Today, geothermal represents a tiny piece of the global energy mix, but it is growing rapidly in some western U.S. states and more than 20 other countries where the ground is literally hottest. According to the Canadian Geothermal Energy Association, global geothermal production may triple over the next 10 to 30 years as demand for clean power increases.

In this exclusive interview with The Energy Report, entrepreneur extraordinaire Ross J. Beaty talks about how he intends to offer investors a heretofore unavailable opportunity to ride that growth wave, what sparked his interest in the geothermal arena, and where he sees many similarities between mining for metals and capturing the energy from the magma beneath the earth's crust. (Hot water and steam from the magma are piped to the surface to drive turbines to generate electricity).

Ross, who has earned himself a sterling reputation and world renown for scratch-building wealth-creating resource companies, is applying his considerable expertise and team of experts to a new enterprise, Magma Energy Corp. The company just went public in a heavily oversubscribed IPO in July.

The Energy Report: You come from a mining background, primarily silver and copper now you've moved to geothermal. What motivated you to jump into the geothermal arena?

Ross Beaty: After having built a number of public mining companies for 23 years, I retired from my silver company in 2007 and sold my copper companies by early 2008. I was looking around for something else to do and I wanted to build a green company. I've always been a closet environmentalist and thought this was a good thing to do with the next part of my life. Then I looked at specific areas where I could use my experience that would work. The more I looked at geothermal, the more I liked it. It is very much like mining.

TER: In what respects?

RB: You're dealing with a subsurface resource. To develop it successfully, you need to move it through early stage exploration, advanced exploration, feasibility, permitting, financing, construction, and then operation. You deal in the same geological environment that you look for gold and silver deposits in and you largely deal in the same countries that I've dealt with through most of my career—North and South America, Pacific Rim and so forth.

So it's an area I am very comfortable with. I understand the science. And as with mining, you need a lot of capital in this business, so public markets are very appropriate. The big difference is that you sell electricity instead of metals.

TER: Some observers considered the IPO of Magma Energy Corp. (TSX:MXY) the hottest deal of the year, with your international book three times oversubscribed. You raised almost double what some experts had expected—and in a tough economic environment. And now, barely three months since, your market cap has more than doubled—from a pre-IPO total in the neighborhood of $200 million to about $450 million. You've also announced an $18.2 million plan to double Soda Lake's gross generating capacity from 11 megawatts to 23 megawatts, presumably using some of the proceeds from your tremendously successful IPO.

RB: Yes. We're already drilling production wells at Soda Lake, and have acquired three geothermal leases on adjacent property—about 13,200 acres—at a U.S. Bureau of Land Management auction. A fourth lease we obtained adds approximately 3,600 acres to our McCoy Hot Springs advanced exploration property. All told, we picked up 67,950 acres on seven leases for just under $2.6 million.

TER: Relatively few companies are making much headway in the geothermal sector, and there seem to be few opportunities for investors despite the drive for cleaner, greener energy.

RB: It's interesting to see who's in the space. Some very large companies—such as Chevron Corporation (NYSE:CVX), MidAmerican Energy and Italy's national energy company, Enel (Ente Nazionale per l'Energia eLettrica)(ENEA) (NYSE:EN; MI:ENEL)—play in that space, but it's impossible for equity investors to buy to get geothermal exposure in those stocks.

At the other end of the spectrum are some very tiny companies, but I don't feel they have the business model necessary to succeed in this business. Before starting Magma, really only one mid-tier geothermal company seemed to be doing it right and that's Ormat Technologies Inc. (NYSE: ORA) with a market cap of just under $2 billion. Ormat produces about 500 megawatts of geothermal power, and was essentially the only go-to stock in the States.

TER: And now we have another one.

RB: Before starting Magma, I thought that if we were really focused, if we put our heads down, applied the same business principles that have worked for me in the past, we could build the world's preeminent geothermal energy company. For an entrepreneur like me, that's a very cool thing to focus on. I felt it was achievable and I'm absolutely determined now to realize that mission.

TER: Ormat is pretty vertically integrated, with a lot of operations and leasing as well as production. Do you envision Magma evolving that way?

RB: No. Ormat isn't really a true pure play on geothermal energy. Ormat produces electricity and it produces technology—it builds very good binary geothermal plants. So it's split in its focus. What I aim to deliver to equity investors is a company that's totally focused on geothermal power. I don't care what technology we use. We simply want to build the biggest, the most profitable, the longest lasting and the best managed company with the best exploration prospects on the planet.

TER: One difference between geothermal and metals seems to be that geothermal relies on serving a smaller, somewhat restricted geographical area. But you've established an international strategy already. For instance, thanks to a recent transaction, Magma now owns 43% of H.S. Orka, a geothermal energy company in Iceland. Could you tell us a bit about your geographic strategy?

RB: Sure. Like mining, geothermal energy is a global business. There are now 250 geothermal plants running in 28 different countries, producing over 10,000 megawatts of power. And as with mining, certain countries are better for geothermal operations than others. When I say better, I mean not only better in terms of resources but more enjoyable places to work—better politically, socially and environmentally. So—again, this is exactly like mining—we screen for all of those things when we look at a potential acquisition.

We've already looked in at least 30 countries for geothermal projects and we've selected two or three. We are currently very active, of course, in the United States, mainly in Nevada. We have properties and very small budgets for Peru and Argentina, but most of our work in Latin America is in Chile, which is a great country for geothermal. And as you mentioned, we've taken a stake in a large producing geothermal plant in Iceland.

The common threads in all of those areas are large opportunities, good profitability for geothermal production and plenty of upside via long-term growth. So those are the sort of things we look for, but we'll be very selective about where we actually end up.

TER: You mentioned early on that the big companies with geothermal operations, such as Chevron, don't really let investors play in the geothermal space per se, and the tiny companies don't have the right business model. Is it your intention to roll up some of those smaller companies to become the dominant player in geothermal?

RB: Our mission with Magma is to build the planet's preeminent geothermal power company. In only one year, including our Icelandic power production, we now produce 86 megawatts of power. That makes us the second-largest company, after Ormat, in the States.

So we've grown quickly already, but we have an awful long way to go. By swinging for the fence, trying to hit a home run and going big, we mitigate one of the biggest negatives in the business. We have lots of assets spread over many different geographic regions, which means less risk in the drilling stage. Size and spread give us better ability to withstand the failure of a dry hole and give us opportunity for many, many successes because we have so many projects in the pipeline.

Going for scale in this business also lowers our cost of capital. Geothermal energy is all about margins. It's a business that can generate very large EBITDA and cash flow. But if you pay too much for capital, you end up giving all of the upside to the providers of capital. That's another one of the negatives that's held back some of the small players in this space. The larger the company, the lower the cost of capital, and the lower the cost of capital, the better the cash flows you get for your shareholders.

Also, as you get bigger in public markets, you generally achieve better multiples. Your company has better liquidity on share markets and your enterprise value to EBITDA ratios are better. You have better access to larger capital pools to sustain your growth. They're all wealth-creating reasons for going big.

TER: So should investors who are intrigued by geothermal's potential area wait for smaller companies to roll up into larger ones? Or do you see any plays in these smaller companies?

RB: I can't speak about the investment qualities of other companies. I can only tell you to look at what Magma has done. We came out of nowhere in early 2008 and have already built a company with 86 megawatts of producing power and in excess of 500 megawatts of confirmed resources on land holdings around the world. We have 25 properties in all stages of development in the geothermal business. With properties in Nevada, Utah, Oregon, Chile, Peru, Argentina and Iceland, Magma has one of the largest property bases of any company in the business. We have a large pool of talent, a world-class management team. We've raised $162 million. I think we also have one of the most liquid stocks in the geothermal industry.

We've had success at advancing our business plan, but we have just begun. Over the next few years, I'm not sure whether we will grow more by acquisition—and there are plenty of acquisition opportunities in the geothermal world—or whether we will grow more by developing our own assets. But if we put our heads down, work hard, focus on adding value to shareholders through discovery, building good projects, operating plants well and buying well, we can deliver great shareholder wealth.

Over time I think you're going to see superior financial performance and superior shareholder returns with Magma.
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