Magma sinks cash into Iceland geothermal producer

OTTAWA (Reuters) - Canada’s Magma Energy Corp said on Thursday it will boost its geothermal production power with an investment of up to $40 million in Iceland’s HS Orka, a producer poised for expansion.

Recently listed Magma shares touched a new high of C$1.90 on the Toronto Stock Exchange before slipping back to C$1.80, a gain of 16 Canadian cents, at the close on Thursday.

Magma, which generated C$100 million ($91.7 million) in its IPO July 7, said it will buy the minority interest in privately-held HS Orka from Geysir Green Energy.

Magma will first buy an 8.62 percent stake for about $20 million, payable at deal closing, and a 2.16 percent holding for about $5 million, due by March 31, 2010. It has an option to acquire another 5 percent share by investing $15 million into HS Orka.

The geothermal sector is attracting increasing interest, said John McIlveen, research director at Jacob & Co Securities Inc, an investment bank specializing in renewable energy.

“There are 9,000 MW worldwide, however, a lot of utilities now, I think, will be entering the market,” he said.

“Major utilities, especially in North American, know that a cap and trade system is coming. And so they’d be better off to use their money to buy existing renewable opposed to continually buying carbon credits.”

McIlveen cited a bid by TransAlta Corp, Canada’s biggest publicly traded electricity producer, for Canadian Hydro Developers as an example.

Separately on Thursday, Canadian Hydro Developers recommended shareholders reject the bid from TransAlta, which is worth about C$654 million.

Iceland’s largest privately owned energy company, HS Orka has installed geothermal power capacity of 175 MW of electricity from its Svartsengi and Reykjanes power plants. It plans to expand production to 425 MW by 2015.

The company also generates 150 MW of thermal energy for district heating.

Much of its geothermal power is sold in U.S. dollar contracts to a large aluminum smelter, Magma said, with expansion capacity earmarked for a new aluminum smelter under construction.

Magma, run by mining magnate Ross Beaty, is currently a small producer of geothermal energy, with one plant in Soda Lake, Nevada. It has four advanced-stage exploration properties in the western United States, Chile, Argentina and Peru.

Magma has said it plans to use the C$100 million from its IPO to double capacity at Soda Lake from 8 MW to 16 MW, advance its exploration properties and make acquisitions.

“I think Magma’s more interested in acquiring online assets than pipeline projects,” said McIlveen. “They have a considerable pipeline now and really don’t need to acquire more projects.”

Geothermal power comes from hot water and steam produced deep below the earth’s surface. They are piped up to the surface and used to drive turbines that generate electricity.

($1=$1.09 Canadian)

Reporting by Susan Taylor; Editing by Frank McGurty