Spec­u­la­tive but sen­si­ble

Savvy share­hold­ers and elec­tric­ity price hikes make Ipsa a good buy

Finweek English Edition - - Companies & Markets - MICHAEL COUL­SON michaelc@fin­week.co.za

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

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