Interview: Ross Beaty's 100 Year Energy PlanBy Ron Hera
May 8th, 2010
Hera Research Monthly (HRM) is pleased to present the following exclusive interview with Ross J. Beaty, Chairman and CEO of Magma Energy Corp. (TSX:MXY). Mr. Beaty talks about green energy, geopolitical risk and peak oil and reveals the investment strategies of Lumina Capital Partners, LP. Mr. Beaty is a successful serial entrepreneur who has founded and run public resource companies for the past 25 years, including Pan American Silver Corp. (TSX:PAA, NASSAQ:PAAS), which he founded and grew into one of the world's leading silver producers with eight operating mines and market capitalization of more than $2.8 billion.
In Chile we have tremendous geothermal resources and long-term growth potential at our Mariposa property south of Santiago. We've already made a new discovery there in our first exploration project that we think will deliver growth for the next 15 to 20 years. It's a 320 MW resource and we have an active drilling program there today.
In Iceland, we had the opportunity to buy a minority stake in a geothermal company called HS Orka that has two operating geothermal plants, Reykjanes and Svartsengi. Svartsengi currently generates 75 MW and Reykjanes currently generates 100 MW. We've been picking up pieces of the company that were held by various shareholders that had difficulties and we've now acquired, through three different transactions, a 43.2% stake in the company. We are hoping to increase our stake to over 50% and eventually to 100%. What's great about Iceland is that there are big, operating plants with state-of-the-art technology, incredibly strong human resources, and they have very large geothermal resources that will allow these operations to expand and expand for years and decades to come, which will give us a solid pipeline of future growth prospects. HS Orka has reserves of 640 MW and we plan to expand production by an additional 230 MW for a total output of 405 MW by 2015.
HRM: I read that since 2008 the company increased its production from 11 megawatts (MW) to 86 MW and its resources from 199 MW to 784 MW.
Ross Beaty: We've been very busy. Since our IPO last July we have increased our power production by eight times and our subsurface resources by nearly four times. That's satisfying growth but I think it's just the start. We made a very large discovery last year and it's a significant asset for us that will drive a lot of future growth. It's also a great example of wealth creation in this business through successful exploration.
HRM: Is it possible to keep up that kind of growth?
Ross Beaty: What I'm trying to do is build a company that's going to be here for generations. We are working now to build the foundation for that long-term growth-the producing assets and the large underground geothermal resource assets, which are the core building blocks to long term value.
HRM: What kind of overall growth do you foresee in the next 3 to 5 years?
Ross Beaty: Between our three platforms, Nevada, Chile and Iceland, we've been able to develop a very strong business of both operations and prospects for future growth that give Magma Energy tremendous value. What we have to do is maintain that growth. To do that takes a lot of capital and it's going to be several years before we have enough internal cashflow to sustain our growth without needing external sources. Our business plan right now seeks to produce 500 MW by 2015 and to have resources of 2000 MW.
In geothermal, 1 MW is equivalent to 3 or 4 MW of wind or solar power because wind and solar are intermittent while geothermal goes day and night. So, 500 MW is a great deal of baseload power and will certainly position Magma Energy in the top tier of global geothermal power companies. Once this is achieved and Magma Energy becomes a real go-to stock for energy investors, we're going to have so many wins: for shareholders, for the planet, and for the energy security of the countries we work in. Our whole team is motivated to achieve our mission and we think we're going to have a tremendous financial win for shareholders, to the extent that we can succeed. It's the same thing we did with Pan American Silver, growing it from an idea into the world's preeminent silver mining company, creating 8000 jobs and all kinds of community development. It's a wonderful thing for me and for our team to be doing.
HRM: I'd like to ask you about Lumina Capital Partners, LP, in which I understand you are the largest stake holder.
Ross Beaty: Lumina Capital should really be thought of as a private investment fund. What happened was that I had a very skilled team of people that worked with me on the copper strategy that we began in 2003 through Lumina Copper. Over the course of 5 or 6 years we raised and invested over $80 million in exploration and development of copper deposits in Latin America and Canada. The business plan was to buy these properties cheaply and add value by exploring and developing them and then sell them. In 2008, we sold the last of the 4 companies we had created - the four companies brought in a total of $1.2 billion. It was a very successful business and we executed it well, but by 2008 the team was pretty much out of work. So, we created Lumina Capital and the team went back to work looking for good ideas investing in natural resource companies in various areas.
HRM: I read that Lumina Capital has some uranium investments. Are you focusing on alternative energy in general?
Ross Beaty: Lumina Capital is focused on natural resources, not just energy. I just happen to like uranium and I think the future is bright. Certain exploration targets that some companies have are very promising so we're making investments in companies that have good management teams, good properties and lots of potential.
We've invested in a nickel company, a copper company, a couple of uranium companies and a gold company. Our most successful investment so far has been Ventana Gold Corp., which was the darling of the Canadian stock market last year. So, the Lumina Capital investment fund has done extremely well in its first year of existence.
HRM: You mentioned nickel and copper. Do you think this is a good time to invest in base metals?
Ross Beaty: Just look at what's happened to the prices over the last year. Copper has gone from a low in December 2008 of $1.26/lb to currently $3.35/lb. Nickel has gone from a low of about $5.00/lb to currently $11.66/lb and is the best performing base metal in 2010 so far. Uranium is also having a good run. All of these really are powered by the same fundamental forces: greater demand and constrained supply. Now, all metals are not the same. Each metal has its own specifics of supply and specifics of demand.
We invested in a nickel project in Guatemala because we love the exploration potential. Even if the price of nickel doesn't go up, we think the company, Anfield Nickel Corp., is going to have increased value as we discover more resources on the property through drilling. If we get the double benefit of increasing resources and the price of nickel going up, it's a double win. Of course, the target for that company is to sell it to a company that wants to take the resources that we discover and build a large nickel mine. We don't plan to do that. It takes too much capital and it takes too long. It's a very nice niche business to discover and develop resources and divest to a big developer that wants to put mines into production.
The same thing can be said about Lumina Copper Corp., which has a large copper deposit in Argentina. We like the property, we like the metal, and we think the basic game plan of developing the property and selling to a 3rd party for a significant capital gain is a good bit of business.
In the case of Blue Sky Uranium Corp., it's pretty much the same philosophy. We like the company. We like its management team. We like its property position. We also like uranium. Even if uranium doesn't go up in price, we think that company is going to prosper based on new discoveries. If we are right in our view that uranium will go up in price, we should get a double benefit from that. We've invested in another uranium company exploring in the Northwest Territories [of Canada], Kivalliq Energy Corp., and it's exactly the same story. We're not just picking the metal. It's the metal plus the company [and its property position], plus the management team, and, to some degree, it's taking a punt and relying on some luck.
HRM: Would it be fair to say that Lumina Capital is opportunistic?
Ross Beaty: Yes, if the value is right and the potential is right and we like the management team, we'll invest in companies across the commodity spectrum.
HRM: Let me ask you about geopolitical considerations. You mentioned Guatemala and Argentina. Magma Energy has operations in Iceland and a resource in Chile.
Ross Beaty: I've made a lot of money in Latin America so we'll certainly keep investing there. In some cases, you just have to hold your nose and hope that the governments come to their senses and enact more investor-friendly policies. For example, Pan American Silver spent $600 million on a large silver property in the province of Chubut Province, Argentina, which had a mining ban because of some problems they had in a beautiful resort area with a gold development over 10 years ago. They threw the baby out with the bathwater. We're expecting the province to zone the area so that mining can occur where it is sensible to occur, where it doesn't create any big issues, and mining should not occur where it's in conflict with other important industries like tourism. We held our nose when we did the deal but we actually think this year that the province will enact legislation that's sensible for them and for us. You have to do that sometimes.
There are places in the world I will not go. Russia is one of them, and several places in Africa. I've had experiences there. They weren't good ones. For me, life is too short. Most of the rest of the world is pretty much open season. Our view is that resource development done in harmony with government desires and community desires is a good business and it creates employment and economic development. You can do these things without degrading the environment. You can do this in most of the world. It's a big world out there. I don't have big geopolitical "No's".
HRM: Before we go, I wanted to ask if you subscribe to peak oil theory.
Ross Beaty: The candle is burning out on fossil fuels to generate electricity, and even for transportation. Oil is a beautiful commodity. It's got so many great uses that it's a crime to use it for electrical power generation, and even for transportation. Natural gas is cleaner and it's going to be with us for a long time, but coal is a dirty, dangerous product, and it also has higher uses in the future. I hope it's phased out as an electricity source.
One thing I do is travel a lot. It's abundantly clear to me that we are very much a finite world. The easy oil has been discovered and is largely depleted. We cannot sustain the quantity of oil consumption that we have today. It's not being matched by new discoveries and it cannot be. Sure, they're finding some new fields here and there but I definitely subscribe to peak oil and another thing I subscribe to is the fact that oil shouldn't be wasted by burning it. There are just too many other uses, like plastics and fertilizers, that will help people a lot more than burning it. I believe it will price itself out of existence as an electricity and fuel source and that can't happen too soon.
HRM: Thank you for sharing your views with us today.
Ross Beaty: People like you are very much part of my success and I am grateful for it.
Ross Beaty is a man on a mission who is not just building a company but building a legacy for future generations. He has the experience and the skills to achieve his goal. When Ross Beaty talks about geothermal resources and operations lasting 100 years or more, he's talking about Magma Energy. If Magma Energy achieves its goals it will eventually be one of the largest and perhaps most profitable geothermal power companies in the world. Geothermal energy is not only a profitable business that enjoys strong political support, but a clean alternative to fossil fuels that doesn't harm the environment and that promotes economic development around the world. Ross Beaty's vision of the future is a hopeful one on many levels, but rather than awaiting the future, Mr. Beaty is creating it.
Hera Research, LLC, provides deeply researched analysis to help investors profit from changing economic and market conditions. Hera Research focuses on relationships between macroeconomics, government, banking, and financial markets in order to identify and analyze investment opportunities with extraordinary upside potential. Hera Research is currently researching mining and metals including precious metals, oil and energy including green energy, agriculture, and other natural resources. The Hera Research Monthly newsletter covers key economic data, trends and analysis including reviews of companies with extraordinary value and upside potential.
By Ron Hera
May 8th, 2010
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