Adrian Day: Wanna Go 'Green'? Go Geothermal Source: Brian Sylvester and Karen Roche of The Energy Report 6/15/10
Investment guru Adrian Day likes green energy but doesn't see many ways to make money in that space, save two. In this Coles Notes interview with The Energy Report, Adrian gives us his favorite juniors in the geothermal sector and even offers a few of the base metals juniors that he owns.
The Energy Report: Could you give us an overview of the alternative energy market?
Adrian Day: We all know the story of why green energy is attractive. We all know the story about oil, the risks and buying it from unstable foreign countries. . .how dirty coal is, and so on. So, we all know the potential advantages of what we might call green or alternative energy.
The big problem for me, being a realist, is that most of them don't make money. Wind, solar and biomass are really just marginal additions to energy. At least for the foreseeable future, they're marginal in the overall picture, and they're also uneconomic. The only reason they make money is because the government gives them ridiculously outrageous grants.
TER: But of these different sectors of alternative energy-wind, solar and geothermal-you seem to hold a preference for geothermal energy.
AD: The beauty of geothermal is that it is green, renewable and has a very, very low environmental footprint. . .and it actually makes money. Now, the two that I like-Ram Power Corp. (TSX:RPG) and Magma Energy Corp. (TSX:MXY)-are both small companies, but they are the largest of the juniors. That's really important; in the geothermal space, you really have to have scale to grow. In very simplistic terms-and you know I am a simplistic person-the big difference between say the metals industry, or gold exploration, and geothermal is that a lot of your costs come right up front in the initial stages of exploration. And so, the costs are pretty heavy at the early stage of exploration; but, once the thing's in production, the capital costs, and, in particular, the operating costs, tend to be very, very low indeed. The point I'm making, however, is that you need scale in order to get to first base.
These two companies are both large enough and have good enough balance sheets that they are able to do the adequate exploration; and, of course, once you've done the exploration in the U.S., you can get some grants back from the government to help reduce your costs. Both of them have strong entrepreneurial management; both of them are growing. Just in the last couple of weeks, Magma has taken over the half of Iceland's big Orka Project that it didn't own-but it now has taken effective control: 98 %.
And Ram has just made an all-stock offer for a small geothermal company called Sierra Geothermal Power Corp. (TSX.V:SRA), and that's a perfect illustration of what I was saying. Sierra has a very good pipeline of about 14 projects in the U.S., a very good pipeline, but it just didn't have the capital to explore them and without the capital to explore them, they couldn't get grants from the government. It was really just stuck; it couldn't move forward. So Ram has a wonderful deal by buying these things very, very cheaply, and it has the capital to pursue them. So, yes, I like those two very much, and they're both at very good buying prices right now.
TER: You have all these gold equities and some royalty companies, but these are the only two geothermals. How did they find their way into your asset portfolio?
AD: I'm not sure whether you're talking about my money management or my newsletter-we have a lot of metals companies, resources of various types in the money management, so these would not be the only non-gold assets that we own. But I think the attraction there is that they have sort of high potential that you can see from a junior gold-exploration stock, and the people involved-or the people behind both Magma and Ram-are people who have been involved in the gold-mining industry. So, I think it was a sort of a natural fit.
TER: I believe those companies were in your newsletter list.
AD: That's probably right. We have a couple of larger oil and gas companies; but in the money management, we own a reasonable amount of smaller, diversified metal companies. One of my long-time favorites, Altius Minerals Corporation (TSX.V:ALS), for example, is primarily base metals and uranium. You know we own some silver companies, obviously; and Lumina Copper Corp. (TSX:LCC), a copper company.
TER: Any parting thoughts?
AD: The next few months, I think, will offer some great opportunities for buying, but I also think one needs to be a little bit cautious and, in particular, one needs to be selective in the next few months. I do think prices have the potential to come down in the next couple of months, but that will be the opportunity to buy.
Adrian Day is a British-born writer and money manager, a graduate of the London School of Economics, who has made a name for himself searching out unusual opportunities around the world, with two books on the subject. At his money management firm, Adrian Day Asset Management, he specializes in global diversification and gold equities for individual and institutional clients. Adrian is a frequent speaker at international seminars, and is a frequently guest on CNBC and The Wall Street Journal Radio network and has been interviewed by Money, Straits Times, Good Morning America and others.
Adrian's forthcoming book Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks will be published by Wiley this autumn. He is also a contributor to the recent The Golden Rule: Safe Strategies of Sage Investors.
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