Tuesday, December 07, 2010

Geothermal World

The United States is the leader in geothermal energy production, but there are over a dozen other geology-rich countries with abundant hot springs, hot geysers and steam vents from deep in the earth’s crust. Iceland gets over three-quarters of its power and heat from geothermal sources and policy makers have pledged to reach a 100% fossil fuel-free economy in the next few years. The Philippines relies on geothermal for over 25% of its electric power supply.

Geothermal energy is becoming more plentiful, but outside the U.S. investing opportunities for the minority investor are scarce. In the Philippines, Energy Development Corporation (EDC: PHL) is the principal geothermal power developer in the Philippines, generating over 1,400 megawatts per year. EDC produces about 60% of the total geothermal power the country. EDC is growing through acquisition as well as increased power sales. Net income doubled in the first half of 2010 over the prior year. Earnings grew 26.5% in 2009 over 2008, largely on increased revenue.

In Iceland, HS Orka hf (private) got its start in the early 1970s with municipal heating plants. The company currently produces 175 MW of geothermal power and 150 MW of heating energy. Earlier this year Magma Energy Corp. (MGMXF: PK: MXY: TXS) acquired an additional 14.3% of HS Orka giving Magma a 98.5% stake. Orka reported approximately $50 million in sales and a net profit of $50 million in 2009, a feat that was accomplished largely on other income sources. Gross profit margin on power and heating sales was 28.7% in 2009. Okra’s primary customer is Rio Tinto Alcan (RIO: NYSE ADR), which operates an aluminum smelter. Magma is counting on expansion of aluminum smelting in the country by Alcoa to drive demand for geothermal power.

The bigger player in Iceland geothermal power sector is Landsvirkjun (private). The company operations two geothermal stations, twelve hydropower plants and one oil-fired power plant. As with HS Orka, Landsvirkjun is highly dependent upon aluminum production and the world price for aluminum. Revenue was $342.3 million in 2009, providing $193 million in net income. Capitalized largely on debt - debt to equity ratio is 2.0 - S&P recently raise its rating of Landsvirkjun debt to BB+ (BB-) on improved liquidity and the company’s risk management program vis-à-vis aluminum prices.

The first to tap geothermal resources, Iceland views its geothermal expertise as a viable export product. Indeed, Iceland’s Geysir Green Energy (private) has announced a string of joint ventures with energy concerns in China, Hungary and El Salvador to build geothermal power plants at “hot spots” in those countries. Geysir is 41% owned by Atorka (ATOR: ICEX), a fully integrated industrial products and energy holding company. Investor may want to hold off on investing in Atorka until its reorganization is fully completed. Geysir itself is undergoing some change since its recent divestiture of the HS Orka position to Magma.

Close to home are two Canadian companies involved in geothermal power production. Nevada Geothermal Power (NGP: V; NGLPF: TSX; and NGLPF: OTC/BB) has five properties in the western part of the United States and perhaps should have been included in our discussion of U.S. geothermal power production. NGP is operating a 49.5 MW power plant at its Blue Mountain location in northern Nevada. A power purchase agreement is in place with NV Energy (NVE: NYSE), making NGP a company to consider for a geothermal pure-play. NGP has four additional geothermal sources under development, which if brought on-line successfully could bring profitability to the company. NGP reported a net loss of $20.7 million on $18.7 million in total sales in the twelve months ending June 2010. It was the first revenue realized by the company in its history and sales have been sequentially higher in each quarter, suggesting that NGP should be a company to watch in the geothermal space.

Ram Power Corporation (RPG: TSX) operates a 10 MW geothermal power plant in Nicaragua and has projects under development in the U.S. and Canada. In the first nine months of 2010, Ram reported $3.1 million in revenue on which it earned a gross margin of 58.1%, well above average in the geothermal sector. Still spending heavily on developing its geothermal assets, Ram posted a net loss of $17.1 million in the nine-month period.

Australia should not be left out of a discussion on world geothermal power. Geodynamics Ltd. (GDY: AX) is developing renewable energy generation from hot fractured rocks (HFR), an enhanced geothermal process. Using water fracturing know-how in the oil and gas industry Geodynamics has proven the concept of extracting heat from hydraulically stimulated hot fractured rock to create power. The method has its detractors among environmentalists who point to an increased incidence of earthquakes and other geological issues when water is injected into cracks deep in the earth. There is also a danger of killing off the golden goose by “cooling” the rock to the point it will not longer generate heat.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Energy Development Corp. (EDC: PHL), Geysir Green Energy (pvt), Atorka Group hf (ATOR: ICEX), HS Orka hf (pvt), Magma Energy Corp. (MXY: TSX), Landsvirkjun hf (pvt), Nevada Geothermal Power, Inc. (NGP: V), Ram Power Corp. (RPG: TSX) and Geodynamics Ltd. (GDY: AX) are all included in Crystal Equity Research’s Earth, Wind and Fire Index in the Geothermal Group.


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