Although the Copenhagen Climate Conference proved more a lesson in futility than a blueprint for a global energy shift, investors are already chasing green in 2010. But which alt energy source to invest in? One that runs 24/7, according to Steven Li, Senior VP of Technology & Clean Tech at Raymond James. "With geothermal it's always there, all the time," says Li, who examines key drivers for geothermal development and explains how small geothermal companies become "institutionally relevant" in this exclusive interview with The Energy Report.

The Energy Report: Steven, what do you think are the key drivers long term for the sector?

Steven Li: For most of the companies we cover in the alternative energy field, when you look longer term—say 10 to 15 years—we see an "energy gap" as one of the key drivers. For example, as more and more Coal plants are taken offline because of tougher pollution controls, they have to be replaced by something greener. And so we think that two geothermal companies that we've just launched coverage on, Ram Power Corp. (TSX: RPG) and Magma Energy Corp. (TSX: MXY), which have strong geothermal assets, are very well positioned to take advantage of this coming energy gap in the short term.

TER: The observations that I have heard about geothermal are that it's fairly regionally focused (i.e., only available in certain topographies) and would not be a national solution to coal power. What's your input on that?

SL: The way I look at it is if you drill deep enough anywhere you're going to get a lot of heat, but obviously, there are areas where it is easier and more economical to get the heat out. So, you're right, in the U.S., for example, California is one of the best places to find geothermal assets. There are assets like The Geysers and Imperial Valley where developers have been producing geothermal energy for the past 20, 30 years, and hundreds of production wells have been drilled successfully in these areas.

So, yes, there is some regional focus, but again at the end of it, we are only scratching the surface. The amount of geothermal energy that is available is huge; it's significant. And as you develop these geothermal assets, it can start to represent a bigger proportion of the energy supply globally.

TER: Both Ram and Magma are, in essence, roll-ups of smaller geothermal companies. What advantages does rolling these up have for geothermal? What advantages does it have for an investor in this sector?

SL: It's pretty simple. The bigger you are, the more institutionally relevant you become. It opens up doors to accessing the capital markets. In this case, let's use Ram. Ram was the result of the merger of four companies: GTO Resources Inc. (NEX:GTR.H), Western GeoPower Corp. (TSX-V:WGP), Polaris Geothermal Inc. (TSX:GEO), and Ram Power. I doubt that these four companies by themselves would have been able to raise the capital that is required to move their projects ahead. By merging, you have a company that has a market cap that is very institutionally relevant. And not only that, the other advantage is you get an increased pool of managerial expertise you can leverage across the different assets coming from the different firms.

From the investor's perspective, you have diversification; you're not confined to just one project. You now have multiple projects at multiple stages of development, and again, you know that you're investing in a company that can have access to capital in the future if they need to.

TER: Do you see investment opportunities in these smaller companies?

SL: Yes, but it's riskier, again, for the reasons we just highlighted. There are definitely a number of smaller geothermal resources out there. But a lot of them are single projects and are very small, and you are taking a bit of a chance in terms of "can they access capital?" Keep in mind, these geothermal projects require an enormous amount of capital to bring them to production. So that access to the capital markets is critical.

TER: Is there an investment opportunity for people to come into these smaller ones anticipating that a Ram or a Magma might acquire them?

SL: You know, that's an investment angle that has attracted some investors. You look at all the different small companies, and you make some bets as to who's going to get taken out, which is fine. But when I look at Ram or Magma, for example, I see companies that have very impressive management teams that have done it before, and I see great assets and a relatively very cheap valuation. So, yes, you can play the take-outs, but on the other hand, Ram and Magna would be the lower-risk plays. So, my preference would be to stick to Ram and Magma.

TER: Do you see in the future any potential similar to Ram and Magma as roll-up plays that are starting to develop?

SL: First of all, the market has seen Magma and Ram do this roll-up and come to the market and successfully raise capital. So, yes, I am pretty sure we're going to see a couple more next year. It's a very fragmented space, and you've got many companies out there with assets in different locations. And I could see a couple of them get together and maybe try what Ram or Magma has done. If you successfully put together a group of assets and a quality management team, you do create value.

TER: Do Ram and Magma get any "first mover" advantage of doing the roll-up as compared to those companies who might attempt it?

SL: Absolutely. First of all, as you know, the window is never guaranteed. Ram and Magma seized the window that was open. Magma now has roughly $100 million in cash; Ram, after its raise, has about $130 million in cash. Cash is very critical for these companies. Everyone is still at the stage where they're proving up assets by drilling, so cash is king and that gives them a great first-mover advantage. If you're the next company trying to do the same thing, you can never predict if the investors are going to have a similar appetite. If you come in later, you get compared to Ram and Magma. Because these companies have fantastic assets, the bar is set quite high for the next few companies. Having said that, it can be done, and there are going to be a couple more next year.

TER: Geothermal as an alternative energy sector is relatively small right now. Do you see it growing in importance and, if so, how much will geothermal really represent of energy usage?

SL: It's very small, you're right. You're barely scratching the surface. As a percentage of overall demand it is probably a fraction of a percent. What's going to help geothermal is the fact that geothermal is base load, meaning it's there 24 hours a day, whereas, for example, if you compare it with solar, you only have so much solar power during a day, and with wind, it depends on when you're going to have the wind to drive the turbines.

So, with geothermal it's always there, all the time. When we talk about these Coal plants getting closed down and these coal plants were supplying baseload power because they were up all the time, you can't really replace them with wind farms or solar farms. You have to look for another alternative for baseload power, and that's where geothermal is pretty unique.

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