George Frangeskides, Chairman at ALBA, explains why the Pilbara Lithium option ‘was too good to miss’. Watch the video here.
Hi All - I've not posted for a while (and I enjoy the sensible discussions here), but have been a very very long term shareholder , since well before the Aim listing, and I've always had confidence in the gas assets and hub strategy. As GG points out, having a fully funded plan reduces market volatility , and I am certain that the current discount to risked NAV will narrow as project execution risk is removed. With the exception of LCF administrator placing risk (and even that may have been reduced by todays announcement that many LCF bondholders will be made whole by the Treasury), there is no reason - prima facie - for the discount to be sustained. We will be left with some reservoir performance risk, but there are enough satellite tie in prospects to mitigate that. The value gap will be closed either through investor demand or takeover. GLA
I view this exercise as a positive value signal. In taking this action, the Director is crystallising an income tax liability and leaving himself exposed to capital gains tax (at a lower marginal rate currently) on any further gains from the exercise price. Its not quite as positive as buying shares, but its not far off.
Peak - he’d fund it mainly with an institutional placing with some bank debt - I believe most institutions are prevented from investing in cash shells . I reckon AA will want to scale the business quickly , so will look for a deal that has a good equity story , possibly multiples of Kristos current market cap.
Thanks Trellis - I stand corrected. The capital structure has changed so much since then, that’s its hard to track per share dilution. But fundamentals today (Fully funded NAV/ share ) does mean that an opportunistic bid will fail - only a fair offer would have any chance .
Peak - when AAustin made his first approach ,IOG was in a fundamentally different position to today - no development funding, no equity, a financial scandal surrounding its main backer. The LOG administrator backed management's plan against the approach made by AA for the debt package (inc warrants) that the LOG Administrator owned. There was never an offer for the equity, and I've no idea what the equity would have been worth had the AA approach turned into an offer. The share price then was more of an option on the future of IOG. TODAY we're in a different place, albeit with the same share price. LOG restructured, IOG refinanced and recapitalised (at some dilutive cost to shareholders), fully funded via CALe and Bonds. Development risk reducing by the day and first gas/cash in sight. Unfortunately we still trade at a MASSIVE discount to generally accepted NAV due to LOG overhang imho. This could create a sweet spot (maybe the 'high 20's you mention ) where LOG gets out with head held high (remember they've already taken some capital off the table in the restructuring), II's get a good return, AA gets a fully funded , staffed , operating company a year from first gas. And CALE? I guess they still get the gas project they bought into, just via an operator with a new Chairman, and some new shareholders. And if for some reason they didn't want that, they'd need to bid up the LOG Administrators stake to block the deal. Maybe I'm dreaming........it could get competitive.
Peak - Calenergy would probably prefer a stable institutional ownership , but they don't own any equity, and so whilst they are a key source of development funding and a key stakeholder, they can't control who owns the company . I have always thought that at the right time they might take the LOG Administrators stake, to secure more direct control. Either way the LOG stake will change hands in the next 12 months in my opinion.
Kistos listing/placing has put Andrew Austin (Rock Rose) back in the market looking for acquisitions of energy businesses involved in 'energy transition' to low carbon. Gas production and infra-structure could be relevant, and he knows the IOG portfolio and owners well from his earlier run. He could take out the LOG administrator, or merge with IOG to give him an operating company? Any thoughts ?
Mole - then NAV gap will close eventually, so long as management doesn't do anything silly in terms of value destruction. The block is the LOG administrator overhang. Normally a stake like this could be placed with institutions - and there may well be price where LOG gets a price that justifies their patience, and enough upside is left for new investors. Finally, and as a backstop if this doesn't happen, once first gas is achieved and cashflows begin, the company itself could start to buy tranches from the administrator for cancellation, which would also be value accretive. Either way the gap gets closed eventually.
BUTD - agree that this is the right outcome. Very difficult to agree merger terms between a funded low risk development company, and an unfunded exploration based play. Plenty of opportunities to build out the portfolio will come IOG''s way as we get nearer first gas.
Mole - i think you are correctly observing that the risks ( ie uncertainties) surrounding DELT are relatively higher than IOG. The range of outcomes for IOG is narrower and does not include any downsides due to inability to develop/monetise assets as IOG has mitigated all of these in getting to where it is. On the other hand, DELT may have upside asset value scenarios, but it also has much larger downside risks. The coarse broker NAVs don't really capture these fully as analysts don't generally use Monte Carlo models to look at the full range of possible outcomes - they use rule of thumb $/bbloe as a proxy. This can also be misleading when trying to value a company (with associated balance sheet constraints and tax issues) as opposed to valuing a group of assets.
The stumbling block in business combinations like this, is that in practice a genuine merger does not really exist. Even if the 2 sides can agree relative risked NAV ratio asa basis for combination (itself a haggle) , one side wants and has to 'control' the other. Most often the larger wants the control, and it always comes down to who gets the top jobs and who gets to decide where costs are reduced . This control is then expressed in a premium to theoretical merger terms. So this is where then danger lies for IOG. they have to be able to identify genuine merger synergies (costs/tax/revenue) that the combination unlocks that can then be divided between the 2 sets of shareholders in a way that justifies any premium paid.
The big challenge will be that IOG shares are at a big discount to NAV, and the associated risks are reducing as the core project is executed. This discount is largely technical IMHO due to LOG administrator overhang. So the deal terms will have to make sure that IOG shareholders do not loose out in terms of risked NAV/share. We could easily end up 'baking' in the current discount and never actually benefitting from the core asset value as cash-flow is realised. I hope IOG management don't get deal fever.
I Haven't posted for a while, but Im very encouraged by this news flow. We are seeing shareholder value being built as execution risk is reduced. The market is going to lag events here imho due to LOG administrator overhang, but eventually the valuation gap will become too large and obvious and will be closed either by retail/institutional demand or by opportunistic corporate activity. Having ridden this horse since 2011, I can wait another 18 months......
Phippsy - You may misunderstand. This is not an incentive award (which should always be stock based). This is basic salary payment in lieu of cash - quite different.
I agree Ali. This salary sacrifice scheme was put in place when IOG had no cash. Its no longer appropriate. Pay your employees in cash, and if they want to buy IOG shares, thats their call. Long term equity incentives for management are needed - BUT they have to have meaningful performance objectives attached to them.
This is a clearly undervalued situation and stands apart from most leveraged/unfunded E&P nightmares. I added yesterday - the only stock where I have done so. So a timely update AH - look forward to more progress.
I get that BUTD - but how much of a premium, and is there a sweet spot where the economics work for both?
bandit - CalE originally did not want to operate , but having seen events unfold, they may feel that it better to control /become the operator. Otherwise their asset investment could be compromised by corporate strategies, even though today you would think they were fully aligned with IOG. So acquiring the LOG administrators equity (at a discount to the value implied in the asset farm-out) would give them a block on the takeout of the company, increase their returns, and allow management to get the job done - thats why I think they should do it. I also think the Harvey results have shown that the reservoir in this part of the SNS is not straightforward (one reason why these assets have never been developed), and this additional risk has complicated the Harvey v equity investment choice. It also would indicate that the IOG NAV should be more heavily risked.
Ali - I have to admit Im one of those that didn't think this would play out like it has - I didn't expect the valuation swing on Harvey results to be this material, and I think what has happened is that trading strategies have had a more powerful effect on the share price than asset fundamentals (but maybe thats me just clutching at straws). I do believe that CalE would be better off buying the LCF administrators equity position to protect its underlying asset investment over any narrow deal on Harvey, and LCF administrators may well have lowered their value expectations in the light of these results.
If I were CalE, I’d be seriously considering taking the LOG administrators equity position instead of the Harvey farmin. CalE have already backed the management and core assets , and so why spend £20 m on half of Harvey ( whatever the reserves ) as opposed to £30/£40m to effectively call the shots on the company’s future, acquire assets at a discount to NAV and clear out the overhang - just a thought.