Site visit to Renergen Virginia Phase 1

Last week I visited for the 4th time the gas operation of Renergen in the Free State

Last week Wednesday 13th July I flew to Johannesburg to visit for the fourth time since April 2021 the Virginia gas project of alternative energy company Renergen. CEO Stef Marani took me on an exclusive visit to see a plant that on Friday 8th July saw gas to plant. 

The R1bn Virginia Phase 1 (VP1) project has been some two-years in engineering, procurement and construction (EPC) with the Chinese built plant & Chinese workers busily completing their commissioning checks as I visited. The plant is mostly complete with only the final paving, fencing and finishes to undertake. The plant is ready for full operation and production.

The project is slightly behind schedule and only modestly above budget. But given much of the EPC was undertaken during Covid and the supply chain and logistics problems it is a remarkable achievement to undertake. 

On site at VP1, two of the four compressors were operating and Dr Lim, the main design engineer from China, assured us that the plant was working 100% and ready for production by the end of the July.

Initially, a ramp-up in production will occur to achieve a daily production of 50 tons of Liquid Natural Gas (LNG) and 310kg of helium.

The market has been awaiting milestones. They are now here and deliverable. The confirmation of the successful completion of VP1 and more importantly a project at a point of physical revenue and profit generation.

VP1 sets the stage for the larger VP2. The total capital cost is between R12 billion to R15 billion. This second stage is projected to commence production by mid-2025 and will uplift total daily LNG production to 800 tons and 5 tons of helium.

Given the high price of diesel the availability of LNG as an alternative fuel source has landed in South Africa at just the right time. Renergen has already contracted some 30 tons of LNG to two customers Consol Glass and Ceramic Industries (part of Italtile). 

The balance I foresee going into the trucking segment as converting a large 40-ton truck to run of LNG (from diesel) costs around R250,000 and with the current diesel price where it is & the KM's truck travel, the kit will pay for itself in around 3.5 months then will save the hauliers some 30% a month on fuel costs.

I can see wider adoption of this LNG fuel for trucks in the coming years and when VP2 comes on stream in mid-2025 daily LNG production will rise to 800 tons per day. I'd watch for news from the logistics sector in the coming months on conversions. 

Overall, the VP1 plant was running well. I was told on full production less than 50 people will run the site with only 18 involved in actual operations & maintenance. 

The helium market also remain robust. Some may know of the serious current global shortage of the key gas due to problems with suppliers in the United States and Russia. Qatar has delayed its expansion until 2025 and Algeria is focussing on natural gas rather than helium to keep Europe supplied given the Russian gas supply crisis due to the Ukrainian war and sanctions.

Renergens VP1 seems to have hit the market just at the right time to capitalise on the demand for cleaner, lower carbon fuel as well as helium.

I again selected the stock at 3375 cents as one of my top stocks. After a 29% run to 4365 cents to mid-March, Renergen has retraced all its gains and is trading at 3450 cents as I write copy. Year to date the stock is +2.2% versus the JSE small cap index down -2.2% and the JSE mid cap index being down -6.6%.

Renergen has had a raft of JSE SENS announcements in 2022 ranging from signing new LNG deals, successful well drills as well an informing the market on the progress of VP2. 

A key milestone was gaining US$700 million in debt funding (or R12 billion) from US-backed DFC and various banks. That was announced in early-June. This funding secured much of the EPC for Virginia Phase 2 (VP2).

There was also an equity component but that lapsed on Friday 15th July and I will give my take on that news that saw Renergen trade -2.1% lower on the day. 

On March 14th international mining company Ivanhoe signed a deal with Renergen and initially took a 4.35% stake in the stock for R200.6 million at a price of R35.625 a share. Ivanhoe in Rand terms is down 3.2% since the deal but in US$ is off more given the material weakness of the Rand since mid-April. The Rand has weakened by 17% since that date.

What is interesting is the Ivanhoe share price has slumped post the start of the Ukrainian war and is off some -35% year to date compared to Renergen +1.2%.

Ivanhoe had 120 days to complete its due diligence on Renergen and all proceeded well. But the timeline was tight. That timeline expired at midnight Thursday 14th and thus the agreement lapsed. Nobody walked away the deal simply ran out of time.

Under the terms of the original agreement, the Ivanhoe deal that would have seen the investor increase its Renergen holding to 25% and then potentially to 55%. The deal could have secured Renergen US$250 million at its maximum but would have led to material equity dilution for existing shareholders. 

Ivanhoe is still working with Renergen regards the supply of LNG to power a plant to feed into its interest in mining in the Platreefs and Ivanhoe (may) come back again. 

But for now, the original deal has lapsed and shareholders will not have a massive equity dilution nor have a stock sitting on piles of underutilised cash. 

The cash would have been useful but its termination is hardly a train smash. Renergen only needs VP2 funds to flow in Q1 2023 and has sufficient debt funding in place to proceed. 

In commentary going back to early-2022, I suggested that Renergens had numerous options in place to raise any equity portion for VP2. 

The Ivanhoe equity deal has slipped the timeline but I continue to believe that the natural investment hub for Renergen is a potential US listing. JSE and NASDAQ listed Montauk, as an example, has been a highly successful alternative energy play.

Renergen has ample funding to proceed with VP2. As further equity funding is required, I contend new investors naturally coming into play, it may even be a side-by-side funding round to any offshore listing into 2023.

Renergen remains a stock for the patient. 

At 3450 cents, with production due to start, new drilling to occur and EPC for VP2 in preparation, the long-term prospects for Renergen, to this analyst, remain unchanged as does my standing 6000-cent target. 

This is not a recommendation rather an opinion on Renergen and its prospects. I urge readers to always do their own research to understand the current stock dynamics.