Commodities Update: Ncondezi and Greatland

Greatland Gold. – Still too high.

With GGP down 31% over the month since I urged ‘Be Careful’, share traders might be tempted to go back in for a bounce – or even for the longer term. I wouldn’t deter them regarding a short-term bounce especially with reported shorts on the shares poised to be unwound. Except to keep pointing out that at anything above the current 8p and £340m market cap, the shares still look expensive in the medium term. The bulls (on the bulletin boards, for the little their opinions are worth) blame conspiracies ‘keeping the shares down’ for their fall, but the latters’ long term steady nature suggests something much more rational – they are still unwinding the extreme and absurd price they reached two years ago.

The optimists are waiting for the Havieron Definitive Feasibility Study due to be released by Newcrest by the year end which will certainly show a much better NPV than the $500m (at $1,750/oz gold) that GGP came up with in its own pre–feasibilty study a year ago (ie worth $150m, or £135m, for GGP’s 30% share). But the fact that Newcrest since I wrote has declined its chance to acquire another 5% of Havieron for $60m, saying that would be too high for its investment return criteria, should be pause for any thought that the DFS (where NCM must have an early insight) will spur the shares up again very far. So while they could offer traders some excitement in the run up to the DFS publication, I am still cautious, especially as GGP will be running up nearly $150m of borrowings or extra equity soon to fund its share of Havieron’s build cost.

NB: This piece was written prior to Greatland’s announcement of funding and share issues on September 12th. An update will be provided next week, but the author feels that the shares remain overpriced after the news.

Ncondezi Energy – Solar to the Rescue ?

Investors with a penchant and a wallet for possibly extreme reward and risk know the attractions of the mining, and increasingly energy, sectors (in fact any share whose underlying company is ‘sponsoring’ a project bigger than itself). I write about them because, while rewards could be large, they are more of a challenge to get right than any other share.

Some of the most hairy such that I have written about are/were in the ‘coal to power’ sector – which of course have been moving to ‘greener’ pastures. The two hairiest have been Kibo Energy, and Ncondezi Energy, each having dropped their original ‘coal’ monikers.

Ncondezi Energy (NCCL market cap £3.4m) for more than ten years has been sponsoring a coal fired power station in Mozambique’s Tete province which, until a year ago, had secured practically all necessary promises of the technical and financial backing it needs to start construction. If it went ahead the project would deliver a very large short and long term amount of cash for NCCL – justifying a share price 2-3 times the 6-8p it was trading at up to some three years ago.

But the Moz Government, while also seeming to deliver the infrastructure to connect Tete’s much-needed 300MW into its and neighbouring country’s networks, can’t agree a tariff until exact financing is agreed, which itself suffered a blow when China, who was to supply it and all the kit, put a hold on decisions whether to continue to finance and build coal power plants abroad.

NCCL says China’s coal decision is still awaited, but meanwhile it has decided to make the best of the work it has already done on infrastructure and grid connections by developing a solar powered plant instead, for which it has plenty of space over and above needed for the coal project.

Naturally the May 9^th announcement breathed life into the shares which most had written off, while in July NCCL announced start of a feasibility study for up to 300MW of solar power which should be published soon. With much infrastructure already in place, it says power could start to be delivered by 2024 while, further out, it has space for another 3,200 MW over and above three sites totalling 1,500MW already under study.

But, as ever, we don’t yet know how it will be financed. Although solar power would be much cheaper to develop than coal, and even cheaper with site and infrastructure in place, a recent 10MW plant at Pan African’s Evander mine cost $10m, probably including the infrastructure. Over and above that up-front cost however, NCCL says a pre-feasibility study for a 300MW plant shows it would earn fully diluted net cash flows of between $5m and $7m pa (- ie after finance or partner costs).

That compares with NCCL’s current £3.5m market cap, and meanwhile there are still hopes the Coal-Power Station will go ahead – having been identified as a key infrastructure project at the 2nd China-Mozambique International Cooperation Summit in 2019, since when China and Mozambique have strengthened their intended economic ties. If it goes ahead NCCL would receive an initial $21m repayment of costs it has already incurred, as well as a share of the project itself.

Another coal-power company I wrote about initially was Kibo. But its subsequent descent into near bankruptcy cannot be compared with NCCL’s situation, illustrating as it does an ill thought-out strategy to pile one project upon another – leading to a disastrous ten-fold ballooning of issued shares to pay for them all, before any one delivers a return.

NCCL by contrast has concentrated on only its one Tete project, so that issued shares over the ten years it has been spending to develop it up to near shovel-ready status have expanded by only some 120% with commensurately less dilution for shareholders.

In addition to the coal project doubts, NCCL’s shares have, of course, suffered from fears that cash will run out, so, to keep the top ‘sponsor’ company alive, much support has had to come from the directors and others, in the form of convertible loans which will eventually add to the current 450m or so fully diluted issued shares. And with initial spending on solar, and its needed external financing, more shares are likely to be issued before long. So it is almost impossible a the moment for outsiders to put a value on them going forward. Except that, with the numbers I’ve already set out here, the upward scope looks substantial – if unquantifiable. So the shares look an excellent speculation. But as the chart shows, with little free float they can be very volatile, with spikes at every announcement followed by quiet drifts back.

I’m conscious that I haven’t discussed for some time Solomon Gold (now at a low no-one could have imagined) or Xtract Resources (in a doldum-like low awaiting news). I hope to do so next time.