By Corrie Kruger
The Central Energy Fund (CEF) is spending a lot of money on upping its gas stakes and as it does so the now familiar black empowerment partner has been taking on debt, a lot of debt. The price of the equity is questionable. The role players may hold some answers.
There are conflicting views on the role of gas in South Africa’s Just Energy transition.
Feeding into the urgency of getting a secure gas supply is the current energy crisis that is being felt in South Africa and the world after the Ukrainian invasion by Russia, which sent energy prices soaring through the roof.
However, the best type of energy technology to secure a stable supply is very much a topic of debate as there are as many views and beliefs around the pros and cons of different types of energy as there are participants.
President Cyril Ramaphosa stated at the Mining Indaba in Cape Town that African countries “need to be able to explore and extract oil and gas” as this would ensure “energy security” as they decarbonise their economies.
Energy minister Gwede Mantashe has told Parliament, “The gas industry will be with us in the transition, in a big way.”
This as South Africa is part of a Global Pact to decarbonise its energy footprint.
By early 2021, countries representing more than 65 percent of global carbon dioxide emissions and more than 70 percent of the world’s economy made ambitious commitments to carbon-neutrality.
Seven of South Africa’s key export markets have set net-zero targets, including the European Union, China, the US, the UK, Japan, and South Korea.
National Business Initiative in partnership with Business Unity South Africa and the Boston Consulting Group has launched this project to collectively develop a view of what the decarbonisation pathways could look like for the South African economy together with the South African private sector and other relevant stakeholders from the government, labour and civil society.
This body of work inter alia states “South Africa is also facing a significant trade risk. South Africa ranks in the top 20 most carbon-intensive global economies on an emissions per gross domestic product (GDP) basis, and in the top five among countries with GDP more than $100 billion (R1.7 trillion) per annum. The South African economy will face mounting trade pressure, as trade partners implement their low-carbon commitments.”
The world’s biggest economies are to stop funding any overseas fossil fuel development from the end of this year. The energy and environment ministers from all G7 countries agreed at a meeting in Berlin recently to end taxpayer funding for oil, gas and coal projects overseas.
The member countries are Japan – which held firm against such a pledge before last year’s Cop26 climate summit – the UK, the US, Canada, Italy, France and this year’s host country, Germany.
Amid load shedding by Eskom, the CEF is acting on Mantashe’s mandate to get more gas reserves, and is actively investing in the sector with an eye to tripling its oil and gas revenue by 2025.
In March, the CEF announced it planned to invest R1bn for a 10 percent ownership stake in Renergen’s Virginia Gas Project, which is said to have sufficient helium to supply the entire world demand for almost six decades.
This follows the CEF, via its subsidiary iGAS last year acquiring 30 percent of Sasol’s stake in the Republic of Mozambique Pipeline Company (Rompco) along with Companhia Moçambicana de Gasoduto (CMG). The 30 percent share in Rompco was valued at R4.1bn.
In this article I am focusing on Renergen. (Share Code: REN).
The company is an investment holding company, which engages in alternative and renewable energy businesses in South Africa and sub-Saharan Africa. The company is an emerging helium and natural gas producer. They reported that its Virginia gas project in the Free State has entered operations, a milestone that represents the company’s transition from explorer to producer and the emergence of Virginia as South Africa’s first commercial liquefied natural gas (LNG) plant.
The company is also progressing with the far larger Phase 2, which will involve an investment of $900 million (R15.3bn) to produce 5 000 kg/d of helium, 24 000 GJ/d of LNG and the development of a 60MW gas-to-power plant
Earlier this year, Blue Gem Research said it had conducted the due diligence in respect of the CEF’s R1bn equity investment in Renergen.
In their report “Renergen – FY 22 Results – Token Update”, they state the market capitalisation as R4.6bn, PE (price: earnings: -129x ) – DY (dividend yield): 0.0 percent.
Many assumptions underpin Blue Gem Research’s valuations such as that they assumed Canadian mining giant Ivanhoe Mines (which in March purchased a 4.35 percent stake in Renergen, with an option to scale up its involvement) takes up their full equity stake and the CEF’s R1bn investment proceeds successfully.
It is a given that the group massively upgraded their proven gas reserves.
Blue Gem Research then make the following conclusion, “This solidifies an arms-length R10bn valuation for the Virginia Gas Project (ie if 10 percent is worth R1bn, 100 percent is worth R10bn).
Blue Gem Research quotes the following developments:
⦁ Renergen has signed a Retainer Letter with the US International Development Finance Corporation (DFC) for Phase 2 debt funding of up to $500m. The DFC provided debt of $40m in Phase 1.
⦁ Added to this, Renergen has received multiple Letters of Intent to co-lend alongside the DFC of up to $700m in senior debt.
⦁ The lenders are currently conducting a due diligence to finalise their offers and assuming a positive outcome, it leaves Renergen in the envious position to pick its debt funding.
⦁ These lines of debt are up to $1.6bn in potential funding that – when combined with potential equity funding from Ivanhoe Mines and the CEF – points a clear path to a fully funded Phase 2.
⦁ Renergen is now targeting 65 percent gearing and the implications of the amounts are that Phase 2 will be materially larger than originally envisioned; we originally assumed R12bn capex cost for Phase 2, but the above figures imply greater than R15bn/gas projects tend to get returns to scale and 25 percent larger size may produce greater than 25 percent more gas.
⦁ If we assume a $1bn Phase 2 and Ivanhoe (capped to $250m) and CEF (R1bn) both follow through for their equity and Renergen management draw down on their debt with a 65 percent gearing (drawing $650m), this implies that there remains equity funding of $45m or R700m (1-for-10 rights issue at current prices).
However, Blue Gem Research discloses: “Potentially a commissioned report with reference to the disclosure contained within the ‘disclosures’ section below, it is possible that Blue Gem Research has agreed with Renergen (here after referred to as ‘the company’) for the inclusion of the company in its coverage universe for a certain time period.
“Part of this agreement includes payment to Blue Gem Research by the company and, as such, Blue Gem Research, any employees, contractors and/or analysts who worked on this report cannot be considered independent in any way. Thus, this is a commissioned report and cannot be considered financial advice, investment advice or any such similar material. In the event that this is not a ‘commissioned report’, then all the usual disclaimers concerning independent research are applicable per industry norms.”
Blue Gem Research includes the following disclosures to their research: “Disclosures” A. The analyst is an officer, board member or director of Blue Gem Research. The company is a client of Blue Gem Research (ie this is a commissioned report) and Blue Gem Research has received money in exchange to produce this report. C. Analyst holds long or short personal positions in a class of common equity securities of this company.” The JSE should have a closer look at this.”
There are also other opinions on the value of Renergen such as that of Simply Wall Street.
The Simply Wall St app performs a number of quantitative checks across a range of assessment criteria on listed companies.
In its risk assessment on Renergen it found:
∎ Earnings have declined by 8.4 percent per year over the past five years.
∎ Has less than one year of cash runway.
∎ Makes less than $1m in revenue.
∎ Shareholders have been diluted in the past year.
It concluded that Renergen had a worrying balance sheet with weak fundamentals.
There has been much market excitement around Renergen.
However, valuations and expectations are two different things.
For example, to the day, 10 years ago President Cyril Ramaphosa bid R19.5m for a buffalo and her calf.
After an uproar from various sources, he stated: “I regret it because it is an excessive price in the sea of poverty. I belong to a community, and it was one of those moments when I was blind-sighted.”
There are about 513 000 buffaloes on the continent. It cannot be concluded that the value of the buffaloes exceeds R10 trillion. It is just not the way to value assets. If someone pays an excessive amount for a 10 percent equity share, it does not follow that the entire investment community apply the same pricing to the whole entity.
The project looks too good to be true. Let us hope that this time it holds true.
Corrie Kruger is an independent analyst.
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