It seems like it’s now only a matter of a few months before Shanghai Electric Power closes out a joint development agreement with Ncondezi Energy Limited (LON:NCCL).
Between the two, the plan is to develop and operate the Ncondezi power project, currently envisaged as a 300MW power station to sit beside the existing Ncondezi coal resource in the northern Mozambican project of Tete.
So will Shanghai Electric actually sign?
Of that, Ncondezi’s chief development Hanno Pengilly has little doubt.
The agreement was actually first mooted at the end of last year, signed in January and is now just running through various box-ticking exercises ahead of Chinese government approvals before it becomes effective.
“They are just conditions precedent that need to be met, like auditing our accounts,” he explains.
“They’ve asked us to set up a company in the UAE to hold the asset. None of these things are game-changing in nature. They just represent the final pieces involved in getting Chinese government approval. We’ve been working with these guys for two years – their chairman has already visited Mozambique once to review the project and meet with Mozambican officials, and is due to come again in July.”
It seems like a fairly solid relationship then, in the final stages of its initial flowering.
And it’s worth emphasising at this point that Shanghai Electric Power is a full-blown Chinese utility and not just an equipment manufacturer looking to sell plant into a project on a lend-lease basis.
Shanghai Electric is the real deal, and as Ncondezi chief operating officer Christiaan Schutte points out, the development in Tete may only be the start of their ambitions for Mozambique.
Ever since the end of the civil war in the early 1990s the country has struggled with something of a physical divide between north and south. Roads took a long time to be reconnected, for years travel remained easier by air, and even now the country operates on two separate grids, one for the north and one for the south.
Shanghai Electric has cast its eye over Mozambique’s plans to connect up the two grids and if that’s its long-term aim, it’s certainly going to do everything in its power to make its first foray into the country, at Ncondezi, a success.
“Once the deal with Shanghai Electric is closed in the third quarter they’ll be investing up to US$25.5 mln against an agreed budget,” continues Pengilly.
That money will go into the UAE company and will be used to take the project up to the point where funding for construction and development is in place. As an aside, it will be covering all of Ncondezi’s power development related costs that Ncondezi has till now been shouldering alone.
At that point, Shanghai Electric will have 60% of the equity in the joint venture, with 40% still vested in Ncondezi, although if Ncondezi does encounter any funding issues there is a mechanism for automatic dilution down to 20%.
But what does all this mean in terms of valuation?
First off, it’s worth noting that Shanghai Electric have agreed to arrange any debt that’s needed for construction, so there’s unlikely ever to be any gearing on Ncondezi’s balance sheet once the most recent shareholder loans are cleared.
Instead, this is a straightforward equity proposition: if you look at the details of the announcement made in January, the transaction supports a valuation for the power project at US$100 mln before financing. Ncondezi will be left with 40% which, by a clear read through, should have a theoretical valuation of US$40 mln.
Not all the ducks are in a row, of course, which perhaps is why Ncondezi’s valuation still stands at a fairly modest £10 mln in London.
But with things moving along nicely now, that value gap is likely to narrow.