Coal to Power – Raising Steam?

So all the while that lack of news has had investors muttering that it is about to go bust, Ncondezi Energy (AIM:NCCL) has been quietly progressing its negotiations with China’s SEPCO to build its 300MW power plant on its Tete coal field in Mozambique. A surprise RNS late afternoon yesterday (January 11^th) spurred the shares to 3.4 times above my flagged price two months ago (less than half-way to my lowest suggested ‘target’) and spelled out some detail as to how SEPCO goes about setting its terms. (As the supplier of the power technology without which the Tete coal would be worthless SEPCO is, after all, in control – just as it is with Kibo (KIBO) and Edenville Energy (EDL) in Tanzania.) The implications for the other three companies I described back in October and November are interesting if not yet offering enough detail to help our figures very much.

But we are now slightly closer to understanding how the deals between owner (in this case NCCL) and provider/contractor (SEPCO), needed to manage developing the projects before raising the necessary finance, might be structured.

SEPCO, as is also likely to be the case for at least the two Tanzanian companies, is to become the strategic investor and, in return for contributing $25.5 million to development costs to be incurred up to financial close, will receive a 60% initial direct equity interest in the power project itself. We say ‘initial’, because SEPCO will then have to bring in outside investors to provide the

more than $550 million project financing, so diluting its initial 60%, as well as NCCL’s initial 40%. Whereas in the past NCCL was hoping for 85% of this to be by way of debt, it now quotes 70%, presumably reflecting the deteriorating funding market.

At initial drawdown of funds after financial close, SEPCO will then pay NCCL a further $35 million (14p/share on present shares in issue) which presumably is some element of goodwill and payment for past costs incurred by NCCL. It is unclear whether this is also for NCCL’s coal mine, of which part will supply the power station, and which has incurred large costs in the past when intended to export coal to India. It will also have to compensate NCCL for whatever costs it still has to contribute to planning up to financial close, so investors can’t assume there won’t be a placing to keep NCCL plc going meanwhile. That is why some quick profit taking has seen NCCL’s shares retrace a lot of their 90% rise on the day. But they obviously merit close attention.

Much of this mirrors what is expected for Kibo’s MCPP project (and Edenville’s). What is difficult to work out is which project is now ahead. Before all went quiet on fears NCCL was running out of time and cash, it appeared to be well ahead of Kibo in the various steps including a power off-take MOU before construction commences, and in 2013 expected to generate electricity in 2017 to feed into an existing transmission system, whereas Kibo has only just announced a power off-take MOU with no news yet on the necessary power network.