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alternative energy

geothermal energy

The North American geothermal power business is hoping for a renaissance after two successful recent financings and a big boost from new U.S. government incentives.

The industry has been around for decades, but has never gained much traction with investors because of the small size of the players and the long lead times to get projects up and running.

Companies in the business search for potential sites where the heat in the interior of the earth can be tapped, usually by drilling for hot water or steam that is piped to the surface and used to power turbines that generate electricity.

In North America, funding for many of the small number of public geothermal power companies comes from the Toronto Stock Exchange and the TSX Venture Exchange. Canada's natural resource expertise, and the availability of shell companies for reverse takeovers, helped create this critical mass.

Ironically, there are no operating geothermal power plants in Canada. Most of the existing and planned operations - including those owned by the Canadian-listed firms - are concentrated in the western United States, with Nevada as the epicentre.

And over all, the geothermal sector has so far carved out only a tiny niche in the alternative energy scene, far less than 1 per cent of electricity production generated worldwide.

"It has been the Rodney Dangerfield of renewable energy, but things are changing," analyst Greg Reid of Wellington West Capital Markets Inc. told a geothermal investing conference yesterday.

The very consistent level of power produced by geothermal plants over very long periods is now being recognized as highly valuable, Mr. Reid said. Even when the long lead times to get a plant up and running are factored in, geothermal operations generate power more cheaply over the long term than wind or solar power projects, he added.

Industry watchers sat up and took notice recently when two new companies in the sector completed substantial equity issues.

In July, Vancouver-based Magma Energy Corp. raised more than $110-million in an initial public offering on the TSX. Magma, run by experienced mining entrepreneur Ross Beaty, has one operational plant in Nevada, several others on the drawing board, and recently bought a chunk of a large geothermal producer in Iceland. Its stock has gone up 30 per cent since the IPO.

And last month, Ram Power Inc. of Reno, Nev., raised almost $180-million by selling 60-million subscription receipts, which will eventually be converted to shares on the TSX.

Ram is in the process of amalgamating its own operations with those of two other public companies, Western GeoPower Corp. and Polaris Geothermal Inc.

These financings have "created a buzz" in the geothermal sector, Mr. Reid said, and may be the start of a flurry of equity offerings and consolidations.

The other big factor that has lit a fire under the industry is the Obama administration's generous new green energy incentives, which provide grants for geothermal development, along with tax credits for facilities when they are in production.

The U.S. geothermal business has also been boosted by individual state mandates that require a certain percentage of power to come from renewable sources.

In Canada, however, a lack of incentives from federal or provincial governments, and a difficult permitting processes, have kept the geothermal sector from developing, industry players say.

While British Columbia has the geological potential for geothermal projects, only Western GeoPower Corp. and Sierra Geothermal Power have projects planned for the province, and those are considerably down the road.

For investors, it is tough to evaluate a geothermal company that has long-range plans for new plants that may not come on stream for several years. Some analysts set multiples on net asset value, or discount back from projected future EBITDA (earnings before interest, taxes, depreciation and amortization).

The most mature public geothermal company in North America, Ormat Technologies Inc. of Reno, Nev., generates more than 500 megawatts of power from plants around the world and currently trades at a price/earnings multiple of about 30.

One advance that should help investors in the future is a code, being developed by the Canadian Geothermal Energy Association, that will set standards for the way companies report the amount of energy they expect to glean from drill sites.

Still, the uncertainly over valuation hasn't stopped individuals from participating in the recent equity financings. Magma reports that about 30 per cent of its stock is held by retail investors.

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