Coal-to-power – Still misunderstood by investors

Here is an update with particular mention of where Kibo Mining and Ncondezi Energy have got to, and a repeat tutorial on how not to value such companies. If their projects go ahead, either company could see their shares reach a few multiples of current levels. By how much isn’t easy to determine, especially for Kibo, which is still some way away from funding and still needs to clarify its plans. It’s very unlikely to be the multi-bagger that the chat boards hope for. At present Ncondezi looks better value. There are still too many questions over Kibo, whose shares, buoyed as they are by misconceptions on the chat boards, look vulnerable.

Kibo Mining (LON:KIBO) is riding high (market cap now £33m) on chat boards awash with private investor projections that have little basis in informed calculation. Although its ‘flagship’ Mbeya Coal-to-Power Project (MCPP) in Tanzania will have value if developed, Kibo’s other mining interests have little because it has no cash or prospect of cash to develop them, while its gold resource, being hived off into a separately listed company, also looks of little real value – initially at least.

A caveat is that Kibo has not disclosed whether its coal mine, or only part of it, will be integrated financially with its power plant. If integrated, Kibo’s shares currently look to be trading at about double what is justified at its present stage (and are valued at many times those of the other coal-to-power projects on AIM, two of whom have published more detail about their funding, and one of whom is further advanced). If part of Kibo’s mine remains separate and a market can be found for the excess coal, it might add value, but only in the long term.

_{Kibo Mining year to Oct 9th}

Kibo’s over-valuation seems to be due to investors’ apparent ignorance (and the company seems happy to allow confusion to persist) to the critical difference between the power project itself, MCPP (which will generate all the profits), and the special purpose management vehicle, Mbeya Development Co, or MDC, through which Kibo holds MCPP indirectly, and in which some partners have been or will be given a stake. The chat boards seem unaware that MDC will only have tiny assets of its own while its (and Kibo’s) share of MCPP’s profit of around £900m (discounted at 8% over 28 years after the capex has been met) will be after being heavily sliced and diced among those who put up the c£600m capex to build it.

At present MDC has 100% of MCPP, which is worthless until that c. £600m is raised, and has nothing but nominal value that can be ‘sold’. The MDC, on the other hand, has the value of the work done to plan the MCPP and to attract the required construction and financial partners.

Adding to a confusing picture are Kibo’s explanations behind recent allocations of shares in MDC. On 1st September it granted 2.5% of MDC to Sanderson Partners in lieu of repaying a £1.5m onerous loan that Kibo has no funds to repay. On 22nd September it granted an option (in return for a reduced retainer fee) to Absa Bank (a Barclays subsidiary), which Kibo has just appointed as financial advisor in place of Standard Bank (unfathomable, given that SB has been advising for 3-4 years), to buy a 3.5% stake in MDC at a price that can’t be known until financial close.

The 2.5% of MDC implies a ‘value’ for MDC of £60m, but which Kibo (confusingly) says is based on a $100m ‘discounted value’ for MCPP – which is nonsense because MDC is not MCPP and the latter’s value can’t be known until financial close when all funding is agreed, all costs and profit projections are known, and the share stakes taken by funding partners have been fixed.

Kibo goes on to state “that ABSA/Barclays are prepared to take an equity stake in the MCPP, on completion of the project, demonstrates its faith” etc. etc. That may be so – no one doubts that the project will go ahead. But MDC is not MCPP and the relation between the two and their respective values can’t be known until financial close.

Recognising those contradictions might be difficult has not stopped the chat board warriors coming up with ‘projections’ for the share price (partly relying on that vague $100m value for MCPP) which range upwards of 50p to 100p (when Kibo’s market cap would be larger than most companies on AIM). In contrast, estimates based on the likely costs and splits of loan and equity funding, allowing for the necessary large expansion in shares (whether in the listed Kibo, in MDC, or in MCPP) and allowing that MCPP’s profitability will be limited to the 21% IRR that is likely to be capped by the Tanzanian government, suggest no more than 15p on 1.5bn Kibo shares in issue (giving a £225m market cap against £32m today).

That estimate assumes all the required equity is in Kibo listed shares. Part might instead be provided by a partner, as at Ncondezi Energy (LON:NCCL) where Shanghai Electric Power Co is funding 60% of the initial equity, so limiting what Ncondezi shareholders will have to find. While that will limit the public shares Ncondezi will have to issue, the pro-quo is a smaller share of the project, so the end result for shareholder value will be the same. (There is no space here to show the spreadsheets, sensitivity analyses, and range of assumptions underpinning my estimate, but like the usual 30% margin for error in consultants’ project economics, it could be out by the same.)

That method gives a valuation in line with the other three coal-to-power projects on AIM whose sponsor/owner companies have released far more information than Kibo and in some cases have already received promises for most of their funding.

More of my reasoning will follow tomorrow…