Resource Expert Powers Up Geothermal Plays

Day continues, "Renewable energy certainly has attractions. We can't avoid the political considerations. Many countries around the world have mandates to provide a certain amount of their energy from "green" sources.

"In the U.S., 33 states have set "renewable portfolio standards" (30% of its energy for California) and federal legislation is in the works.

"Because of this, green energy has a premium demand. In addition, green energy attracts various subsidies and preferential treatment from governments. Importantly, permitting is likely to be smoother; with backing of governments and little environmental opposition, the process should be easier. Green energy that can generate green

"Geothermal is pulling power from the earth. At its core, the temperature is as hot as the sun, about 9,900 degrees Fahrenheit. Deep underground reservoirs contain hot rocks saturated with water. The hot water is pumped up to a geothermal plants and drive electric generators.

"Once the water is cooled, it is piped back to the reservoir, and the process starts again.Unlike solar or wind, geothermal provides "base-load" energy; it runs 24 hours a day, 365 days a year. Geothermal runs at about 90% capacity all the time, and it permanent, constantly renewing itself.

"And geothermal has very low operating costs. However, capital costs are quite high, although right now, companies can obtain a refund of 30% of the capital costs as a grant from the government. Importantly, it is a mature industry with very low technology risk. The risk is in finding the reserve, not in operating it.

"A major part of these capital costs is the exploration, given that drilling even known areas has a success rate of only about 25-30%.

"Success means finding a reservoir of adequate size. After that, confirmation drilling, to confirm the resource, has a success rate of about 60%. However, once up and running, geothermal becomes inexpensive, partly because the amount of electricity relative to its capacity is so high.

"For investors, the problem with geothermal is that the market is bifurcated between a few very large players and several tiny companies.

"The largest geothermal generator is Chevron, but one wouldn't buy that company for its geothermal. There are a dozen or more tiny geothermal outfits, some of which have current operations, but they are very thinly traded.

"A much better investment is in a couple of new mid-size Canadian geothermals, Magma Energy (MXY) and Ram Power (RPG). These two companies were each taken to market in 2009, with the aim of building a geothermal company of scale.

"Magma is the more advanced. Founded by serially successful mining entrepreneur Ross Beaty, it has large assets in the U.S., Chile, and Iceland and aims to build the world's largest pure geothermal company. Beaty has an astonishing track record, successfully building gold, silver, copper companies.

"He is likely to be similarly successful with Magma. Whatever the final end-game, I suspect investors who attach themselves to Ross's coattails will do exceedingly well.

"Ram Power was put together by equally ambitious Rick Rule, who hired Hezy Ram from Ormat to run the company, with Chris Thompson, former CEO of Goldfields, as chairman. The company was formed by bringing together three of those small companies referred to earlier.

"The team is more prepared to buy existing companies to build Ram, which now has small operations in several countries. One is likely to do very well attached to these coattails as well.

"I have been waiting to buy these companies. Both stocks are down in the past several weeks, so we can now buy at a good time.

"My recommendation is buy one or both of these stocks, with a long-term view. Because of the likely need to raise more money, or issue stock, we are putting both in the Aggressive part of our investment pyramid, but suspect patient investors will do very well."

Steven Halpern's TheStockAdvisors.com offers a free daily review of the favorite stock ideas of the nation's top financial newsletter advisors.