General Coal-to-Power Article4 Sep 2020 08:53
https://masterinvestor.co.uk/equities/should-you-invest-in-coal-to-power/
Should you invest in coal-to-power?
By John Cornford 20 November 2019
8 mins. to read
The risks are high and the rewards are slow to materialise, but the rewards are sometimes large. It’s only partly a matter of timing when it comes to coal-to-power, writes John Cornford.
Engineering projects, infrastructure projects, and junior miners – they’re the same really, only named differently. One of my first ‘mining’ articles in 2015 covered the coal-to-power projects, just then coming to attention on AIM through Oracle Power (LON:ORCP), Kibo Energy (LON:KIBO), and Ncondezi Energy (LON:NCCL) (re-named subsequently to reflect their switch from a pure coal miner to a power station developer, when their external coal markets fell away). Later, I discussed Sirius Minerals (LON:SXX) and its dangers.
Developers not owners
These companies are ‘developers’, and not ‘owners’ – the cause of much misconception. Even professional investors and analysts find it hard to understand them, let alone AIM’s private investors. Their attraction is that they are in charge of (ie hold licences for) very big ‘projects’ with completed values orders of magnitude larger than their own usually modest market caps. Surely some of that will rub off on them?
The description ‘sponsor’ (they never call themselves that, even though it is the correct legal term – they’d rather investors think of them as ‘owners’) is accurate, because before a spade is in the ground there is nothing to own – only plans and licences and permissions, and later perhaps, contracts with world-class builders and, increasingly in Africa, Chinese banks. Their projects will only have a value when everything, including the funds to build, comes together and construction completes. Up to that point there is nothing, unlike a mine which might still have something ‘in the ground’.
But even when completed, a ‘sponsor’ won’t ‘own’ the value of its project. That can only happen if it puts up a meaningful proportion of its much larger capital cost which, generally, is provided by those world-class builders and bankers, which is why they are known as the ‘backers’.
The sponsor, meanwhile, if the project goes ahead, will be credited, as a deemed contribution to the cost, with the value of the planning work it has done, and perhaps some element of a fee. And in addition – and only if the completed value of the project is sufficient – the backers might award the sponsor a ‘development premium’, being a share of any ‘profit’ on completion. (But see later.)
So, while a sponsor doesn’t probably know what value it will end up with, it almost never knows what costs (for development, and to cope with the inevitable delays) it will incur before getting there. And if the sponsor doesn’t know that, how can an investor know what value to put on the sponsor’s shares?
[...]
Sign In
Follow the stocks
