It’s probably only a matter of a few weeks from now before Ncondezi Energy Ltd (LON:NCCL) signs on the dotted line of its long-awaited joint development agreement with power industry giants China Machinery Engineering Corporation (CMEC) and General Electric South Africa.
The deal will allow for the development of the Ncondezi power project in northern Mozambique, and follows on from a successful round of negotiations with the Mozambican government and power authority in regards to project timing and indicative prices for long-term tariffs.
The idea is to build a power plant in phases, starting at a capacity of 300MW and building up to 1,800MW in due course. Even allowing for that scalability though, it’s a big ask for a small company like Ncondezi, which is capitalised at just under £24mln.
And that’s why it’s bringing in CMEC and GE.
“It’s a billion-dollar project,” says Ncondezi chief development officer Hanno Pengilly.
“A small Aim company’s never going to fund this type of thing on its own. GE and CMEC have the balance sheets and the track records to build and operate a project like this.”
And the clever thing about the proposed deal, which was first mooted as a non-binding offer back in November 2017, is that Ncondezi will be able to keep hold of a sizeable chunk of the equity, all the way through to production.
This may seem like a no brainer, but it’s all too easy for junior companies to be all but completely diluted out of big ticket deals like this, as they either struggle to raise the finance to hold up their ends, or else they have to give away everything just to attract partners in the first place.
But Ncondezi is different for several reason. The first is that, although the coal asset that’s associated with the power station would effectively be stranded without the power option, the project itself is situated right in the heart of Tete, Mozambique’s most rapidly industrialising region and a hub for power generation.
GE and CMEC are not new to Mozambique and they know what they’re looking at when they see Ncondezi: opportunity.
And so, the deal will likely leave Ncondezi with 40% of the project and GE and CMEC with 60%.
So, on that nice round billion dollar price tag, Pengilly argues that an industry standard 70% or US$700mln could be funded by debt, leaving the partners with a total of US$300mln to find between them.
Ncondezi’s end would be 40% of that, or roughly US$120mln, a sum to which discounts can be applied for costs already incurred, running potentially to at least US$20mln, and also for what’s known as a “developer’s premium.”
That takes the overall amount Ncondezi’s likely to need to a more manageable US$100mln or so, which is still a tidy sum, but not necessarily unattractive given the annuity-type income that’s on offer from selling into the fixed price tariffs that will agreed with the Mozambican government.
The precise numbers that Ncondezi is modelling are not public, as negotiations are ongoing and apt to be a matter of some sensitivity.
But it’s clear from the presence of GE and CMEC at the project level, and from the presence of Poland’s largest independent power producer, Polenergia International, on the share register that professionals inside the power generating industry view this project with much optimism.
Ncondezi is also supported on the share register by the African Finance Corporation, a specialist Africa infrastructure fund, and Polenergia and African Finance Corporation together hold approximately 30% of the company’s issued shares, which would go some way to funding the project if both follow their rights when it comes time to raise the finance to get the project built.
That’s potentially quite a distance from the US$1bn overall price tag, and not a bad overall ticket for part of a project that’s likely to deliver annuity income generated from selling into at least a 25 year off-take deal.
How attractive remains to be seen, but Pengilly puts it like this.
“If the returns weren’t attractive enough GE and CMEC wouldn’t be interested in the project and looking to move forward.”
Separately, Ncondezi has just signed a deal that moves it into the solar power and battery storage space. The company has signed a joint venture deal with GridX Africa Development with a view to building captive solar and battery storage solutions for commercial and industrial use.
To fund this deal a capital raising of £1.88mln was put in place.
GridX has 15 solar and battery storage projects, of which six are at an advanced stage.