Investors Jump on Geothermal IPO

Magma Energy is enjoying a volcanic IPO. The Vancouver-based geothermal start-up is going public and some observers estimate that they may raise more than $85 million - double what was predicted only one month ago.

"It's significantly oversubscribed," one source told the Financial Post. "It's definitely one of the hottest deals of the year."

So why the flood of cash – especially in the one of the worst capital markets in history? One reason is Magma’s legendary CEO Ross Beaty, whose lucrative success in the mining sector has made his grateful investors very wealthy.

In an industry famous for boom and bust, Beatty has only seemed to pick winners. He has started nine mining companies, eight of which were sold for big profits. His Lumina Copper venture went from an investment of $80 million to a profit of $1.2 billion in six years.

That uncanny instinct for picking winners has now brought Beaty to the geothermal business. He told the National Post:

"I looked at the space and decided that's for me. It's just like the mining industry. You explore, you permit, you finance, you construct, then you operate. The actual business of development is very similar. Plus it is the greenest, cleanest form of electricity production you can get, and it comes right from the ground...My goal is to build the biggest and best geothermal business in the world, just like we did with silver."

While Magma was only launched last year, they have already made a big splash in this comparatively small industry. Magma raised many eyebrows at the highly competitive Nevada BLM auction last year when they scooped up more than $10 million in geothermal leases.

Their shopping spree has not been limited to Nevada. They currently hold about 200,000 hectares of promising ground in the US, Peru, Argentina and Chile with a potential generating capacity of 200 MW.

While still a relatively minor player on the production side, Magma already owns a operating geothermal plant at Soda Lake in Nevada that they hope to ramp up to 23 MW.

Magma’s swift financial progress from inception less than a year and a half ago is equally impressive. Even before their IPO, the company raised $200 million from private investors. They reportedly have $11.6 million in cash and no debt.

More importantly, their success is sign of the ballooning growth in this so-far stunted sector.

Geothermal currently supplies only 10GW of power, or less than 1% of global consumption. It remains marginal because it has been seen as a high-risk venture with long returns on investment.

But that ground is shifting on a number of fronts.

Government’s are getting onboard in a big way with substantial incentives. The Obama administration just committed $350 million to scale up the US geothermal market.

Policy shifts are also leveling the investment playing filed by requiring utilities to increasingly rely on renewable energy. Geothermal has a competitive advantage over wind and solar because it is base load power avoiding the expensive need for grid energy storage.

If cap and trade legislation becomes a reality in the US, this will also be a shot in the arm for the geothermal sector, and all renewables.

Lastly, emerging technologies are transforming the potential for making geothermal a much bigger player.

Conventional generating technology required finding those rare geothermal deposits that produced steam in production quantities. Exploring for such sites is risky, expensive and time-consuming.

New binary generating systems instead use chemicals like pentane, which has a much lower boiling point. Geothermally heated water vaporizes pentane in a closed loop system that drives a turbine to produce electricity. This means that many promising properties  previously passed over can now go into production.

These converging factors have caused some financial observers to conclude the geothermal sector is “poised to erupt”.

While Magma has an impressive record, they are not the only ones that investors should be keep an eye on.

U.S. Geothermal (GTH) has seen its stock grow almost 300% in the last six months. Canadian Press reported that financial analysts believe the Magma public offering also shows that U.S. Geothermal is "undervalued."

"We expect Magma's IPO to provide additional support for our thesis regarding U.S. Geothermal. Both companies have proven land resources and management teams with strong track records," Clarus Securities wrote in a recent note to clients.

Another promising player is Raser Technologies, which recently announced the intention to raise $150 million through securities sales.

That said, Magma is one of the few mid-sized pure geothermal plays in the marketplace. If CEO Beaty is right again, this sector and his company are bound for big things.

And what might Magma do with their newly-filled coffers of cash? Well, there is another BLM geothermal lease auction in Nevada next month…