A future explained | Fin24

A future explained

Apr 04 2019 10:09
David McKay

We’re expanding so we need more office space,” says Nick Mitchell, Renergen’s chief financial officer. 

He indicates the white wall to his right.

One wonders if in the new configuration he’ll continue to share an office with his CEO, Stefano Marani: the two occupy facing desks, a few metres apart. 

For now, the floorplan aids the free flow of ideas, says Mitchell.

It’s easy to underestimate how entrepreneurs feel about the space they choose to work in. 

Where you work can have as much bearing on how you work. 

But it’s not the only ‘location addition’ coming Renergen’s way. Earlier in March, shareholders approved by a majority of 99.4% a listing of the company’s shares on the Sydney Stock Exchange where it may raise as much as R100m.

Marani is clearly animated on the subject of the firm’s Australia debut. 

As quoted in media previously, he considers the JSE to have been a disappointing setting for Renergen, on balance. 

In Australia, there are more companies of a similar market capitalisation, and a pool of capital and knowledge about the type of business Renergen is, and wants to be. 

And then there’s Johannesburg: a pulsing beacon to some weighty multi-national capital in the industrial, mining and financial services sectors, but profoundly unsympathetic to the rhythm of the mid-cap heart.

According to Marani, investors prefer a share price “on the move” rather than the relative stasis of Renergen since its 2015 listing. 

Even if the fundraiser planned for Australia were carried out in Johannesburg – which is expected to increase the firm’s free-float to 10% (from its current 5%) – Marani wouldn’t expect the share to respond significantly; not even if the company were profit-making. 

“Fund managers don’t like to see your share trade sideways. When you go out and you’re trying to access additional capital, what’s the value proposition? You’re going to put more money in and the share is going to trade sideways for longer,” he says. 

“I’m actually of the firm opinion that even if we do go into positive profit-making territory, I don’t think that the share price will move anyway because people still don’t understand what we do.”At this juncture, it’s necessary to state what Renergen is trying to do. 

As a mission statement, it describes itself as an alternative and renewable power company. 

In practice, it is hoping to tap gas from a field in Virginia – the one close to Welkom in the Free State – which it hopes to beneficiate into two fuels: compressed natural gas (CNG) and liquified natural gas (LNG), and a third product in helium.

Renergen wants to sell the alternative fuels to SA’s transport industry whereas helium has both local and international reach in some of the world’s more specialised markets such as deep-water diving bottles, high-tech medical equipment, mobile phone manufacturing and, yes, party balloons. 

CNG is already being produced from a pilot plant Renergen built. 

The other two products are more technically demanding and have been the focus of a busy fundraising period in which the company has raised about R780m, excluding a R218m loan from the Industrial Development Corporation it now won’t draw down. 

Assuming it gets R100m out of its Aussie listing, it’ll have raised in excess of its market capitalisation.

The process plant for the LNG is off-the-shelf technology. 

The helium extracting process, however, takes a shade more specialisation, although Marani hastens to add it’s not impossible to do – unlike re-imagining Coca-Cola’s recipe for syrup. 

It is complicated, though; at least to the layman’s ears. (See box.)

Once the manufacturer has been supplied with the plant specifications, especially the kind of volumes of helium required, you wait 20 months and the technology arrives in about 23 boxes of pre-assembled kit. 

“You’ve just got to connect them up with the right piping and the right cables,” says Marani. A bit like meccano then? There’s a patient chortle from Marani (this journalist really has no clue), but he adds: “Yes. We’ve got a very strong and competent team of engineers with cryogenic experience.

“Where we can, our contracting philosophy is to go out with EPC [engineering, procurement and construction] turnkey with delay penalties and delay damages etc. So, the only risk we’re taking on board as a company is risk we see as being manageable which doesn’t actually relate to the plant and the technology. Certainly, as a company, we’re not taking any engineering risk on the liquefiers.”

In terms of business, the upshot of Renergen’s technical efforts is to supply SA’s transport market with an alternative to petroleum as well as diesel, access to which was in question in the final weeks of March owing to Eskom’s over-reliance on the fuel. But that’s another story.CNG already provides this alternative, but LNG is so much better. 

“The obvious benefit of LNG over CNG is that depending on the configuration of the truck, CNG will take a truck about 400km whereas LNG will take a truck up to 2?000km, if you wanted to take it 2 000km. It’s very energy dense.”

The pilot plant will produce 2 700 gigajoules of LNG daily – about 45 000 litres in diesel equivalent, but the fully-fledged operation is about 10 000 gigajoules a day or up to 280 000 diesel equivalent litres daily. 

Annually this is about 70m litres. 

Its small beer set against the 12tr litres consumed nationally annually, but it’ll help take Renergen into cash generating territory from about 2021.

The pearl in the oyster, however, is the helium. Marani says there’s so little of it globally that whatever Renergen produces from Virginia will be enough to tip SA into a net exporter of the element. 

Based on current reserves, production will be 3% of global consumption. But there may be more to come by virtue of a so-called ‘sandstone trap’ discovered in the Virginia fields. 

“The indications are, from what we’ve seen and from the logs and the lithography, we’ve seen approximately 120km of sandstone, 100m thick which in oil and gas terms would not be insignificant,” says Marani. 

What this may mean is extended high helium prevalence. 

The richest gas pockets contain 11% helium against a world standard of 0.5%. It adds up to efficiency and, ultimately, the kind of wealth the Australian market may be prepared to recognise.

There’s also the question of – once the company has landed in Australia’s investment market – how it’s going to talk about its medium- to long-term future. 

One of the reasons for vibrant venture or small-cap markets is that investors like to think they’ll stumble upon the next big thing.

“Blue sky-wise there are some interesting helium assets out there. The key is what do you do with the associated gas. 

That’s the complex part because gas is very much a local theme. 

In other words, gas in SA trades at different prices to gas in Australia which trades at a different price to gas in the US.

“Helium is an exceedingly difficult commodity to get out of the ground because it’s such a small concentration of gas that unless you can find a profit or purpose for the rest of it (other gasses), it’s not worth taking out of the ground,” he says.

Bearing this in mind, Renergen sees itself specialising in the smaller end of the natural gas market. 

“Our business model is relatively unique by global standards in terms of a complete vertical integration on the natural gas side, and where that differentiates us from other companies is that most other people will go out, find the gas, prove it up, and then try and sell it to a major.

“The way that we’ve approached it is to vertically integrate the entire business – wellhead right into the tank. We put the filling stations down, extract the gas, beneficiate the gas, process the gas, dispense the gas ... the entire value chain, and that changes the economics sufficiently that you can take a stranded gas asset and you can make it viable,” he says.

The “Electron Game” fails to sparkMarani

Stefano Marani is a proper maths boffin. 

Actually, he’s an actuarial scientist with a further degree in advanced mathematics of finance, and while some actuarial scientists go on to form insurance companies such as Discovery Holdings’ Adrian Gore, applying the science of risk to human behaviour, Marani went into the bond market, which is to say, fixed income funds. 

He led Morgan Stanley’s fixed income capital business in sub-Saharan Africa.

Bit of an odd pursuit for a rare academic talent perhaps?

“At the end of the day, all businesses are just about cash flow,” he says. 

Having done actuarial science, it’s just really about “the probability weighted series of cash flows over time” – an explanation that doesn’t necessarily make the endeavor easier to contemplate.

Nonetheless, it was the absence of risk associated with the Virginia gasfields that caught Marani’s eye while working on other transactions at the time. 

“It’s not the world’s most complex oil and gas play, but we surrounded ourselves with the right number of professionals, got the right external consultants, got a deep fundamental understanding of the business and that’s allowed us to take the business to where it’s gotten us today,” he says.

There are no plans to move into some of the other energy fields where SA is in major deficit; which is to say, as an independent power producer supplying the national grid, described by Marani as “the electron game”. 

“Not in this country. We’ve got lots of sunshine, we’ve got great infrastructure blah, blah, blah … It’s time to turn something on. But the approvals you need, the red tape, the bureaucracy, political challenges ... All these things are risks, and all these risks mean that money becomes more expensive and the more expensive the money, the less the IRR [internal rate of return] on a project.

“So, I don’t see us ever being at a point where we’re at least an industrial scale supplying electrons to either the grid or to any state-owned enterprises to anything like that,” says Marani. 

The company might look at smaller power projects, such as off-grid solutions to industrial customers “... but there’s no red tape in that”, he says.

This article originally appeared in the 4 April edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.


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2019-06-24 07:33