It’s current market Cap is circa £18m. Which in terms of the stated intention is very small. But as we all know there is a world of difference between intention and delivery.
In overall terms there are at least 17 factors worth considering.
1 – The operations are in Mozambique. Often regarded as one of the more “legally” orientated African countries readers without strong connections to the country might be advised to consider this a higher risk item.
2 – The plant is to be coal powered and NCCL (Ncondezi Coal Company Ltd) has a hole in the ground with theoretical reserves of 4.8Bt. What that actually means is open to interpretation but it does suggest a sufficiency for the current project and perhaps the ability to sell coal elsewhere. Management claims they have 25 years of supply. The licenses to mine are potentially not granted in absolute but are dependent on the final project, (including power plant. being approved).
3 – It may in the longer term be possible to sell power into South Africa or alternative African markets. Don’t hold your breath but it is an upside.
4 – Shanghai Electric Power has signed a JDA with NCCL to enable it to invest in the project, become the senior partner (60%) and take on much of the ongoing risk in developing the project. Should this proceed NCCL will receive a substantial payment circa the current market capitalisation. Though this is variable for a number of factors and it is not clear how much of this NCCL will require for future investment. Presumably if this is forthcoming so will a willingness by banks to lend on the project.
5 – Should the investment go ahead SEP was supposed to be taking 40% of NCCL up until late last year. This SEP has now backed away from so NCCL will control 100% of the mine. Why this occurred did SEP not want it, did SEP not want to finance, did Mozambique not want Chinese participation, is not clear. On the plus side it means that NCCL will now keep the profits, but it will now need to finance the mine development itself.
6 – SEP’s largest shareholder is SPIC ( State Powered Investment Corporation), as such they are not going to do anything without Chinese government permission.
7 – SEP do not want the power plant to operate as NCCL had set it up. As such any deal with SEP is going to lead to a significant change in the work already done. Move to Pulverised coal combustion from Circulating Fluidized bed.
8- Both for the mine and the Energy plant NCCL requires permits. Whilst these have been approved in theory key permits will only be given when NCCL and SEP can clearly set out that an agreement to proceed exists and what that agreement specifically entails..
9 – The business is cashflow –ve and has been kept afloat by shareholder loans. These have ensured no share issuance at low valuation, but are not cheap and seem to be redeemable on demand. If the deal with SEP ever looks like not happening then the pack of cards folds fast.
10 – African Finance Corporation have 22% of the shares, Brooks MacDonald 14%, Kulczyk Investments 11% and Directors 7%.
11 - Current planning by management is to introduce 2 * 150MW power plants. They claim this can be taken to 1,800MW over time. This does suggest that if the initial steps can be taken then there is a real development potential.
12- NCCL relative to peers does seem to be cheaply valued. It is perhaps further down the path to actually completing an investment from SEP, but per Liberium Capital has a discount to peers of 70-105%. With no obvious rationale.
13-Until everything is in place there is no set price for NCCL to sell its power into the Mozambique grid so any IRR or DCF is highly speculative.
14 – I haven’t followed NCCL for long. But am aware of a number of private investors who do, some of them I think are worth listening too.
15- Most of the valuations I see for NCCL make no sense to me. I have seen ones as high as £1 a share. Given SEP is going to take at least 60% of the profits of the power plant and NCCL has to invest in a mine I just don’t see it. Certainly not in any relevant time frame. If and this is a big if, the deal with SEP does go through to the next stage then a valuation of circa £40m is possibly valid.
16 – There has been a number of false dawns on this project and finalisation of the deal with SEP does keep getting pushed back. This is not good. At best it suggests management are overoptimistic at worse it could suggest problems with the SEP approvals. SEP does mention this deal on its website so the delay in finalisation may simply be an attempt to negotiate by getting the company closer and closer to no cash. In which case the ongoing support of the shareholder loans could be crucial.
17 – Even a perfunctory read of the historic documents suggest that every 6 months the exact deal on the table varies, even the inexact deal varies. As such it is not unreasonable to wonder what the real deal will be if SEP does proceed.
Conclusion;
I am not well versed in coal, Mozambique or the realities of transportation and power generation in Africa.
I think it well to remember the old adage that a mine is a hole with a liar at the top.
Coal is highly pollutive and solar increasingly cheap and I am reliably informed there is sunshine in Mozambique.
That said there is a decent chance that within the next 6 months holders will be able to double their money from today’s prices, perhaps more as if it goes it is likely to be overbought. However there is also a chance at a level not to be dismissed that any holding could prove to be virtually worthless. As much potentially from a change in the deal and who profits from that as from any change in the inherent viability of the transaction.
Whilst I do hold a small investment in NCCL I would not put anyone else into it and anyone considering would do well to DYOR as WDIK.
Please note this article may well be updated to reflect any viable information I get over the next few days. I may try and contact the company, but given the deal keeps changing I am not sure how much they could really tell me without pushing the rules.