Blue Chip With Blue Sky

The trouble with punting on long-odds prospects is that the horses tend to be roughies with little in the way of decent track records. It’s axiomatic that the runners with good records aren’t roughies '” they win more often, but at shorter odds with smaller payouts.

The sharemarket operates on much the same principles when it comes to stocks offering plenty of blue sky; the rewards might be large, but so is the risk that they won’t pay off at all. For every speculative resources company that hopes to find a massive copper project somewhere near Cloncurry, there are plenty that don’t.

The exception worth hunting for is the occasional blue chip that still manages to offer some big blue sky on the side. Sometimes it’s almost accidental '” BHP was really only after the central Queensland coal mines when it purchased Utah International from General Electric back in 1984, but found the Escondida prospect was thrown in as well '” but normally it’s not that easy.

Blue chips tend not to make a big deal of speculative blue sky as they have reputations to protect and don’t need to talk up their share price like the small companies desperately trying to raise capital. The interesting little research projects funded by major corporations generally aren’t big enough to have a material impact on their share price, but the research budgets are often larger than many specs’ market capitalisation.

(Again, there are exceptions: some might argue Rupert Murdoch has never stopped boosting News Corporation’s blue sky potential without ever quite delivering.)

The neat thing about investing in a blue chip with blue sky on the side is that the exercise is relatively painless if the attempt to discover a better mousetrap doesn’t come off. If the main business is sound, paying nice dividends, there’s no loss whatever happens.

Which eventually brings me to CSR. After our interview with chief executive Alec Brennan this week, we had a general discussion about the outlook for the sugar industry '” where it might be heading and the geo-politics that might play a role in where production might thrive. Brennan, as you might guess, is quite passionate about the sugar industry and its prospects.

He talked a little more about the possibility of sharply increasing the sugar yield from sugar cane through genetic modification. CSR has a joint venture with the University of Queensland that is exploring the very thing, and some of the early experimental results are most promising.

The GM grail

There’s a lot more work to be done and the joint venture is only one of several chasing the GM grail, but it’s interesting to explore the blue sky. Imagining something as fanciful as a 50% increase in sugar content seems simply too good to be true, but let’s consider it for the sake of speculation.

Discovering such a plant '” or even one half as good '” would totally change the economics of sugar production. The immediate impact would be a collapse in the sugar price. No producer could afford to not grow such GM cane, if it existed, and almost overnight markets would be awash with sugar.

But such a development would also change the economics of ethanol production. Sugar would suddenly be a much more viable feedstock. At present it is too expensive except in Brazil with its massive efficiencies. (Remember the Brazilian industry grows each year by the equivalent of the entire Australian sugar crop.)

The dramatic increase in supply and reduction in cost could establish ethanol from sugar cane as a major alternative fuel instead of a bit of a novelty item working off excess molasses as feedstock.

That’s all just blue sky of course. The bluest bit is that if the scientists working in the CSR–University of Queensland joint venture are the ones to make GM cane work, it would be the joint venture’s patented cane doing all the growing, earning royalties with every crop.

Knowing if any or all of that is possible is still some years away, but in the meantime CSR is a very nicely performed blue chip. As Brennan told us, the future for the company is in growing its international sugar business, inevitably moving into Brazil.

Should the genetic engineering boffins strike gold, a strong, geographically diversified sugar company would take on another level of stockmarket rating altogether as a fuel company. If such a company co-owned a key element of the technology, well, it’s a pretty blue sky indeed.

What’s bemusing is that in the fashionable mini-boom for sustainable energy stocks, this aspect of CSR is generally overlooked. Punters will happily pile into some little company with “bio” in its name or “greenhouse” in its mission statement without even considering CSR, despite its much greater experience, credibility and financial strength.

Of course, CSR doesn’t have brokers running around earning fees by raising capital for it '” unlike the fledgling alternative energy stocks. If bio-fuels take off, I’d bet CSR is more likely to be in it for the long run and in a large way than any of the new tiddlers.

It’s a case of having your blue sky and your blue chip too.

Disclosure: The Pascoe family super fund holds CSR shares '” as do most super funds.