Mining

Renergen shares plummet on disappointing trading update

Renergen’s share price slumped by over 10% following a trading update that revealed the discrepancy between the company’s current earnings and its projections.

Renergen informed shareholders this morning that it expects the company’s loss per share to increase by between 50% and 60% for the second half of the 2023 financial year.

The company advised shareholders that a reasonable degree of certainty exists that for the interim period ended 31 August 2023, that loss and headline loss per share will be between 28.9 and 30.9 cents.

This represents a 50% to 60% increase in the loss compared to the loss per share of 19.31 cents reported last year.

Renergen said this bigger loss comes despite an increase in production activity during Phase 1 of the Virginia Gas Project (VGP) that resulted in a marked improvement in the company’s revenue for the period. 

However, it said operating the plant with the delayed startup of the helium module and at the current turn-down level combined means the revenue is not yet balanced with the running costs.

Costs have increased mainly due to the company ceasing to capitalise some of the costs attributable to the construction of Phase 1.

Therefore, some items during the project’s final commissioning and ramp-up period will not be capitalised within property, plant and equipment but rather expensed.

Renergen’s losses have also been impacted by increased borrowing costs and foreign exchange losses, depreciation attributable to assets brought into use during the period, and an increase in selling and distribution activities, given the increase in plant production.

“As production continues to ramp up, so will operational efficiency,” the company assured shareholders.

However, based on Renergen’s own projections for its earnings in the next few years, the company will need to make significant improvements to its balance sheet to reach its own targets.

Renergen CEO Stefano Marani

Renergen’s VGP is located in the Free State, approximately 250 km southwest of Johannesburg.

Its main revenue source is liquid helium (LHe) and liquefied natural gas (LNG), with existing production and sales of compressed natural gas (CNG).

Renergen said its expansion plans will be executed in two phases –

  • Phase 1 began operating 24-hour shifts on 19 September 2022. It aims to produce 2,700 GJ of LNG and 350 kg of LHe per day by the end of the 2024 financial year.
  • Phase 2 will be constructed as a standalone expansion of the VGP with a commercial operation date of 2026. It aims to produce a maximum of around 34,400 GJ of LNG and 4,200 kg of LHe per day.

Based on these production estimates, Renergen said its EBITDA should be between R5.7 billion and R6.2 billion by the 2027 financial year.

This was with the assumption that liquid helium would have a long-term spot price of $600 per thousand cubic foot (MCF) of helium.

However, according to an annual United States Geological Survey report, helium prices have hovered around $200 to $210 per MCF since 2016.

In 2022, unexpected supply shortages saw helium prices surge to $310 per MCF. This was the highest price for helium in a decade – but still a far cry from Renergen’s $600 per MCF estimate.

Based on Renergen’s Phase 1 and Phase 2 helium production capacities, it would generate 300kg of LHe and 2700 GJ of LNG by 2024.

Daily Investor projected Renergen’s revenue using these production estimates and the average US spot price of LNG over the past ten years of $3.36 per MCF and the 2022 high helium price of $310 per MCF.

This analysis estimates that Renergen would generate revenue of R2.59 billion in 2027 if Renergen is able to achieve their production targets.

If helium prices were, however, to fall back to $210 per MCF, Renergen’s annual revenue would only be around R2 billion in 2027.

Both of these estimates are far below Renergen’s estimated EBITDA of between R5.7 billion and R6.2 billion in 2027.

Therefore, given today’s trading update, which estimates a loss per share of between 28.9 and 30.9 cents, Renergen has a long way to go before reaching an EBITDA of R5.7 billion.

The market did not react well to this update, as Renergen’s share price fell by over 14% following the announcement.

Renergen’s results for the interim period ended 31 August 2023 are expected to be published on or about 31 October 2023.

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