Joel’s Resource Report – the future of coal? #SAE
The Author holds a long position in the stock discussed below.
Good morning all, I hope you had a good week last week, I’ve been enjoying the subsidized “eat out to help out” scheme which as a tax payer I’m paying for. I may as well take advantage of the scheme if I’m paying for it.
A slightly different type of Resource Report this week – a company which has a fuel which can be used to replace coal in power stations. The product meets stringent emission controls, is cheaper than biomass and burns plastic waste.
The company is AIM listed SIMEC Atlantis Energy (SAE) who is world leader in hydro & tidal power. Last week the company signed heads of terms for a 50/50 JV to sell waste derived fuel pellets with it’s Dutch partner N+P group. SAE’s flagship project is the Uskmouth Power Station conversion project which will use the aforementioned pellets.
Reasons you shouldn’t touch the shares with a bargepole
As I hold a long position in this stock, I first want to discuss issues with it and why it may not be for widows or orphans.
1. Historic poor performance
SIMEC Atlantis’s first day of dealing was on the 20th February 2014 at a price 94 pence per share giving the company a market cap of £72.1 million.
6 years later the share price is 13 pence per share with a market cap of £64 million. One could argue that SIMEC has primarily been successful at issuing shares.
2. Inability to stick to timelines or guidance
This is my largest issue with SAE – according to RNS’s SIMEC’s Uskmouth project should already be under construction with Q4 of this year being the target for production.
Instead the company has yet to award the EPC or even announcing financing terms and recently announced that EPC award and financial close would be delayed until Q1/Q2 next year.
Irrespective of covid the conversion was already massively behind schedule.
3. Loss making business
SAE is currently loss making as is evidenced by last year’s results – “Overall Group losses for the year were £35.4 million (2018: £24.1 million). The increase in this loss is primarily attributable to a £16.1 million non-cash disposal of seabed options for five development sites“.
It goes without saying that company’s that don’t generate any FCF cash may need more of it.
Reasons to be bullish
Despite SAE’s lack of cash generation and poor historic performance I’m bullish about the company across the short, medium and long term for a number of reasons.
1. Market Mechanics
The recent placing was heavily oversubscribed – one twitter user mentioned that he was scaled back by 40%:
This information is also backed up by another investor I know buying on market to achieve the allocation they wanted. The CEO confirmed that there was significantly more demand during the proactive interview linked to below.
Newly issued shares account for 13% of the share capital – existing shareholders have not been diluted into oblivion. Were it not for the raise the shares would likely still trade around the 18 pence mark.
2. Institutional Interest
Institutional Investors have invested £6.5 million into SAE – given the relative illiquidity in the shares it’d be difficult to offload sizeable positions without tanking the share price.
II’s (should) have done extensive due diligence prior to investing.
3. Uskmouth conversion unlocks a scalable business model
Upon completion the Uskmouth power plant conversion solves multiple problems:
- What to do with coal power stations – coal power stations across the world are in danger due to increasingly stringent emissions rules. “19 of the world’s 80 coal-powered countries plan a complete phaseout of the fuel, including the UK and Germany”. Companies that run coal power stations will increasingly either need to decommission them or convert them. For example London listed Drax has successfully converted coal power plants to run on biomass.
- How to produce base load energy with low emissions – renewable technology is always improving. What it is not good at it (in general) is proving reliable power irrespective of weather conditions. Converting coal power stations will help us transition towards a carbon neutral economy.
- What to do with plastic waste – plastic waste is clogging up our oceans and getting into our food. Some plastic can be recycled however not all of it can. Many western countries shipped plastic waste offshore for “recycling”, many of the countries which previously accepted plastic waste are banning it for example China banned the import of low quality plastic back in 2018. One solution is to incinerate it – the pellet which N+P have developed is up to 50% plastic waste.
- Cheaper fuel – one solution is to convert coal power stations from coal to biomass (biomass is paper/card/wood etc). Pellets containing waste and biomass have a key potential advantage over purely biomass – cost. Local authorities typically have to pay for plastic waste to be taken away – at worst plastic waste should be free, at best you’re paid to accept plastic waste.
Upon successful conversion SAE’s Uskmouth project will prove that the technology works at scale. This further reduces risk for financiers which improves the rates at which SAE could borrow at for future projects and increases the financial returns for shareholders.
Were SAE able to convert even a fraction of the world’s coal power stations the potential upside is mind boggling – there are currently around 10,000 retired, operating and planned coal power plants in the world:
(source: carbon brief)
4. 50/50 Joint Venture with N+P
SAE’s 50/50 joint venture with N+P is a major milestone and piece of news. SAE can now profit from another revenue stream – pellet production.
For example the Chinese may be very interested to reduce emissions at their coal power stations and deal with plastic waste.
Rather than SAE converting the powerplant existing owners may wish to convert themselves with the newly formed JV providing the pellets.
Why have N+P joint ventured with SAE?
Initially I couldn’t understand why N+P would partner with SAE. Reasons why a partnership makes sense:
- They were previously JV’d with SIMEC (not SAE) a GFG Alliance company – this is SAE’s largest shareholder who vended in the Uskmouth project. You may not have heard of GFG Alliance – it’s a group of companies owned by Sanjeev Gupta.
- SAE are the perfect partner – once the Uskmouth plant is converted who better to showcase the technology to prospective customers?
- SAE are well connected – any company responsible for multiple power projects around is guaranteed to have a global network.
5. UK Proposed amendments to the CfD Scheme
The UK has proposed amendments to its Contracts for Difference scheme.
“The Contracts for Difference (CfD) scheme is the government’s main mechanism for supporting low-carbon electricity generation.
CfDs incentivise investment in renewable energy by providing developers of projects with high upfront costs and long lifetimes with direct protection from volatile wholesale prices, and they protect consumers from paying increased support costs when electricity prices are high.”
Changes to the CfD system could be very positive for tidal stream power as the government is proposing to put off-shore wind into its own category:
If you want to read the full rational for why offshore wind may be put into a separate pot – see page 21 onwards.
Should a separate pot be established for off-shore wind, SAE’s Meygen Project would be well placed to bid in future CfD rounds. SAE already have planning permission for a further 73.5 MW of turbines.
There’s no guidance as to when the results of the consultation will be announced (yes I’ve emailed the team responsible) although my hope would be that it’ll be delivered before year end.
6. News flow
The amount of news and announcements due over the next six months provide multiple value inflection points. CEO Tim Cornelius discussed how the company has a “huge six months coming”:
An investment in SAE is not without risk which is why I highlighted potential issues prior to explaining why I’m bullish on the company. It’s been a (very!) long and painful hold for existing shareholders however I believe that SAE has never been better placed to drive shareholder value. Given the recent news and upcoming newsflow I’m willing to look past prior performance issues for now – fingers crossed management deliver as promised.
Till next week!