpha called Second Wind Capital.
Courage & Conviction Investing: Do you want me to share my best top idea?
RS: For sure.
CCI: Yeah, so Advanced Emissions Solutions (NASDAQ:ADES). Okay. So, I’ve been on this trail for a long time. And in this business, you have to know when you’re wrong. And I don’t think I’m wrong and I wrote a recent piece that we’ve tripled down. But I’ve done a lot more work on this company and I’m going to — behind the scenes I’ve talked to expert, through a Wall Street friend, he hired an expert.
We had a conversation for an hour. There’s a lot of great stuff going on here. So just high level. This company is in the environmental space. So they make powder activated carbon, which is used to take out the toxins in coal-fired plants and coal-fired plants are kind of going away. They do have some industrial and soil side, but they’re in the middle of upgrading their plant. So they have this $400 million plant that they bought from private equity because private equity in ‘09 made an incorrect calculation that coal-fired generation would stay at 50%, and now it’s 20%.
So they bought this asset that cost $400 million for $80 million through Apollo, it was a private equity firm. And the capacity utilization was really low and they had all these bad legacy contracts and yada, yada, yada. And they had this great tax credit business with Goldman Sachs and that sunset and that made a lot of cash flow. So the company had a lot of cash. And they announced a strategic review and I thought that they were going to sell it because you had one asset, you had all this cash, you are $5 in cash and you had this good asset. And so I thought, and I invested in it and I wrote on, and I thought this thing is going to get taken out at eight.
And after 15 months, lo and behold, they did a merger with this company Arq, which is really interesting. Founded by Julian McIntyre. He is a serial entrepreneur that’s made extraordinary success. We have a couple of Goldman Sachs partners. But the market hated it because everyone was in this for a deal and the stock crashed, right, it crashed from $6 to, I don’t know, it got as low as like a $1.20 recently.
Because they have all this cash and because they bought Arq, they have a 30-year supply of bituminous coal, which is the big feedstock you need to make this next generation product which is granular activated carbon.
And they’re in the process of upgrading their plant to get to 60 million pounds of granular activated carbon. So the name plate is 150, but you lose some of that to go to GAC and long and the short of it is they have most of the money on the balance sheet to do it. The average selling price is much higher, but I’m going to be working on a piece.
But just as a little preview, there’s this big EPA policy changes in flight that were published in March of 2023. Okay. And no one’s connected these dots and I’ve read the policy paper and so this is called, PFAS which is the forever chemicals. And 3M (MMM) just paid $10 billion to settle this. The EPA is going from 70 parts per trillion to 4 parts per trillion.
I don’t want to give away the whole plot here, but this policy is in motion, this bipartisan support is going to happen. And so, they’re going to have 60 million pounds of granular activated carbon, which in the EPA report is the optimal way to treat these PFAS chemicals. Okay. So you have a huge catalyst. A new CEO that got announced this week that just bought $2 million worth of the stock. And he took a $50,000 salary. This guy is extraordinarily wealthy.
So for him to, just take on day one puts up – and above the market puts up a 1.8 million, and he want to get paid in equity at $3. So I would argue this guy’s in this for 10 and whether or not they can execute and do it, who knows? And there’s always risk.
But no one sees, no one’s even — has even connected the dots on the EPA PFAS, where they’re going with GAC and the equity 70 million. So it’s by far my biggest position and I think it’s wildly undervalued. That said they do – there’s certainly risk, you do have to successfully upgrade the Red River plant to be able to process on the front-end side to make the granular activated carbon.
But the market has not worked out this PFAS angle and if you just kind of do the math, and as a quick aside, so Calgon is the biggest player in the United States and they’re owned by Japanese chemical company, Kuraray. It’s a $3 billion company in Japan. And there’s a privately held company.
So ADES is the only way, or one of the only ways to play this massive catalyst of EPA policy change, the papers — it’s already in the public domain and it’s in the public comment section process and you have a 70 million market cap that has most of the cash that they need to get this thing to production. And they brought him, a CEO, as an operator who just put up $2 million and he’s getting paid $50,000 in salary and taking his compensation at $3 strike price.
So this is ridiculously asymmetrical. That’s by far my biggest position and if they can pull it off, I think the stock goes materially higher. So I haven’t even written on this, I’m still working on it with a couple of people. So I haven’t been able to do all the calculations. But if people took the time to listen to it and you took the time to reach out, I’m sharing something that I did that’s kind of a rabbit in the hat.
RS: We like it. We like it. Advanced Emissions Solutions, ADES, you wrote about them in late June. So I guess that’s kind of a prelude or an addendum depending on how you’re looking at it to this conversation.
CCI: Yes.
RS: Yeah. Appreciate you sharing that with us. I have no doubt that listeners will appreciate a rabbit in a hat. The ones that do will. Courage & Conviction, really enjoyed talking to you, really enjoyed listening to you, really enjoyed this conversation. I hope it’s the first. I hope you come back soon and we’re going to be reading your stuff in the meantime. I certainly will be.
CCI: Great. Thanks so much Rena. I appreciate it. Thanks for thinking of me. Be well, talk to you soon.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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