Scirocco Energy PLC (AIM:SCIR) chair Alastair Ferguson has told shareholders it is in their own best interests to approve the sale of the company’s Tanzanian assets at an upcoming EGM.
The company earlier this month agreed a deal to sell Scirocco’s 25% stake in the Ruvuma asset, which primarily comprises the Ntroya gas field development project, to Wentworth Resources and a shareholder vote is scheduled for Wednesday, 29 June.
Ferguson and the Scirocco board, which own just over 3% of the company's shares, are recommending shareholders approve the deal.
Scirocco’s deal has a headline value of US$16mln albeit US$3mln of that is upfront and US$13mln is both deferred and contingent upon the future performance of gas operations (should they be delivered successfully by Wentworth and its new partners Aminex and ARA Petroleum).
Significantly, as highlighted by Ferguson, however, the company’s participation in the pending field development would be subject to a cash call, of around US$6mln, to cover Scirocco’s share of costs for the planned Chikumbi-1 well later this year.
Further funding requirements would also follow, subject to the Chikumbi results, to develop the field which is targeting commercial gas production before the end of 2024.
Ferguson, in his letter, cautioned shareholders over the potential risks that Scirocco would face if it were to retain the Tanzanian assets.
“Should the resolution not be passed, the company will be required to fulfil its near-term funding obligations on the Ruvuma asset which can only be achieved by raising further equity, likely in excess of its current market capitalisation, and at a level of issuance and price that would be highly dilutive for existing shareholders,” he said in the letter.
“There are no guarantees that the company will be able to raise the capital required to meet near-term obligations which would likely lead to the company defaulting on its financial commitments and potentially relinquish its interest in Ruvuma for zero consideration.”
Adding further to the potential uncertainties, he added: “It should also be recognised that success is not guaranteed in the upcoming CH-1 well and the ultimate approval, extent of or timing of a related development is also uncertain.
“The Ruvuma project involves significant technical and subsurface uncertainties, meaning the company would retain material downside exposure associated with the project, as well as the potential long-term requirement for large capex expenditure, implying further dilutive capital raises in order to maintain our interest.
“Those factors and the significant concentration in a single asset lead the board and management to conclude that this is not an appropriate risk/reward profile for Scirocco and does not provide a reasonably deliverable path to growth or cashflow.”
Chief executive Tom Reynolds, in a recent interview with Proactive, described the Wentworth transaction as “the best deal available to the company”.
“The Ruvuma asset, as we’ve consistently said, is a robust and strong asset but we haven’t believed that Scirocco is the right home for it.”
Instead, the Scirocco board believes that the US$3mln cash injection and removal of Tanzanian funding requirements will allow it to accelerate its proposed investment and growth plans which target “cash-generative assets within the sustainable energy and circular economy markets”.
Ferguson, in his letter, added: “Completion of the divestment will enable the company to accelerate its growth strategy, which we believe will enable the board to build a business with a long-term future capable of generating sustainable returns for its shareholders.
“As such, the board encourages all shareholders to cast their vote and strongly recommend that shareholders vote in favour of passing the proposed acquisition at the upcoming general meeting.”