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A broken slot machine pays every time you pull the handle – that’s why serially successful Explorers’ League honoree Ross Beaty earned this nickname from investors. Will it be true once again with his latest effort in the geothermal sector? We talked with Ross candidly about the future for Magma Energy (T.MXY), including the activists in Iceland that won’t go away. Here’s the latest from one of the most successful of our XL-ers…
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Explorers’ League Editor Jeff Clark: First, Ross, tell us why you got involved in geothermal after being in mining so long.
Ross Beaty: I wanted to build a green company. Geothermal power is a form of electricity generated from clean earth heat that doesn’t require incentives to be a good business. So I started Magma in 2008, and the business plan is to build a global leader in clean energy, just like we did with Pan American in the silver business.
There are very few companies in this industry. It’s a small component of the world energy supply, but it’s the cleanest type of energy on the planet. It’s also among the cheapest when you add in capital costs, operating costs, maintenance costs, and fuel costs.
I’m proud to say we’re now the second largest primary geothermal power company in North America. Ormat is the market leader and has about 500 megawatts of producing geothermal power; Magma now has 190 megawatts of producing power from three plants.
Jeff: How big is 190 megawatts?
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Ross: 190 megawatts of geothermal power produces about 1.4 million megawatt hours of electricity per year, enough energy to power about 180,000 homes, so it’s quite significant.
What distinguishes geothermal from wind and solar and hydropower is that geothermal power is produced day and night, seven days a week. It never sleeps. It’s called base-load power, and it’s not intermittent like wind and solar, which have the problems of not producing any power when it’s not sunny or windy.
On the other hand, geothermal power only works in certain parts of the earth’s crust – the Pacific Rim, certain places in Asia and Africa, the Caribbean, and Western North America – where the rocks are so hot that they heat water you can actually produce electricity from economically. Magma has built a global business already. We have a large number of properties in Chile and Peru; we have an extensive landholding in the Western U.S.; and we have a very large business in Iceland where we produce 9% of Iceland’s power.
Jeff: I hate to bring up the political issue in Iceland because it’s frankly growing tiresome, but it doesn’t seem to be going away. I know the objection is to foreign company ownership of their resources, but tell us where it stands now and what it’s going to take to resolve it.
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Ross: Fair question. We acquired our 98.5% stake in the Icelandic geothermal power company, HS Orka, in several stages over the last year and a half. We’ve since had several government committees look at it and confirm we acquired it legally and properly, and there is nothing they can do to take it away from us. So we don’t see any great risk of nationalization or anything like that.
There is a small minority of Icelanders, led by celebrity Björk, who are opposed in principle to any foreign company owning any energy production of the country. We’re unfortunately the target of their opposition. We’ve simply been trying to complete our acquisition, which we have now done; operate the business successfully, which we are doing; and become a valued part of the Icelandic corporate world as a responsible company, which we are.
I think actions speak louder than words, so we’ve been keeping quiet, going about our business, and proving to the Icelanders that we are not a threat or a concern. Unfortunately, Björk and her allies are the exact opposite, and there’s not much we can do about it except to put our heads down and carry on.
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We are, however, seeking to divest some of the company to other Icelandic investors. We’ve been working on this for several months. We’d still own the majority interest, but there would be an important minority stake held by Icelandic interests. This should significantly reduce the noise we get from these nationalists.
Jeff: Will it dilute the profit potential for Magma?
Ross: It will dilute it modestly, but the flip side is, we will bring significant cash into Magma that we can then use elsewhere. We never sought to acquire 100% of this business anyway.
The nice thing about HS Orka is that it has very large low-cost production and tremendous growth prospects. We should be able to more than double the production in Iceland over the next five years. And there is a tremendous team of Icelandic geothermal experts, some of whom we are already using elsewhere in our business. So it’s a perfect fit for Magma.
Jeff: What’s next?
Ross: In addition to our Icelandic assets, we have excellent growth prospects in Chile, Peru and the United States. And we expect to be very active in exploration in other countries as the year progresses.
Wealth creation in this business comes from two different areas. The first is through operating low-cost geothermal plants, which is a low-risk and essentially a permanently profitable business. And the second is through discovery of new resources. In just two years, Magma has gone from holding zero resources to about 1,350 megawatts of reserves and resources in the ground, which gives us an incredible growth platform for the next 5-10 years.
Jeff: So the Magma story is about both exploration potential and production profits?
Ross: Yes, both. I’m trying to build Magma the same way I built Pan American Silver, through a combination of exploration discovery, good acquisitions, and profitable operation. This covers all the areas where you can create wealth in the resource business.
There’s one big difference between geothermal and mining, though, and that is there’s no depletion in the geothermal business the way there is in mining. The cash flow from geothermal operations lasts over a very long period of time. You can debt finance geothermal plants much more easily than you can debt finance mines. Therefore, the business is all about the cost of capital, and as you get bigger, your cost of capital goes down.
Jeff: As an investor, I’d like to know what’s going to make the stock go up.
Ross: Well, this is not a business that benefits from commodity price movement like mining does. It’s not as sexy as the mining business right now, which is in a boom market, so you’re seeing a lot less volatility in the geothermal space than in mining or exploration.
By the same token, when there’s a bear market in mining, you’re going to see geothermal continuing to generate strong cash flow, like a utility. It’s a steady long-term business. And when we make new discoveries of geothermal reservoirs, our capital value goes up and investors should see good capital gains.
Jeff: What’s on the calendar for 2011?
Ross: Our game plan is to build a big operating company that’s going to generate a lot of cash and ultimately pay a big dividend.
In 2011, our focus will be on expanding Iceland, expanding our Nevada operation, getting more cash flow from both operations, as well as a big push on exploration. We are going to work hard on our properties in Nevada, Iceland, Peru and Chile. And we’ll potentially have some very exciting ground in one other country we’re hoping to get title to in a couple of months.
Jeff: Sounds exciting.
Ross: It’s bread-and-butter stuff. This is nothing we haven’t already done in the silver business. It just comes down to working hard, taking some risks, and reaping the benefits to the extent that those risks pan out.
Jeff: We’ll be watching. Let’s talk next month about your other companies, because I know you’re still involved with them.
Ross: I am, and I’m particularly excited about Pan American Silver. Talk to you then.