Magma CEO Ross BeatyJOHN LEHMANN
Magma Energy Corp., a geothermal energy company founded by Vancouver mining entrepreneur Ross Beaty, has had a spectacular debut on the public markets.
After an initial public offering at $1.50 a share in early July, the stock is already up by about 25 per cent on the Toronto Stock Exchange.
Mr. Beaty promised rapid growth in this emerging green energy sector, and he has delivered since the IPO closed, with the acquisition of several new development sites and a substantial stake in an Icelandic geothermal company.
Investors were attracted by the combination of a promising green technology, potentially stable cash flows down the road, and managers with experience in exploration and drilling, said Greg Reid, an analyst at Wellington West Capital Markets in Toronto.
"You've got a management team that was very successful in the mining industry, and [that]really woke up a lot of people," he said.
Mr. Beaty, who still serves as chairman of Pan American Silver Corp., built and sold a number of copper companies over more than three decades. But in 2007 he decided he would combine his expertise in mining with an interest in environmental issues by starting up a geothermal firm.
Geothermal plants tap hot water and steam trapped below ground. The heated water is pumped to the surface to power turbines that generate electricity. Bringing these kinds of projects to fruition is similar to developing a new mine, so Mr. Beaty's knowledge of geology, finance and promotion put him in a strong position to make it work.
He started Magma early in 2008, and with the help of private investors built up a portfolio of properties, including the already-operational Soda Lake plant in Nevada.
The idea was always to grow fast, Mr. Beaty said. "It was a fragmented industry and there was an opportunity to build something that could truly be a pre-eminent company."
Going public was also on the agenda from the start, he said, because it cuts the cost of capital and can smooth growth through acquisitions. He initially considered an IPO last fall, but the markets were in no shape for it. By June, however, the atmosphere had improved dramatically. The $1.50 a share issue which closed in July gleaned $115-million.
Since then, the company has added seven new exploration properties in Nevada to others in that state, Utah, Oregon, Chile, Peru and Argentina.
It also made its move into Iceland. An initial investment of 11 per cent of HS Orka - a large geothermal producer - was announced in July, and this week Magma negotiated a deal to get another 32 per cent.
Mr. Beaty says he'd like to take that ownership share up to at least 50 per cent.
Canada, however, is not on the company's radar. While there are areas with potential geothermal resources in B.C., conditions there are just not favourable enough, he said.
Unlike the U.S., where incentive programs have lit a fire under many green energy industries, B.C. has not been supportive in the same way, he said. There are also problems dealing with remote locations, transmission lines, and negotiating access arrangements.
Even with plants already generating power, Magma is a long way from being a stable utility, with strong, continuous cash flow. For some time, money will be plowed back into expansion, Mr. Beaty said. "I wouldn't look to Magma for dividends any time soon. It is in the classic growth stage of a resource company where it is growing like crazy ... and then in the fullness of time we'll morph into a large cash-generating company."
Mr. Reid, of Wellington West, said he expects Magma to be one of the consolidators in the geothermal industry. With a "decent market cap" of about $440-million and the ability to raise money, it will likely continue to pick up smaller competitors. His firm was involved in the Magma underwriting, and he has a one-year target of $3 on the shares, and expects it to reach $6 over several years as new projects start generating power.
Still, there are significant risks. "If oil goes back to $30, people won't care too much [about geothermal]" he said.
Magma Energy (MXY)
Close: $1.87, down 3¢
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Geothermal players
Other public companies in the geothermal sector:
Ormat Technologies Inc., a Reno, Nev.-based firm with annual revenue of about $345-million (U.S.)
U.S. Geothermal Inc., listed on the TSX and Amex, has projects in Idaho, Oregon and Nevada.
Nevada Geothermal Power Inc., based in Vancouver and listed on the TSX Venture Exchange. Projects in Nevada and Oregon.
Sierra Geothermal Power Corp. based in Vancouver and listed on TSX Venture. It has projects in Nevada and California
Three public Canadian-based geothermal firms have agreed to merge into a single company. Polaris Geothermal Inc., Western GeoPower Inc. and GTO Resources Inc. will join with private U.S. developer Ram Power Inc.
Richard Blackwell