The Alternative Fuel Industry You've Never Heard Of

Merritt must be one of the ugliest towns I've ever visited.

Beautiful forests and snowy mountains surround it, but the town itself looks like a sprawling trailer park in a dust bowl. Tumble weeds blew down the streets. It would have been a good setting for a spaghetti western.

In the center of town there is a sawmill the size of three city blocks. A huge pile of logs occupied more than half the space. "Excess supply," I thought to myself...
 
Merritt is in British Columbia, about 200 miles east of Vancouver. Last weekend, I went to Merritt to see the dead forests and the Mountain Pine beetles that kill them, but I also had an appointment with the owners of a small sawmill.

Business in the Canadian sawmill industry is tough right now. The slump in the U.S. housing market and the huge oversupply of logs has reduced prices for lumber products to 15-year lows. Now the strong Canadian dollar is putting the Canadian lumber industry into receivership.

The couple that runs the sawmill had to lay off nine workers recently. That's half its workforce. Now this couple is excited about another business... and that's why they were so eager to meet me...
 
They need $1 million to build a pellet mill.

"A friend from high school is a big cheese at Tolko," one of the sawmill owners told me. Tolko is one of the largest lumber companies in Canada.

"I called him up," she went on, "and I said look, 'Give me an honest answer. I don't care what the answer is, I just need the truth: Would a pellet mill be a good investment?' He told me a pellet mill would make 19%-22% returns."

The sawmill owner told me Merritt has five large mills that produce lots of waste chips and sawdust. Right now, it all goes on the burn pile. She could take that waste and turn it into $200 per ton with a pellet mill. Then there's all the wood killed by the beetle. As I explained in my last column, beetle-kill is perfect raw material for pellets, too.
 
The pellet business makes sense to me. You help people save money on their power bills, you help governments make clean electricity, and you use waste materials to do it.

I asked her, if the pellet mill would be such a good investment, why wouldn't Tolko build it?

Tolko is in the lumber business, the mill owner told me. It doesn't want the distraction. Besides, a 20% return on $1 million just isn't a meaningful investment for Tolko.
 
To give you another example how lucrative the pellet business could be, look at the pellet mill going up in Kremmling, Colorado, right now. This will be the biggest pellet mill west of the Mississippi, says the owner.

Like Merritt, Kremmling is also in the middle of a large pine beetle infestation. To ease the forest fire risk, the local Colorado Housing and Finance authority helped with the financing, chipping in $6 million. The mill costs $8 million to build.

The mills owners – Confluence Energy – will buy the trees from the U.S. Forestry Service for $18 a ton, process them into pellets and sell them for $200 a ton on the other side. All said and done, this operation will make 40 new jobs, dispose of the dead beetle wood, and generate excellent annual returns for its investors.

I think the wood pellet business could be a big growth industry if energy prices remain where they are and the environment stays in the news. The sawmill owner's enthusiasm just confirms it.

If you're an entrepreneur looking for opportunity, you should learn more about pellet mills.

Good investing,