Blue Mountain Disappoints; Nevada Geothermal Power Looks Like a Takeover Target
Which company might snatch battered Nevada Geothermal Power out of the scratch-and-dent bin for a song?
When Raser Technologies (RZTIQ.OB) declared bankruptcy at the end of April, I shrugged it off. I saw the writing on the wall for Raser in September 2009, when they failed to get a DOE loan guarantee. But part of the letdown also had to do with resource risk: the company was producing consistently less power from their 10MW (rated) Thermo plant than expected.
Early in 2011, Ram Power (RPG.TO, RAMPF.PK) stock was clobbered when they announced construction delays and higher than expected procurement costs in their Nicaraguan San Jacinto-Tizate project, requiring them to switch drilling contractors. In order to make up the extra cost, they recently priced a stock and warrant offering at an 80% discount to where the stock had stood at the start of the year.
Then Nevada Geothermal Power (NGLPF.OB, NGP.V) announced "lower than anticipated power production and a forecast gradual temperature decline" at their flagship Faulkner 1 geothermal plant at Blue Mountain. They now predict that the 49.5 MW rated plant will produce only 35 MW (net) in 2011, and then decline about 2.5% per year. Although NGP tried to soften the blow by also providing information about several of their other projects that are proceeding well, the stock sold off 50% on the day of the announcement, most likely prompted by the statement that they "will not be able to meet the terms of its loan with EIG Global Energy Partners (EIG)... and accordingly... the Company has begun discussions with EIG in order to make changes to the capital structure."
Investors are clearly afraid of stock dilution as the result of the negotiations with EIG, and although the bad news at Falkner 1 probably does not justify the $30M drop in market capitalization that occurred the day of the announcement, the prospect of dilution tends to cause undervalued stocks to become more undervalued over time in a viscous cycle, since new capital raises usually happen in reference to the current (depressed) stock price.
Nevada Geothermal's enterprise value (market capitalization plus debt) at the close on May 11 was $202 million. The company has over 70 MW (net) of producing power plants, plus a number of other projects such as Crump Geyser, which is currently being developed in a joint venture with Ormat Technologies (ORA), in which Ormat is providing all the necessary cash to develop the project. Even if we assume the value of these other projects is zero, the market is currently valuing the producing projects at less than $3/W installed. While that might be a fair price for solar project with a 20% capacity factor, geothermal plants are baseload, and produce more than 4 times as much energy per MW as solar.
Both Ram Power and Nevada Geothermal look like bargains in terms of assets, although Ram looks like a less likely takeover target, having recently raised capital. I would not be surprised to see takeover offers for NGP from better capitalized companies in the coming months.
Ross Beaty, CEO of Magma Energy Corp. (MXY.TO,MGMXF.PK), which is soon to become Alterra Power Corp in a takeover of Plutonic Power Corp (PUOPF.PK) is one likely buyer. Part of Beaty's justification for the Plutonic takeover was the scale to raise money for renewable energy development. Taking over Ram Power or Nevada Geothermal in an all-stock deal would help him achieve this goal while increasing Alterra's revenue per share. Before the Plutonic acquisition, Beaty said that his company was looking beyond the geothermal industry for accretive growth opportunities. At current share prices, he might take a page from Oil companies' play book, and drill for opportunity on Wall Street (or King Street West, in this case, since both are listed on the Toronto Stock Exchange.)
If that's what Beaty has in mind, he may not lack for competition. Ormat has $65M in cash on its balance sheet. With Nevada Geothermal trading at a $29M market cap, why do expensive joint ventures like Crump Geyser with NGP, when they could buy the company outright to get access to its geothermal prospects?
Other deep-pocketed potential bidders are oil major Chevron (CVX), natural gas power producer Calpine (CPN) and the Italian utility Enel (ENLAY.PK), all of which have experience with geothermal.
I don't expect to recover my investments in Nevada Geothermal or Ram Power anytime soon, but given the current rock-bottom valuations, there's a lot of room for a bigger player to come in and scoop up the pieces for more than the stocks are currently trading for.
DISCLOSURE: Long RAMPF, NGPLF,
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See also: Oil Money Needed for Geothermal Projects.