US Geothermal, Inc. (AMEX:HTM) ) is one of only two pure-play geothermal power companies traded on US exchanges. The other is Ormat (NYSE:ORA), a vertically integrated company widely considered to be the industry leader. As baseload, extremely reliable power, Geothermal fits easily into utilities existing grids, making it a popular source of green power, especially with utilities uncomfortable with the intermittent and difficult to predict nature of wind and solar.
Unlike wind and solar, the potential resource for geothermal power is quite small relative to electricity demand. At least until Enhanced Geothermal Systems (EGS) technology is commercialized, geothermal will remain a boutique form of electricity generation, producing less than 1% of our electricity supply. In many ways, the prospects are like those for new hydropower development in the US: new large resources are unlikely to be developed, but there is a lot of potential for small projects. Until last year, the relatively small potential for geothermal led the technology to be mostly ignored by investors. Now geothermal is getting more of the attention it deserves as a rapidly growing (if still tiny) source of clean power.
The Portfolio Approach
I bought US Geothermal last year as part of a small portfolio of Geothermal exploration companies. Others I bought around the same time were Sierra Geothermal (OTC: SRAGF, SRA.V), Raser Technologies (RZ), and Western GeoPower Corp (WGPWF.PK, WGP.V), which I added to previous holdings of Nevada Geothermal (OTC BB: NGLPF.OB, NGP.V) and Ormat. The group as a whole has performed well, although I have small losses in Sierra Geothermal and Western Geopower. In general, I have not evaluated these companies in depth. Understanding a geothermal exploration company is a lot like understanding other mining exploration companies. To gain insight into their likely success or failure, one would have to delve into the underlying geology of their leases, something I lack the skills to do. This is why I prefer to take a portfolio approach to the sector, which has so far been effective at protecting me from company specific risks.
That said, I agreed I would look into HTM in more detail, and since their annual meeting is coming up, the annual report for the fiscal year ended March 31, 2008 was conveniently sitting in my inbox. I find reading the annual report from cover to cover an excellent place to start when researching a company. Here are my impressions:
- The company has a handful of leases, at many stages of development, from Gerlach and Granite Creek, exploration prospects, to Raft River, which began producing power this year, but which they are continuing to expand. In between are Neal Hot Springs, where they have what sounds like very promising test results from their first well, and San Emidio, a recently acquired older geothermal plant which they have plans to upgrade and greatly expand (they recently received drilling permits to start the expansion.)
- The company seems to be following their stated strategy of acquiring only leases where there is strong evidence of good geothermal prospects. Although all natural resource exploration is risky, this should help to ameliorate the risks of exploration and development.
- The company will need a substantial amount of cash to follow their chosen strategy. This will probably come in the form of additional private placements, and joint ventures to develop specific projects. The need to do additional private placements (where large blocks of stock are sold at a discount to the market price) will likely keep downward pressure on the stock price, which makes it likely that the share price will not see the quick tripling it had last year.
- The interest among utilities in geothermal power is remarkably strong, so much so that they felt comfortable starting over from scratch on the Power Purchase Agreement (PPA) for the second stage of their Raft River project. Management exudes confidence in their ability to negotiate favorable PPAs for future generation. This is a marked contrast to other renewable electricity producers. From my personal experience talking to wind, solar and hydro developers, they typically feel mistreated by utilities which often have the upper hand in negotiations for PPAs.
Overall, HTM seems as solid a company as could be expected from an early stage resource development company. If you do want to venture beyond Ormat to buy a few geothermal exploration companies, HTM should be on your short list. While it may not have the price growth potential of companies which do not yet have US listings, it is also relatively less risky due to the relatively high quality of the projects the company is pursuing.
DISCLOSURE: Tom Konrad and/or his clients have long positions in ORA, HTM, RZ, SRAGF, NGPLF, and WGPWF.
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