Category Archives: Renergen (REN)

A South African helium play with LNG by-product (code: REN).

Renergen – FY 23 Results – R5.7bn EBITDA on a market cap of R2.7bn?

Share Code: REN – Market Cap: R2.7bn – PE: -94.1x – DY: 0.0%

Renergen – FY 23 Results Note – Updates & ValuationDownload

FY 23 Results: Producing Cash Flows from Phase One

  • With Phase One’s LNG production started ramping up during FY 23, Renergen produced its first Liquid Natural Gas (LNG) revenues of R12.7m (FY 22: R2.6) with R11.1m coming from LNG and the balance from the now closed CNH pilot plant (FY 22: zero from LNG & R2.6m from CNG).
  • Our FY 23 cost assumptions were too heavy, and we expected a full year loss of -22.3cps while the Group only actually lost -19.86cps (FY 22: -27.73cps).

Material Updates: A Coming Year of Big Events…

  • Phase One will spend FY 24E ramping up production, & it pivotally shifts Renergen from developer to producer status.
  • The Nasdaq listing process has started with management expecting its conclusion towards the end of this year. A circular to was released detailing the issuance of equity in two tranches; the first being 67.5m shares upon Nasdaq IPO raising c.$150m with the remaining tranche being raised towards the end of the Phase Two build. This is less implied dilution than we forecast & we have adjusted our view and SOTPs for this new data.
  • Management also published a revealing “Phase Two Guidance Note” forecasting FY 27E estimated EBITDA of between R5.7bn and R6.2bn per annum. Given that Renergen’s entire market cap is currently only R2.7bn, R5.7bn EBITDA is significant!

Valuation: SOTPs & Peer Relatives Higher Than Share Price

  • Updating and refining our forecasts, we see Renergen’s current fair value at c.6400cps (previously: 6233cps) and 12m TP as a little over 7500cps (previously: 7347cps).
  • Updating the crude listed helium peer relatives (market cap/helium), Renergen remains discounted against this measure. This remains true even if we take Phase Two’s future equity raises into account and despite Renergen being more advanced than its peers in both proving and starting to produce from its resource.
Renergen – FY 23 Results Note – Updates & ValuationDownload

Renergen – Producer Status Achieved

Share Code: REN – Market Cap: R3.9bn – PE: -108x – DY: 0.0%

Renergen Ad Hoc Note – 1 February 2023Download

Updates: Phase One now producing both LNG and helium

  • Renergen’s Virginia Gas Project’s Phase One is now producing both LNG & helium, thus signifying the Group’s transition from a developer to a producer. While initial project delays &, later, some operational teething issues pushed this event out later than planned, the Group announced late last year the production of LNG &, mid-January 2023, announced the production of liquid helium. Importantly, this now means that:
    • Phase One will start generating cash flows,
    • This provides further evidence of the resource and management’s ability to execute on the resource, &
    • The combination of the above two further de-risk Phase Two.
  • The Virginia Gas Project was awarded ‘Strategic Integrated Project’ status by the South African Government, & the Group completed a small capital raise, placing 4.4m shares at c.2464cps in early December 2023, bolstering its coffers.
  • Finally, the Group announced plans to list on the Nasdaq as a build-up to the equity-leg of Phase Two’s capital raise.

Valuation: Either peers expensive or REN (very) cheap

  • Working through global pure-play helium stocks we found that:
    • There are very few pure-play helium stocks and almost none of them are (or close to) producing anything,
    • Ignoring the two extremely speculative Tanzania-based resources, most helium reserves are lowly-proven & small, yet investors are willing to pay large multiples for them.
    • If Renergen’s reserve (which is proven and now producing) is valued on an equivalent basis, the stock would multiples of its current price. Hence, we believe, the Nasdaq listing…
  • Ignoring peers & the huge relative value in the stock, we see Renergen’s fair value at c.6233cps (previously: 6700cps) and 12m TP c.7,347cps (previously: 8000cps).
Renergen Ad Hoc Note – 1 February 2023Download

Renergen – H1:23 Results – Share Price Disconnected from Underlying

Share Code: REN – Market Cap: R3.7bn – PE: -105x – DY: 0.0%

Renergen – H1:23 Results NoteDownload

H1:23 Results: Delayed but moving swiftly forward

  • Renergen’s revenue was flat at R1.2m and the Group reported a loss of -19.31cps (H1:21 -21.05cps) as it neared production status.
  • Phase One is moments from producing gas and, although delayed against the original timeframe, this will be an exciting moment as the Group transitions from a developer to a producer.
  • Phase Two funding is progressing well, having issued shares to Ivanhoe Mines (though the larger equity deal expired), the CEF has agreed to inject R1bn into the Project, & various blue chip debt funders have expressed interest in funding up to $1.2bn of debt for the project.

Our Thoughts: Enviable Position

  • While Phase One delays are disappointing, the underlying fundamentals and attractive economics of the Virginia Gas Project remain and are further highlighted by the interest in funding Phase Two.
  • The conclusion of the well-priced CEF R1bn equity investment is a strong positive and, we believe, the expiry of the Ivanhoe equity deal is a net positive by avoiding expensive dilution.
  • Furthermore, the large pool of interested debt funders into Phase Two means that Renergen has both time to find the appropriate equity funding and the flexibility to pick terms.
  • All in all, we believe that Renergen is in an enviable position for a developer as it transitions into a fully-fledged gas producer.

Valuation and Implied Return: Share Price Disconnected from Value

  • We see Renergen’s fair value at c.6700cps (previously: 6337cps) and 12m TP c. 8000cps (previously: 7491cps).
  • With a range of fair values from c.5000cps to c.6700cps (CEF deal implies c.6600cps for REN shares), what is clear is that REN’s share price deviates substantially from even the low-end of this range.
Renergen – H1:23 Results NoteDownload

Renergen – Key Due Diligence Is Successful

Share Code: REN – Market Cap: R4.6bn – PE: -124x – DY: 0.0%

Renergen – CEF Update Note – 11 August 2022Download

Central Energy Fund: Due Diligence Successful, Fair Value Implied

  • Following Ivanhoe Mines’ option expiring (see our previous note), questions surfaced about the reason for this expiry &, indeed, whether it involved the quality of the Virginia Gas Project (VGP).
  • Concurrent to Ivanhoe’s deal, Renergen was fielding a due diligence (DD) by the Central Energy Fund (CEF) for a 10% stake in VGP for R1bn. This DD has successfully concluded and both parties are now seeking final approvals to complete the transaction.
  • This is an important event for at least three reasons:
    1. The positive DD by CEF confirms the quality of the VGP,
    2. Assuming final approvals are received, this injects R1bn of equity funding into the Phase II funding, &
    3. This solidifies an arms-length R10bn valuation for VGP (i.e. if 10% is worth R1bn, 100% is worth R10bn).

Our Thoughts: Much Better Price + Less Dilution

  • Above, point (3) implies that REN’s 90% stake is worth R9bn or c.6660cps (= R9bn/135.1m shares) versus our previous fair value of 6337cps & the share’s current market price of 3460cps.
  • Ivanhoe’s option would have come in at a discount to the current market price (if exercised) &, thus, the CEF’s deal is a lot less dilutive for shareholders and ensures a much large proportion of the eventual VGP value likely accrues to existing shareholders.

Valuation and Implied Return: Unchanged

  • We are currently reassessing our valuation and model for REN and will publish this in due course.
  • Despite that & due to the CEF deal—assuming no deterioration in exchange rates, commodity prices or interest rates—we believe that the previously communicated valuation at least guides towards a floor value of the Group. Previously, we saw REN’s fair value as around 6337cps & 12m TP of about 7491cps.
Renergen – CEF Update Note – 11 August 2022Download

Renergen – First Gas-to-Plant & Ivanhoe Option Expiry

Share Code: REN – Market Cap: R4.4bn – PE: -123x – DY: 0.0%

Renergen – Ad Hoc Update Note – 18 July 2022Download

Phase 1: First gas-to-plant

  • On the 8th of July 2022, Renergen successfully achieved its first natural gas to its Phase 1 plant. This was signified by opening the main inlet line from the gas gathering system, to the process plant and then to the natural gas filtration and pre-compression system.
  • This is a major qualitative derisking moment for the entire project and one that, strangely, its share price did not seem to notice.

Ivanhoe Mines: Option expiry allows for better options

  • The Ivanhoe Mines’ option to ramp-up their stake in Renergen (at a discount to VWAP) has expired due to unfilled conditions (we believe that the specific outstanding condition is Competition Commission approval). Ivanhoe remains a c.4.3%-shareholder & there remains a potential LNG offtake deal on the table.
  • This option expiry may appear to leave a funding gap for Phase 2, but it does remove a potentially very dilutionary action (especially if the share price remains well below our fair value).
  • How dilutionary? Consider that the Ivanhoe shares could have been issued at a discount to VWAP/market price (currently c.R4bn or the low-3000cps) while the Central Energy Fund (CEF) deal values the project at c.R10bn or 6933cps (c.102% premium!). Indeed, a positive outcome from the CEF deal’s due diligence should peg REN’s implied fair value higher than the Ivanhoe deal.
  • Finally, as evidenced by the appetite for Phase 2 lending (see our note) & following discussions with management (they have just come back from a well-received global roadshow), we believe that the Phase 2 equity-funding should be filled and we hope it could be done so at a better price, i.e. with less dilution.

Valuation and Implied Return: Unchanged

We have left our model and forecasts unchanged, even though they incorporate Ivanhoe’s now expired options because there should still be some equity dilution for Phase 2 and this allows us to somewhat account for it in our forecasts and valuation.

Renergen – Ad Hoc Update Note – 18 July 2022Download

Renergen – Funding (Almost) Secured

Share Code: REN – Market Cap: R5.0bn – PE: -139x – DY: 0.0%

Renergen – Ad Hoc Note – 9 June 2022Download

Phase 2 Debt Funding: Quantum Points to Larger Phase 2

  • Renergen has signed a Retainer Letter with the US International Development Finance Corporation (DFC) for Phase 2 debt funding of up to $500m. The DFC provided debt of $40m in Phase 1.
  • Added to this, Renergen has received multiple Letters of Intent to co-lend alongside the DFC of up to $700m in senior debt.
  • The lenders are currently conducting a due diligence to finalize their offers &, assuming a positive outcome, it leaves Renergen in the envious position to pick and choose its debt funding.
  • These lines of debt are up to $1.6bn in potential funding that—when combined with potential equity funding from Ivanhoe Mines & the CEF—points a clear path to a fully-funded Phase 2.
  • Renergen is now targeting 65% gearing & the implications of the amounts are that Phase 2 will be materially larger than originally envisioned; we originally assumed a c.R12bn capex cost for Phase 2, but the above figures imply >R15bn – Gas projects tend to get returns to scale & a c.25% larger size may produce >25% more gas.
  • If we assume a c.$1bn Phase 2, & Ivanhoe (capped to c.$250m) & CEF (c.R1bn) both follow through for their equity and Renergen management draw down on their debt with a 65% gearing (drawing c.$650m), this implies that there remains equity funding of c.$45m or c.R700m (c.1-for-10 rights issue at current prices).

Valuation and Implied Return: Updated for latest spot prices

  • While Phase 2 size is rising, output upgrades & the Ivanhoe & CEF equity needs to be pinned down for us to correctly model. These are large variables and, currently, still have conditions outstanding.
  • For now, we have kept the size of Phase 2 flat (which creates upside risk to our valuation and forecasts), assumed debt is drawn down at the end of FY 23E (but interest capitalized until FY 25E), Ivanhoe & CEF follow their full equity rights, 11.5m REN shares are placed during FY 23E (1-for-10 rights issue), & Phase 2 production starts during FY 25E (9 months) with steady-state in FY 26E (albeit, we have used flat spot prices as based on the current basket, ArgHe token price and exchange rates).
  • This produces a fair value of 6337cps (previously: 6344cps) & 12m TP of 7491cps (previously: 7501cps).
Renergen – Ad Hoc Note – 9 June 2022Download

Renergen – FY 22 Results – Token Update

Share Code: REN – Market Cap: R4.6bn – PE: -129x – DY: 0.0%

Renergen – FY 22 Results Note – 16 May 2022Download

FY 22 Results: Pilot CNG revenue higher, losses smaller

  • Given the elevated oil price, the diesel-linked pilot CNG plant at Renergen produced a higher revenue and smaller loss than expected and, in a way, is a precursor to the sensitivity of the Group’s coming Phase 1 (& Phase 2) LNG and helium projects.
  • Given that the Group is still in development stage, the FY 22 results are less relevant than focussing on key project and corporate activity during the period. For detailed analysis of these, see our previous reports listed here (LINK), but in summary:
    • The Group massively upgraded their proven gas reserves.
    • Lockdowns, supply chain challenges & a NUMSA strike negatively impacted Phase 1’s timing. This is a sunk cost and, importantly, Phase 1 is now in hot commissioning.
    • A partnership with Ivanhoe Mines &, subject to conditions, the investment by the Central Energy Fund (CEF) both solidified Virginia’s potential & helped derisk the funding of Phase 2.
    • Finally, the Group’s helium token has listed successfully and early trade indicates a healthy (future) spot market (while providing an effective prepaid offtake financing for Phase 2) while Cryo-VaccTM keeps progressing.

Valuation and Implied Return: Upgrading Fair Value & 12m TP

  • We have adjusted our model to reflect c.9 months of Phase 1 production (adjusting Phase 2 equivalently) while updating spot prices. We expected 35% of the Phase 2 helium revenues to earn Argonon Helium token “spot price” (currently c.$296.93/mcf). Finally, we have assumed Ivanhoe takes up their full equity stake & the CEF’s R1bn investment proceeds successfully.
  • We see Renergen’s fair value as 6344cps (previously: 5821cps) and upgrade its 12m TP to 7501cps (previously: 6867cps).
Renergen – FY 22 Results Note – 16 May 2022Download

Renergen – Government Investor Highlights Virginia’s Value

Share code: REN – Market Cap.: R5.1bn – PE: -114x – DY: 0.0%

Renergen – Update – 28 March 2022Download

News: South African Government invests directly

  • South Africa’s Schedule 2 state-owned diversified energy company, Central Energy Fund (CEF), has signed a non-binding term sheet to invest R1bn into Renergen’s wholly-owned subsidiary that houses the Virginia Gas Project, Tetra4, in exchange for new shares equalling 10% of Tetra4 being issued.
  • The agreement leaves 141 days for the CEF to complete a due diligence, get necessary approvals, & sign a binding legal agreement with Renergen. This period can be extended & Renergen has the option to renegotiate the price.

Our Thoughts: Adds momentum, derisks further & implies fair value

  • This deal adds further momentum to the direct investment into the Group by Ivanhoe Mines, further capitalizes Phase II and, more subtly, aligns this project’s success directly with domestic Government that somewhat politically & regulatory derisks it.
  • Management has confirmed that the CEF deal is backed by Ivanhoe Mines. Thus, it may add to the probability that Ivanhoe Mines will follow their remaining rights at Group-level.

Valuation and Implied Return: CEF price tag implies 6946cps

  • Given the proximately to our last note, we have not updated our fair value for Renergen and maintain it at 5821cps (previously: 5821cps) with a 12m TP of 6867cps (previously: 6867cps).
  • The R1bn price attached to 10% of Tetra4 implies a valuation of R9bn for the remaining 90% held by Renergen, or c.6946cps per issued REN share (=R9bn / c.129.5m issued shares).
  • While this implied valuation is only indicative (the CEF likely has different criteria for making/valuing investments than stock market minorities, the investment further derisks the project, & shareholding in a subsidiary does not take into account other Group assets nor HoldCo costs), it certainly highlights how undervalued Renergen’s shares potentially are.
Renergen – Update – 28 March 2022Download

Renergen – Strategic Partner Invests with Tailwinds

Share Code: REN – Market Cap: R4.9bn – PE: -115x – DY: 0.0%

Renergen – Update – 15 March 2022Download

News: Helium & LNG more valuable, Ivanhoe Mines invests

  • Helium market update: Supply challenges from BLM, Qatar & Amur all limit helium availability as SpaceX & the semiconductor industry ramps up demand, implying large helium spot upside.
  • LNG market update: The oil price rally should drive domestic fuel prices (further) upwards. Reasons for the rally are both sticky and bode well for Renergen’s LNG revenues (tied to diesel &/or CPI).
  • Ivanhoe Mines “strategic partnership”: In a momentous moment for Renergen, Ivanhoe Mines has invested into the Group (an initial 4.35%-stake) with a roadmap to potentially ramp this investment up to a maximum of either 55% or $250m of capital.

Our Thoughts: Renergen’s Potential Upside is Growing Quickly

  • The tailwinds lifting Renergen’s underlying gas resource keep driving its fair value upwards. While the LNG revenue should track domestic fuel prices & CPI upwards, the helium revenue (even the revenue locked into the long-term supply contracts) holds immense upside potential too.
  • The latter may see wild card renegotiation clauses being triggered and repricing in the increasingly tight global helium market.
  • The investment by Ivanhoe Mines is a vote of confidence in the Group and, depending on how/if Ivanhoe Mines takes up their options to further invest, may underpin the (equity) funding for (a much larger!) Phase II that further derisks the Group.

Valuation and Implied Return: Plenty of Room…

  • Despite keeping our helium basket price flat and a stronger Rand exchange rate, we upgrade our fair value to 5821cps (previously: 5747cps) & 12m TP to 6867cps (previously: 6766cps).
  • Given the commodity pricing dynamics, there is considerable upside risk to this valuation from both LNG & repricing helium closer to spot, not to mention any Rand-weakness.
Renergen – Update – 15 March 2022Download

Renergen – Large Reserve Upgrade & Implications

Share Code: REN – Market Cap.: R3.8bn – PE: -89.0x – DY 0.0%

Renergen – Reserve Upgrade Note – 22 November 2021Download

News: Large Reserve Upgrade & Upsizing of Phase Two

  • Sproule has published an updated reserve statement on Renergen, revealing large upgrades to the Group’s gas reserves.
  • For example, +428% and +610% was added to the amount of methane & helium in 1P. Similar upsides came through in 2P & 3P.
  • While Phase One remains mostly the same, this has resulted in us making the following key changes to our Phase Two assumptions:
    • Lifting our LNG production from 300tons/day to 720tons/day with a target of c.2.5% yield of helium, &
    • Boosting our capex to R12.2bn with 30% of being raised as equity (the balance being debt & prepaid tokens).

Our Thoughts & Spot Prices: Updated & Refined

  • We have used this opportunity to update spot prices, exchanges rates and interest rates across the model.
  • Likewise, we have tried to understand management’s expectations for LNG and helium basket pricing and, although we feel that some of their views are conservative, we have tried to align our model with these views.

Valuation and Implied Return: Dividend Discount Model Added

  • Our Sum-of-the-Parts for Renergen sees the share’s fair value as c.5,747cps and, on basic assumptions, implies an FY 30E Price Earnings of c.6.1x with a Dividend Yield of c.15.6%.
  • Upon maturity, management intends paying most profits out as dividends. Therefore, we have taken our valuation a step further and attempted a crude Dividend Discount Model (DDM).
  • Our DDM assumptions arrive at a fair value of 6,412cps for REN minority shareholders (after DWT). This is more or less in line with our SOTP model & adds conviction that REN shares are likely to be worth mid-R50/share to mid-R60/share, or certainly above their current 3,065cps share price, despite Phase Two dilution.
Renergen – Reserve Upgrade Note – 22 November 2021Download