In Depth July 24, 2008, 5:00PM EST

Cash for Trash

Recyclers are devising dazzling new ways to mint fortunes from America's mountains of waste. But it's still easier to squander garbage than sort it

by Roben Farzad

TechTurn's Zeigler has refurbished and recycled electronic junk since before Y2K Matthew Mahon

Prouty at Casella Waste, one of his early portfolio picks in the new trash boom Shawn G. Henry

Bacteria can turn waste into ethanol at Coskata—but incoming garbage must be "clean" Michael L. Abramson

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Surrounded by a canyon of neatly stacked trash bundles, Bob Cappadona, area manager of Casella Waste (CWST) Systems' 65,000-square-foot recycling facility in Auburn, Mass., can't believe the record prices his garbage is commanding. "Aluminum cans, $900 a bale. Tin cans, $150. No. 2 clear plastic, $300. Cardboard, $70. Mixed paper, $40." He barely conceals his glee as he explains the effects of a recent spike in metals prices: "We get an extra $100 a ton!"

Cappadona's numbers are compelling, but the global implications of the trash boom only really hit you when you see the enormous pallets being carted away from the plant. You realize that recyclers can make vast profits from combing through ordinary rubbish, processing it, and then reselling it to other companies. And that leads to another, bigger thought: Trash is no longer just an environmental liability. It is becoming a financial asset. And it is everywhere.

Or so it would seem.

The possibilities have venture capitalists and buyout firms scrambling to invest in a melange of quirky startups that might have provoked belly laughs from these same financiers five years ago. The broad category of "waste and recycling," which includes everything from materials recovery to sewage biotechnology, drew a record $622 million of investment in 2007, compared with $245 million a year earlier and just $20 million in 2001, according to Cleantech Group, a green investing consultancy. Sober investors are throwing money not only at established recyclers like Casella Waste, but also at bolder ventures like Warrenville (Ill.) trash-to-ethanol startup Coskata and Austin-based e-waste recycler TechTurn, so confident are they that there's real cash in trash.

More than anything, it's the commodities boom—or bubble, if you prefer—that's nudging garbage to the asset side of earth's balance sheet. The calculus is simple: As the prices of oil and other raw materials rise, recycled products become more attractive. Consider that 8% of global oil production is siphoned off to make plastic each year. Recycled plastic, however, requires 80% less energy to produce. Recycled aluminum burns up 95% less energy. Recycled iron and steel use 74% less, while paper requires 64% less. The money piles up quickly: One ton of recycled aluminum saves an average of $700 in electricity. The Environmental Protection Agency estimates that if the recycling rate were to increase by just five points, to 35%, this would save the equivalent of almost 2 billion gallons of gasoline annually.

The recycling industry, a loose and unruly assortment of startups and multinationals, can barely keep up with demand. Today virtually all steel made by giants Nucor (NUE) and AK Steel (AKS) comes from scrap metal—a boon for recyclers such as Chicago-based Metal Management, whose sales jumped 40% from 2006 to 2007 before the company was acquired by Australian competitor Sims Group.

The great reappraisal of trash has even prompted a Wall Street analyst to cordon off recycling in a separate investment category, like consumer goods or emerging markets. Eric Prouty of Boston-based brokerage Canaccord Adams started following recyclers full-time in 2006; now he covers 11 publicly traded companies. Since its inception late in 2006, Prouty's six-stock Buy list has returned 180%, trouncing the Standard & Poor's (MHP) 500-stock index's 2% rise. His year-old "Best Ideas" list of eight stocks has shot up 150%, compared with the broad market's 6% gain. "Recycling," says Prouty, "might be the most overlooked beneficiary of the commodities boom."

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