Nice write up27 Nov 2014 08:57
Rame Energy (LON:RAME) has come to the market with what, on the face of it, looks like quite an interesting investment proposition – bringing renewable energy to the industrial sector in Chile.
When you drill down and assess the company’s expertise in this sector and couple this with its unique funding deal, you realise the group has a very well thought out strategy.
The essence of the opportunity is found in Rame’s engineering heritage, in particular its decade-long track record in managing specialised wind power projects.
The breakthrough came when the group was asked to build, from scratch, a solution to Barrick Gold’s energy needs, in the Andes.
“It is the highest operating wind turbine in the world,” said chief executive Tim Adams of the giant wind turbine Rame built.
“We thought it [the project] was going to be all about logistics, but in fact it was also about developing core technology that worked at altitude.”
“So we gained a lot of experience of what’s in the box. It took us into Latin America and exposed us to the mining industry and was our first demonstrable turnkey power project at scale.”
Rame immediately became recognised as a leader in this particular niche sector - and it was obvious there was an opportunity to build, own and earn yield from these projects.
At the same time, project funding for wind energy, which had been problematic in the aftermath of the global financial crisis, became easier to source.
This all led to a decent starting point for Rame.
The company is being bankrolled by a local subsidiary of Santander under a quite intricate funding formula that appears to be a win-win.
Santander has committed US$69mln; however, this isn’t subordinated debt.
It will invest at an equity level, acquiring its stake of up to 90% of the project, on an agreed price per megawatt hour.
Under this formula, the amount invested by Santander to acquire its stake will be more than it costs Rame to develop the asset – so there is a profit there for the company.
It also makes a margin from the building phase itself. Rame’s expertise in project management and construction should minimise the leakage of cash out to a subcontractor.
“Less than a year down the line, Rame will have the opportunity to buy Santander out of its share of the project,” Adams said.
"This should see the bank receive a private equity level of return for a short hold period, while still generating a strong return for Rame for the life of the project.”
The deal could be funded through a traditional bank facility, although it is considering all of its funding options, including a bond.
The last stage of the value creation process would be to sell 49% of the forward revenue stream to financial institutions such as cashed up Chilean pension funds, seeking to invest in long term and low risk cash flows.
“They are hungry for low risk, stable incom
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