Speculative but sensible
Savvy shareholders and electricity price hikes make Ipsa a good buy
THE SAD HISTORY OF generating electricity since 1994 needs little repetition. First, the failure to sell off Eskom’s power stations because of the exorbitant cost of aligning them even with South Africa’s lax environmental standards; second, encouraging privately financed new generating capacity failed through ludicrous pricing and lingering State-ism, even in regulatory body Nersa; third, the effective diversion of funds needed for vital maintenance into welfare spending.
Through it all, one group remained convinced the private sector had a key role in SA’s power future: Independent Power Corp ( IPC) and its offshoot, Ipsa – the acronym for Independent Power SA. IPC is a public but unlisted British company of whose equity CE Peter Earl holds 99,9% (in English law, a plc need have only two shareholders).
Ipsa listed on London’s AIM in September 2005 and the JSE’s AltX in March last year. Earl’s target is to provide 10% of SA’s generating capacity within three to five years and he’s adamant that Ipsa has specific projects to get there.
Earl is a former merchant banker whose other interests include mountaineering. He’s a trustee of Sir Edmund Hillary’s estate and led the 40th anniversary of the British Everest expedition in 1993. He co-founded IPC in 1995 and bought out minorities in 2001.
IPC has been involved in generating almost 7 000MW of power, with a further 4 000MW in development in Britain, the Netherlands, Russia and Indonesia. In August 2004, in a precursor to the Ipsa process, it spun off Rurelec on AIM to hold its interests in Argentina and Bolivia.
IPC’s directors include disgraced Tory politician Jeffrey Archer’s wife Mary, once famously described by a judge as “fragrant” but categorised by IPC as “perhaps the most well-known and respected renewable energy academic in Britain”.
IPC’s first experience in SA was as underbidder in the sale of Johannesburg’s Kelvin facility in 2000. Ipsa has already built SA’s first independent gas-fired power plant for Karbochem at Newcastle. The first phase of that is only 18MW (already operational) with potential for a 55MW second phase.
But that’s just toe-in-the-water stuff compared with its project pipeline. By far the biggest is a fast-track 1 000MW liquefied natural gas (LNG) project at Coega, which, says Earl, is essential to any smelter project there. Asked if the converse is also true, he says there’s no lack of alternative customers.
Phase two would take capacity to 1 600MW by 2011 through conversion to a combined cycle (or CCGT) process with the addition of two steam turbines, to be financed through carbon credits. There would still be potential for a further doubling to 3 200MW that alone, set against SA’s current (though seldom attainable) nominal capacity of 36 000MW, comes close to that 10% target.
While LNG is the preferred raw mate- rial for new generating capacity at the coast (it can be sourced economically from as far afield as Nigeria, Tierra del Fuego or even Indonesia), Ipsa isn’t neglecting coal. It has exclusive rights to the Elithini deposit near East London, 90% owned by Strategic Natural Resources (SNR).
SNR listed on AIM in August 2007 after raising £3m. Its non-executive directors include Earl (also a 5% shareholder) and fellow IPC executive director and Ipsa COO Elizabeth Shaw. Elithini, the only known deposit in the Western and Eastern Cape, is said to be one of the oldest worked deposits in SA (dating back to 1864), though it has lain fallow since 1948.
In May, SNR put the measured resource at 25,8m t from drilling only 15% of the 37 000ha permit. SNR has applied for prospecting rights over another 30 000ha and believes the total extractable tonnage could eventually reach 300m t. Ipsa is confident that could support power generation of more than 3 500MW for over 20 years, though initial plans are for just a 500MW clean coal power plant, plus an 80MW supply contract with Da Gama Textiles.
Further ahead, Ipsa’s ambitions include “power islands” serving large industrial consumers and developing power plants in Botswana, Tanzania and Madagascar. Ipsa’s AIM listing was preceded by an issue at 27p/share. In March last year it issued 10m shares at 75p, though by September – when 13,4m shares were issued to Metlife for a specially formed black empowerment entity, Amandla Energy – the price was down to 60p/share. The latest quote is 65,5p, midway in the 12-month range of 46,5p to 89,5p. In SA, that equates to 950c against a 12-month range of 550c to 1420c/share, with a market cap of R850m.
With significant profits still some years off, is Ipsa a buy? It must be considered speculative, but in its favour is an array of savvy shareholders, plus the fact that its prospects have been improved by recent and likely future SA electricity price increases.
Holds 99,9% of IPC. Peter Earl