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Magma to sell stake in Icelandic geothermal play to pension funds

Iceland's Svartsengi geothermal power plant and Blue Lagoon spa

Vincent Fournier/Index Stock Imagery/Vincent Fournier/Index Stock Imagery

Icelandic singer Bjork once sang All is Full of Love, and while there's not much love between many Icelanders and Vancouver's Magma Energy Corp. , there are the beginnings of peace.

Magma is selling a significant stake in an Icelandic geothermal power company to a group of pension funds in the financially distressed country, after Bjork led a campaign against foreign ownership of strategic assets.

The Vancouver firm, one of the world's largest geothermal power companies, is expected to announce Monday that it will sell 25 per cent of HS Orka to the pension funds for $71.5-million (U.S.). That will cut Magma's stake to 73.5 per cent.

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Returning a stake in HS Orka to Iceland represents another chapter in the rise in resource nationalism across the world, particularly in countries facing financial troubles.

More countries are trying to gain control over their coveted resources, hoping to squeeze out more revenue amid surging commodity prices. Governments are taking back through higher taxes, royalties, ownership or simply by exerting greater influence over commodity-producing companies or projects.

Examples include new taxes in resource-rich nations such as Chile and Australia, a Brazilian government-led change in leadership at mining company Vale SA, Panama's influence over power supply options at Inmet Mining Corp.'s copper project there, and the Peruvian government's cancellation this month of a copper project in that country.

In the case of Magma, founded by mining financier Ross Beaty, it is also granting the Icelandic funds the option until February, 2012, to increase their stake to 33.4 per cent, at a cost of $41.7-million.

The sale prices are roughly equivalent to what Magma paid over the past two years to acquire those shares in HS Orka, the largest-privately owned energy company in Iceland, home to the world's largest and most developed geothermal industry.

The agreement comes after months of negotiations between Magma and Iceland government officials. Bjork, who is a major celebrity in Iceland, had launched a public crusade to pressure politicians to reverse the sale of HS Orka to Magma.

The campaign also called for a stop to foreign takeovers of Iceland's resource assets in the wake of the country's spectacular financial meltdown, which saw the collapse of its banking sector. Since the crisis, Iceland's pension funds have concentrated on investments within the country to help bolster future economic growth.

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Despite being a minority shareholder, the deal gives the pension funds significant power to appoint board members and participate in major decisions in HS Orka as long as they continue to hold at least a 22.5-per-cent interest.

According to its website, Magma paid $250-million, including transaction fees, for its interest in HS Orka, which marked the first foreign investment in Iceland's energy industry. It accumulated the stake over about 18 months using a combination of cash, bonds and Magma shares.

Iceland is endowed with geothermal resources such as volcanoes, the heat from which is used to generate geothermal energy. About 25 per cent of Iceland's electricity production comes from geothermal energy.

HS Orka produces about 9 per cent of the country's electricity requirements and 10 per cent of its heating needs with a capacity of 175 MW from the Svartsengi and Reykjanes power plants and 150 MW of thermal energy for district heating. There are plans for an expansion to 405 MW by 2016.

Magma is announcing the agreement with Iceland as it works to finalize a merger with Vancouver-based Plutonic Power Corp. That deal goes up for shareholder approval later this month.

Magma and Plutonic together would create a diversified renewable energy powerhouse known as Alterra Power Corp., producing electricity from geothermal, hydro and wind projects.

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Magma has geothermal power plants in Iceland and the United States and exploration sites in Chile and Peru, while Plutonic has wind and run-of-river hydroelectric plants operating in British Columbia, and an option for a solar project in Ontario.

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About the Author

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More

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