The markets yesterday cold-shouldered the phase 2 guidance note of helium producer Renergen as it signalled it was considering a potential international public offering (IPO) as well as taking on billions of rand in debt to finance construction.
By 2.26pm the shares in Renergen, which owns one of the richest and largest helium reserves, the Virginia Gas Project (VGP), had tumbled 3.98% to R20.53 after it put out a phase 2 guidance note.
The guidance comes hot on the heels of an announcement on Tuesday that the Public Investment Corporation (PIC) had purchased an 5.118% stake in the firm.
Renergen said yesterday that it had successfully produced both liquefied natural gas (LNG) and liquid helium from the phase 1 pilot plant in the VGP. The main project, referred to as phase 2 of the VGP, would be a significantly larger plant.
Renergen said: “Upon completion, the company expects that VGP will deliver a substantial amount of energy to the South African economy and also transform South Africa into one of the world’s large helium-exporting countries.”
Given the potential production capacity of both phase 1 and phase 2, current favourable high energy prices, the current demand environment, the weaker rand relative to the US dollar, and other current macro-economic indicators, it is the objective of Renergen to deliver estimated earnings before interest, taxes, depreciation and amortisation (Ebitda) of between R5.7 billion and R6.2bn per annum, once the plants were in full production, it said.
It added a disclaimer, among other assumption disclaimers, that “the above estimated Ebitda target is based on assumptions around currency, interest rates and energy prices at the time phase 2 of VGP goes into production, and the actual Ebitda may be higher or lower than the target range provided.”
However, this was expected to occur in the financial year after construction has been completed and was not anticipated to be before financial year 2027.
That is a long wait for shareholders to expect profits.
The markets in October reacted negatively when Renergen delivered an interim pre-tax operating loss, which was 9.9% down to R30 million for the half-year period to the end of August.
However, what also upset the markets was talk of raising capital via debt and a potential IPO, a move which could dilute current shareholders’ stakes.
“It is anticipated that additional equity capital will be needed prior to completion of the construction for the balance of the construction costs,” Renergen said.
It said in line with previous announcements, the company intends to reach financial close on several sources of funding, including an aggregate debt package of $750m (R13.6bn) and a 10% sale of Tetra4 Proprietary Limited (Tetra4) to the Central Energy Fund for R1bn.
In the second half of 2023, Renergen said shortly after reaching FID (final investment decision), phase 2 was expected to achieve debt financing approval of up to $500m from the US International Development Finance Corporation and up to $250m from a mandated global bank, the anticipated point at which the lenders are fully committed to financing the debt.
Market commentators were unimpressed on Twitter.
The Passive Income Guy (@hazelwood_dave) tweeted: “Renergen. R6bn Ebitda by 2027 at earliest. R15bn debt. Further equity dilution. Even if everything goes according to plan, this is not a dripping roast by any means. Really fail to see why people get excited about this... Of course that debt will accumulate interest on the balancee until they can produce cash flow to service the debt, so actual debt will be higher.”
The Analyst (@TheAnalyst777) tweeted: “The PIC effect is in motion. Renergen is down over 3% this morning.”
BUSINESS REPORT