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Ormat Technologies geothermal plant in Reno, Nev.

Investors who were hoping geothermal stocks would generate some heat in their portfolios have been disappointed, as the sector is gripped in a deep chill instead.

All of the North America-based public geothermal companies are trading at a fraction of their prices of three years ago, and most are below year-ago levels.

"They are definitely out of favour and deservedly so," said John McIlveen, head of research at Jacob Securities Inc.

Several of the companies reported poor drilling results in recent months, Mr. McIlveen said, underlining just how much risk there is in the business. Like oil and gas producers, the companies conduct exploration by drilling in promising locations. When they find appropriate hot zones, they build plants that extract steam from the ground to run turbines that produce electricity.

Four of the North American companies – Alterra Power Corp., U.S. Geothermal Inc., Ram Power Corp. and Nevada Geothermal Power Inc. – trade on the TSX, even though very little geothermal exploration goes on in Canada. It is the Canadian market's ability to raise capital for resource explorations firms that has drawn them here.

The company with the deepest Canadian roots is Vancouver-based Alterra Power. It was formed through the 2011 merger of Magma Energy and Plutonic Power. Magma had geothermal power plants in Iceland and the United States along with exploration sites in Chile and Peru, while Plutonic Power brought wind and hydro plants in British Columbia to the partnership.

Alterra trades at less than one-third the price of three years ago when geothermal stocks were much more in favour, and CEO John Carson acknowledges that "a lot of investors who were part of the enthusiastic wave that came in a couple of years ago have been buffeted about."

The company hopes to get a boost from a joint venture it signed recently with Energy Development Corp., a big global geothermal company based in the Philippines. The two companies will work together on projects in Chile and Peru. "We brought in a deep pocketed partner with geothermal expertise to really keep the ball rolling," Mr. Carson said.

Mr. McIlveen has a "buy" rating on Alterra, and he is moderately optimistic about Ram Power, based in Reno, Nevada, which has an operating plant in Nicaragua and projects planned for Nevada, California and British Columbia. The company saw its stock jump sharply a few weeks ago when it announced the Nicaraguan government has agreed to pay a significantly price for the electricity generated there. "2013 looks good for Ram, and eventually the market will start to appreciate its good cash flow numbers," Mr. McIlveen said.

He also likes U.S. Geothermal, based in Boise, Idaho, which has projects in Idaho, Oregon and Nevada and another long-term play in Guatemala. "They plod along and they make progress," Mr. McIlveen said, "and they've done so without any major stumbles." He predicts the company will be cash flow positive by the end of the 2013.

The one company in the sector that is uniformly rated as a sell by analysts is Nevada Geothermal. It has projects in Nevada, California and Oregon, but lost $59-million in the year ended June 30.

One other company, Ormat Technologies Inc. of Reno, Nevada, has projects in the United States and Central American, and owns a division that makes power generating equipment. Even though it is large and profitable, Ormat "suffers from the same out-of-favour theme" as the other geothermal players, said MacMurray Whale, an analyst at Cormark Securities Inc. in Toronto. Its stock, which trades in New York, is about half the level it was at three years ago.

Mr. Whale says geothermal stocks have been caught up in the same downward spiral that has enveloped many companies in the broader renewable energy sector. Investors who have kept their money in renewables have generally shifted their focus from developers to more stable utility companies – those with broad portfolios of functioning projects and long-term contracts to sell the power. The most successful ones also pay dividends.

Geothermal companies, by contrast, have issues ranging from debt problems to productions delays.

Over the longer term, Mr. Whale thinks many of the existing geothermal companies will not survive as standalone public entities. Some will likely sell off their assets, or get bought up by larger energy companies that have access to cheaper capital, he said.


The case for Canadian geothermal power

Canada has lots of potential geothermal power, but there is virtually no commercial activity exploiting the resource in this country.

There is plenty of geothermal heat to warrant building power plants in B.C., Alberta, Saskatchewan, the Northwest Territories and the Yukon, says Alison Thompson, chair of the Canadian Geothermal Energy Association. The problem is provincial governments, and Ottawa, give virtually no support to those interested in developing it. As well, the process for land-access permits is extremely slow, or in some provinces, non-existent.

That's why the North American companies in the business concentrate work in the U.S. and Central and South America, Ms. Thompson said.

"The Canadian market is filled with investors who are very comfortable with exploration and resource risk," Ms. Thompson said.

If the federal and provincial governments would offer support to the geothermal industry, some of the investment funds raised might actually be spent in Canada, she added.

Richard Blackwell

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