Interest in geothermal increasing with intended Magma Energy IPO

Alexander Richter 8 Jun 2009

With the filing of a preliminary prospectus for an IPO, Magma Energy has been credited with somewhat of a rally for Canadian listed geothermal companies, who have seen a sudden raise in stock price.

Reported by the Wall Street Journal, “Canadian-listed geothermal stocks climbed sharply Monday, a move that market watchers attributed largely to the upcoming initial public offering of Magma Energy Corp.”

As reported earlier on this site, Magma Energy, a Vancouver/ Canada based geothermal development company with projects in the U.S., Central and South America, has filed a preliminary prospectus for a potential IPO with the Toronto Stock Exchange last week.

The Canadian listed players, U.S. Geothermal, Sierra Geothermal Power, Nevada Geothermal Power, and Western GeoPower have all seen a growth in stock price between 10 and 30% since Thursday. Trailing with only marginal increase is Polaris Geothermal, which might benefit from this rally as its Nicaraguan project is not effected by the U.S. stimulus legislation.

“In a note Monday, Carolina Vargas of Clarus Securities said she “understands” Magma is seeking a minimum of C$50 million at C$1.25-C$1.75 a share. In an interview, she said she derived the price range by looking at Magma’s most recent private placement, which was priced at C$1.25 a share.

If the IPO is completed as expected, she said Magma’s enterprise value would equate to about 1.2 times its total expected production. By comparison, Magma’s rival, U.S. Geothermal Inc. (HTM), trades at just 0.6 times total expected production, she said.

Industry observers may be picking up on the valuation gap, or the pending Magma IPO may simply be generating interest in the sector. “Of all renewable energy sources, (geothermal) is probably the ugly, red-headed stepchild that no one knows about,” said one market source.

The market source said that, according to industry chatter, Magma’s initial value is expected to be about US$1 million per megawatt. The bulk of the sector trades at US$100,000-US$500,000 million per megawatt, the source said, though industry leader Ormat Technologies Inc. (ORA) trades at about US3 million per megawatt due to the scarcity of large publicly traded geothermal companies.

The valuation gap between Magma and other Canadian-listed geothermal plays reflects Beaty’s involvement with Magma, and Magma’s extensive project portfolio, the source said. Magma has one operating power-generation plant and 19 exploration properties. U.S. Geothermal has just five exploration properties.

Beaty, Magma’s chairman and chief executive, has successfully guided numerous junior mining companies, including Hecla Mining and Da Cap Resources, to sale to major producers, according to Magma’s preliminary prospectus.

While the Magma IPO is the main driver behind Monday’s move in the geothermal sector, U.S. Geothermal may also have contributed. The company, which is marketing in the U.S. and Canada this week, said late last month that it’s close to receiving a US$85 million loan from the US. Department of Energy for a project in Oregon. The low-interest loan isn’t part of the billions in U.S. stimulus money aimed at the sector, so the fact that a geothermal company could secure financing in such tough economic times is a boon for the sector, the market source said.

The source added that the loan will cover 80% of the project, called Neal Hot Springs, and suggested that U.S. Geothermal may look to complete an equity financing shortly to raise the rest of the funds.

U.S. Geothermal closed up 23 U.S. cents to US$1.96 on the American Stock Exchange. Polaris Geothermal Inc. (PGTHF) rose 6 Canadian cents to 81 Canadian cents in Toronto. On the Canadian Venture Exchange, Nevada Geothermal Power Inc. (NGLPF) rose 10 Canadian cents to 72 Canadian cents, Western GeoPower Corp. (WHPWF) ended up 5 Canadian cents to 33 Canadian cents, and Sierra Geothermal Power Corp. (SRAGF) rose 7 Canadian cents to 30 Canadian cents.”

Source: Wall Street Journal