The energy 'gold' rush - South Africa is getting ready for some gas!

Warren Buffet once said, "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes." 

When it comes to start-ups such as exploration companies, the journey towards profitability may include dilution. This can come about as a result of actions like stock buybacks which, in the long term, could bring continuing value to investors.

In this piece, we have a look at two of the top trending exploration stocks in South Africa.

Exploration companies are companies exploring new and existing natural resources on abandoned or new territories, with little or no income

Copper

Orion Minerals

Many copper deposits in Africa were abandoned due to low copper prices in the 80s. Nowadays, copper is seen as the future oil!

By now, you may already know that copper is an important metal for renewables and electronics. Given the current shift to renewable energy and the fact that we are moving towards a green economy, the demand has been on the rise while there's been a lag in supply.

In March 2021, the South African government published its green paper outlining the advancement of new energy vehicles in South Africa. To bring this to reality, investments are required, and this is where the Industrial Development Corporation of South Africa (IDC) comes in. The IDC is a national development financing institution. It is the biggest shareholder and early investor of Sasol, BHP Group and Kumba Iron Ore.

Orion inked ZAR 250 million from the Industrial Development Corporation of South Africa (IDC). By February 2023 (following the triple flag agreement), IDC had become an equity partner. The proceeds will be used to fund early work on its Prieska project.

Looking at Orion's footprint, its projects include Okiep Copper Project, Jacomynspan nickel-copper-PGE, and Fraser Range in Western Australia. 

On 13 March 2023, Orion requested that its shares be halted until 15 March, ahead of the announcement of a strategic funding package to accelerate its South African base metal projects towards development, where it secured AUD 13m (ZAR 80 million) through private placements.

"The combination of a strongly supported AUD 13m placement plus options… puts us in a strong position to realise our growth vision as a major new South African base metals producer," CEO, Errol Smart said. Orion had a balance of AUD 2.7 million by the end of its half-year in December 2022.

Gas/LNG

Renergen Limited

Renergen Limited has announced that production is under way, and to scale up the production, it intends to list on Nasdaq (where it will issue additional shares for cash). The listing is expected to provide additional financial support to its Phase 2 in Virginia, Free State.

Phase 2 is expected to increase LNG and liquid helium production by nearly tenfold, to 34,400 gigajoules of LNG and around 4,200 kg of helimum. Now, to reach the commercial stage by 2023, the explorer may have to spend up to USD 1.16 billion on this project over the next three years. 

In addition to raising more capital, it intends to sell 10% of Tetra4 to the Central Energy Fund for ZAR 1 billion. The Central Energy Fund (CEF) is a Schedule 2 state-owned diversified energy company reporting to the Department of Energy. Its mandate is to contribute towards energy security in South Africa through exploration, acquisition, development, marketing and strategic partnership.

CEF is a parent company to African Exploration Mining and Finance Corporation (AEMFC). It mines coal in Mpumalanga to supply Eskom, iGAS, PASA (national petroleum and gas promotion and licensing agency), Strategic Fuel Fund Association, and PetroSA (it is the largest subsidiary that operates with a gas-to-liquids refinery).

Renergen mentioned in its latest announcement that it believes that it will "deliver estimated EBITDA of between ZAR  5.7bn and ZAR 6.2bn per annum, once the plants are in full production, which we expect to occur in the financial year after construction has been completed but not anticipated to be before FY2027 - the target is based on assumptions around currency, interest rates and energy prices at the time Phase 2 of VGP goes into production, and the actual EBITDA may be higher or lower than the target range provided."

Locally, during the Mining Indaba, gas was praised and considered a key role player in our efforts of establishing a green economy. According to Moneyweb, that Eskom wants to build a 3,000-megawatt  gas power station (enough to mitigate at least three stages of load shedding) by 2028.

By the end of the quarter, which ended on 30 November 2022, Renergen had a balance of ZAR 44 million.

Informed decision

The transition to a green economy will not happen overnight. Infrastructure, adequate workforce and resources will be required. The energy phenomenon has become a global problem, with many countries working towards initiatives not only to bring down prices but also work towards a greener economy. The race to renewables is taking place globally. This includes Europe, China, the US, the UK, and Japan.

Equity funding in the process for start-ups through government funding may result in a dilutive event for existing shareholders. In addition, exploration companies play a significant role in growing and supporting an economy from a commodities perspective, where we may see a lot of government funding inflows, depending on the prospects and contribution of the explorer.

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Sources – EasyResearch, Renergen Limited, Mining Indaba, South African Government Green Paper, plc Orion Minerals, JSE SENS

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