The latest Investing Matters Podcast with Jean Roche, Co-Manager of Schroder UK Mid Cap Investment Trust has just been released. Listen here.
Ocelot: re the new permanent flowline, Angus also said this, in the latest Q&A:
“ Installation will take place during August with commissioning at the end of the month, coincident with a planned plant shut down.“ Any ideas as to how long the plant will be shut down?
I see that some people are still expecting Vast to retrieve a packet of diamonds from the RBZ. In spite of the passing of more than ten years and a recent judgment in Vast’s favour in the Harare High Court, followed by an enforcement action by the deputy high sheriff in which he turned up at the Reserve Bank to take possession and was apparently given the bum’s rush.
The failure of the Governor of the RBZ to comply with a High court enforcement order must render him liable to prosecution. In whose interest is it for the Reserve Bank to withhold the packet of diamonds from its rightful owners? Not his.
Add to this a greedy, rapacious despotism in charge almost since independence to which no one in the country dare say no and I’d say the only person stopping the packet being handed over is the President. They went to Dubai years ago, didn’t they? They are ex-diamonds. Wake up, Polly Parrot.
Ocelot: I’m quite sure that you don’t put down the shocking performance of the share price over the past three years or more to interest rates. Rates were very low when Lord Lucan turned down the bank’s offer of $20mm to complete Saltfleetby, in late 2019. He then took until September 2020 to acknowledge to the market that Angus needed £12mm and finally got the usurious loan plus hedge contracts and royalty in May 2021. Over the two years since then, he was very reluctant to reveal the details of the July/August 2022 hedge losses, the loan repayments, the costs of the massively over-budget and over-schedule sidetrack and current operating expenses and he’s come up with dilutive placings and loans with conversion options (he doesn’t appear to have counted the latter as dilutive). It’s been one unpleasant surprise after another. The new CEO seems to be as reluctant as the previous one to trust shareholders with the information they ask for in the IQs. The market simply doesn’t trust the management and has voted with its feet. It hasn’t helped that Paul Forrest, the ultimate insider, has been prominent in this rush for the exit.
HITS: the new part-time CEO can answer all your questions accurately in four words: more sellers than buyers. I think your analysis of why there have been more sellers than buyers (and the “why” is, I’m sure the true sub-text of your questions) will prove more frank than his, so what’s to be gained by asking?
If the diamonds went through the hands of some Dubai merchant years ago, as seems most likely, it’s hardly a case of when will the RBZ release them to Vast, is it? What incentive does President Mnangagwa have, to admit that they’re no longer in the vault? This could just run and run. Are shareholders here next going to start discussing compensation? There are no effective controls on the power of the President in Zimbabwe - Mr. Mugabe saw to that. If Mnangagwa were himself overthrown, his successor would merely point to the plunder of Vast’s diamonds as another example of Mnangagwa’s rapacity. Betting on the self-restraint of a man like this or his successor is unlikely to be remunerative. Still, Leicester City won the Premier League at odds of 5,000/1. If you think the share price factors in odds of this kind on the return to Vast of the diamonds, or cash in lieu, go for it. Oh, and that’s by some date not very far in the future, isn’t it? Next year will probably be too late.
Yes, each to his own but it’s the share price, for me. Market cap in this company disguises a disaster for long term shareholders.
RE The diamonds, I’m listening to a BBC Radio 4 programme on Zimbabwe. I really think that this discussion here is a version of counting deckchairs on the Titanic. The President and others are apparently busily smuggling lots of gold out of the country and sending it to Dubai. I’m afraid it’s a well-trodden path. In whose interest is it to delay handing the Vast package over?
Bubblepoint: re your 9.08 post and your comment re market capitalisation: it’s the share price that matters to shareholders rather than the market cap. The latter mainly seems to matter to the management, who would be able to justify far higher compensation packages for running a bigger company. The market cap is very roughly a quarter smaller than when Lord Lucan took over but the share price is down roughly 90%. He’s been profligate with new share issues.
Bubblepoint: inflation in prices for anything energy-related has been extremely high in the past two or three years, as Angus has pointed out on more than one occasion. The cost would be far higher than the £200mm. estimate of twelve years ago. Angus can’t raise this kind of sum, and by the time the field is in a condition to be used for storage, it seems to me that it may be owned by someone else, not necessarily to small investors’ advantage.
Re the sidetrack, again they had loads of what they described as expert drilling consultants supervising the drilling, as well as competent drillers. I doubt that Angus management can be blamed for the decisions that were made - unless they went against the best advice, which would be just plain stupid. Re the time taken, I believe the estimate of 48 days at most, given a month or two before the drill, was quite a lot lower than earlier estimates. I think they knew it was way on the low side in the context of such a complex well. It’s been argued here by many that the ultimate “success” of the sidetrack justifies what went before. I’d say the jury’s out on that. A big, sustained rise soon in the gas price would, however, bail them out nicely.
Bubblepoint: Roc, Wingas etc. regarded the cost as uneconomic. Wingas looked at gas storage but decided not to pursue that. It was costed at £200mm. in 2011.
Re the sidetrack, everyone who’s drilled from SF07 has had big problems with it, that’s why it was initially discarded by Angus as an option. Everyone knew that the formation is complex and difficult to map. That’s why Angus had teams of drilling experts supervising the drilling. It was just typical of Lord Lucan that he dissed commentators on here and elsewhere who questioned his 48-days maximum schedule for drilling it and his £2.8mm. budget. Angus just chose the wrong option and trusted to luck.
Re second hand kit, it appears that Angus has bought compressors or engines, or both, with second-hand components. Maybe this was because they were available more promptly but the maintenance costs are likely to be higher as a result. I don’t know what else has pieces of older equipment bolted on. Even with all new equipment, Wingas and the Angus CPR estimated annual maintenance downtime at 10%, or more than five weeks. This will be in addition to the calibration delays experienced to date, and the further outage while the new permanent flowline is commissioned. Is this, by the way, the final, final piece of kit they’re installing? We didn’t know about it before May, did we? These things just keep cropping up.
Bubblepoint: I enjoy your technical commentary on Angus and have learned from it but I can’t agree with this version of the company’s recent history.
Saltfleetby was a heavily depleted field from the start. Its previous owners couldn’t make an economic case for investing enough money in the plant required to enable them to turn it back on after the Theddlethorpe refinery closed. That’s why they sold it for £1 and gave Mr. Forrest £2.5mm. to take it off their hands. I presume that, if Wingas had decided to make this investment, they would have had Halliburton do the work, (an option that Lucan discarded from the start as it would have cost £15mm (was it?) - even though he was offered $20mm by a high street bank to finance it). That would have had the benefit of bringing the thing in on time and budget, enabling Angus to keep all of last year’s inflated gas prices. Angus didn’t have the money, after Lucan turned down the $20mm., to develop the field and they got their sums wrong on costs, because the regulations didn’t allow the use of the non-compliant second hand bits of kit they had planned to install. After that, they had to resort to misleading their shareholders time after time, in order to get them to support share issue after share issue in order to keep Angus in business. And the plant was built, very slowly, using money raised at usurious rates which left most of the upside to the lenders. Then the sidetrack came in four times over schedule and five times or more over budget, loading the balance sheet with yet more debt and who knows what else?
This was never anything more than a punt. The economics of it should have been completely transformed by the (unexpected) gas price rise but the plant wasn’t ready in time and the hedges left them with more debt, making the gas price spike last summer a liability, not a benefit.
The company is now loading the balance sheet with yet more debt. It’s not cheaper than the debt it replaces, since the 8% royalty will apply immediately. And the new lenders are getting potentially very cheap terms for a takeover in due course, if they should want to buy Angus. I think Angus’s is a history of poor/inexperienced management bungling from crisis to crisis. I think the company will only be rescued by a big, sustained rise in the gas price and that’s what investors are gambling on. They’ll just have to hope that there’s nothing out there in the way of liabilities that they still don’t know about.
Ocelot: I don’t like to be churlish but Mr. Herbert clearly doesn’t agree with your paean to Lord Lucan, who has presided over approx. a 90% collapse in the share price and bought a pig in a poke at Saltfleetby, whose economics have been rescued by a war, then frittered away the opportunity presented by the resulting fantastic rise in the gas price with usurious loans, hedge contracts and royalty. All the while consistently misleading shareholders as to costs and timescales, and potential bids. Other than the above, I agree with you. In any case, I wish him well in what he does next - though I shan’t be rushing to invest in it.
Jamesthesecond: I’d be a bit careful about the terminology I use in posts like this. Your second paragraph would probably pass the scrutiny of Messrs. Sue, Grabbit etc., but the first might not.
Lord Lucan has resigned (though it was predictable once Mr. Herbert had arrived) and won’t be turning up for work from next Monday, unless they need to consult him.
It is curious that the new Global Re-Financing is taking so long, in view of how close the providers are with Angus management. Shareholders will be relieved to see the detail in due course (hopefully).
Formerlyeasyp: I think this is pretty well argued, don’t disagree with any of it. It’s a punt on the gas price, assuming the re-financing is agreed.
Bubblepoint: thanks for this. Your analysis does tend to support the argument that Mercuria may want their royalty to apply as soon as possible, doesn’t it?
HITS: I’ll try to make this my last post on this subject for now, but thought it worth considering the following: the CPR and Wingas (though the former drew a fair bit on the latter, if I remember right) both predicted a 10% decline in gas production from this depleted field after 12-15 months AND 10% annual shutdown for maintenance (and Wingas would have been using mainly just pipelines until they got permission for storage). Combined with the 8% Mercuria royalty, that would be about 22% from August 2023 and 14 weeks of production, or 28%, by the end of August 2024. It’s worth considering, surely?
In its RNS’s, Angus likes to talk about dividends, new wells, geothermal, storage etc. and occasionally even about their oil “assets”. I thInk these may be red herrings. Angus’s future depends entirely on the success of Saltfleetby, in terms of sustained production (which is going to be hard and expensive to achieve) and higher gas prices. The rest is flimflam, giving them something to point to if the news in the coming months and, possibly, years is not so good on the gas front.
HITS: well, it makes sense for Mercuria. The gas flow has been predicted to start to fall from 12-15 months after restart (August 2022). Therefore the sooner Mercuria get their 8% royalty, the more money they’ll make. It kicks in after 85% of the senior loan has been repaid. It’s not very good for Angus’s cash flow if it applies early.
HITS: when you referred to the proposed new loan as being less onerous to Angus than the loans they replace, did you factor into the calculation the impact of the 8% of turnover royalty, which comes into effect once Mercuria’s loan has been repaid?
HITS: “there seems zero appetite from ANGS to allow PIs to share in this latest lucrative opportunity.”
Well, in that case, the management needs a reminder that the shareholders own the company and that they, the management, are there merely to run it on the shareholders’ behalf.
Valuation-it-is: quite. I can’t recall any of the AIM companies I’ve looked at ever having a rights issue. I don’t think it would fit the business plans of the brokers, nomads, advisers etc.
HITS: I value your well-researched posts and generally agree with them. But in this case, shareholders should be very interested in considering the terms being discussed for this new loan. Which would you prefer - to hold onto your ordinary shares, which carry no dividend, or to invest in a new loan at 20% annual interest which will either pay you back in three years or enable you to convert at 0.40p? Shareholders must surely think that Angus has a future? Where else are they going to get 20% p.a. for a sure thing for three years? Leave the issue to be underwritten by Aleph, so that Angus will get the money they need, but let the shareholders have the chance to buy this new loan issue pro rata.
I do agree that Angus needs more money and it needs to pay off existing debts. I’m not so sure they’ll be able to afford the proposed terms in due course without a large sustained rise in the gas price. That’s the crucial factor.