Update to Conversion of Sanderson Minority Interest in Mbeya Development to Kibo Shares & Continuation of Forward Payment Facility
Kibo Energy PLC (“Kibo” or the “Company”), the multi-asset, Africa focused, energy company, notes that further to the Company’s announcement on 5 March 2019 with regard to the Conversion of the Sanderson Minority Interest in Mbeya Development into Kibo Ordinary Shares and the continuation of the Sanderson Forward Payment Facility, it wishes to further clarify the transaction with the following information:
Conversion of Sanderson’s 2.5% Interest in Mbeya Development
· Sanderson Capital Partners (“Sanderson”) initially acquired its 2.5% equity interest in Mbeya Development Company Ltd (the “Project Company”), which holds 100% of the Mbeya Coal to Power Project (“MCPP”), and which was at the time a 100% subsidiary of Kibo, on 1 September 2016 by converting the full outstanding loan amount of GBP1,500,000 owed by Kibo to Sanderson at that time under a Loan Facility announced 3 March 2016 into the aforementioned equity interest. The terms of the September 2016 Conversion were calculated based on a net present value of 100% of the MCPP’s coal resource of GBP 60,000,000 (discounted for risk) at the time of the conversion. Please refer to the RNS dated 1 September 2016 for more information in this regard.
· As stated in the previous RNS dated 5 March 2019, Kibo has now re-acquired the aforementioned 2.5% equity interest from Sanderson on the basis of a valuation of GBP 66 million for 100% of the MCPP’s Mbeya Coal Resource (“the Valuation”). The consideration will be settled by means of the allotment and issue of 126,436,782 new Ordinary Shares at their par value of €0.015 (the “Conversion Shares”) to Sanderson. At the time of the conversion agreement, ordinary shares in Kibo were trading below par value. The issue price was agreed as par value due to the Company not being able to issue shares below their par value under Irish company law.
· The Valuation was based on the weighted average total of the following elements:
o the net present value of the proposed Coal Mine based on a 1.5 million ton per annum production figure as determined in the definitive mining feasibility study for the Mbeya Coal Mine amounting to c. GBP79.5m. The calculation also incorporates a risk factor discount of 27% and assumes a lead time for first production of 7 years. This provided a value estimate for the Mbeya coal mine separate to its value to the integrated MCPP coal to power project (ie the value of it were it to sell coal at arm’s length to an undetermined power project); and
o estimated market value of MCPP’s Coal Resource of 120.8Mt (Refer RNS dated 11 April 2016) held under Mbeya Coal LTD with reference to “$/tonne of coal in Resource” market-based multiples, amounting to c. GBP37.2m.
o The MCPP was from inception developed with various commercialization options in mind and all these options remain open to the Company, despite the TANESCO decision announced on 14 February. The MCPP’s current development status was furthermore not in any way affected by the 14 February announcement and it remains a fully developed bankable project, positioned for an ultimate generating capacity of 1000MW to take advantage of the fast-growing local market via TANESCO, private local off-takers as well as the power export market. The TANESCO decision announced on 14 February did not disqualify the Company from engaging with TANESCO on other existing or future opportunities, nor does the current TANESCO tender in any form or manner satisfy / address the country’s growing immediate or long-term electricity demand – the electricity market remains vastly undersupplied. (NOTE: The Company is still pursuing its request for clarification from TANESCO on its decision not to qualify the Company for tender No. PA/001/2018-19/HQ/N/033). The lucrative and fast-growing Tanzanian and regional markets, across both public and private sectors, therefore remains open and available to the MCPP, albeit that it will not be able to access the market via the specific opportunity that the current TANESCO tender for coal fired power offers. Apart from the energy market the Company also has the option to develop the MCPP coal resource as a dedicated coal mine (or a part thereof) to supply coal into the local and regional coal market as evidenced in the Company’s MOU with Mbeya Cement LTD, see RNS of 20 April 2017.
· The current transaction valuation has increased by just 10%, or GBP6,000,000, since the 2016 transaction where Sanderson acquired a 2.5% interest in the Project Company from Kibo. The Company believes that, notwithstanding the Company’s share price, the Valuation reflects the progress made and value added to the MCPP’s coal resource since 2016 to date, which inter alia includes the following milestones reached:
o Integrated Financial Model Completed – November 2016
o MCPP Update: EPC Contract Awarded to SEPCO III – December 2016
o Final Approval for ESIA Scoping Reports – January 2017
o Completion of Integrated Bankable Feasibility Study – January 2017
o MCPP Receives Formal Reconfirmation – June 2017
o MCPP Awarded ESIA Certificate from the Government – October 2017
o Final Lot of EPC Contract Signed on MCPP – May 2018
o MCPP’s Mbeya Coal Mine updated Special Mining Licence re-submitted and subsequently recommended for grant by the Tanzania Ministry of Minerals – July 2018
· The Company also considers that the ability to do business on the Mbeya coal Resource will be considerably enhanced with a clean ownership structure where counterparties, such as but not limited to, authorities, suppliers, and potential project debt funding providers, are only dealing with one owner. While the benefits from this are not readily quantifiable, they would be expected to avoid unnecessary costs or delays as a result of a minority party being present that may be value destructive in the shorter and longer term. This may potentially take on a particular significance as Kibo continues to seek clarification on the TANESCO decision announced on 14 February 2019 while also pursuing alternative paths to commercializing its Tanzanian assets, which amongst others include the export market and private local market off-takers.
Continuation of Forward Payment Facility
As stated in the previous RNS dated 5 March 2019, the Term Sheet also provides for the continuation of Kibo’s USD 2,940,000 Forward Payment Facility (the “Facility”) signed between Kibo and Sanderson, which currently remains undrawn.
Since the events notified in the RNS of 14 February 2019, the Company’s shares have been trading well below their par value of €0.015. This unexpectedly and suddenly placed Kibo under considerable funding pressure as it did not, and could not possibly, foresee the events announced 14 February 2019, the result being that sourcing additional funds through an equity placing was no longer considered a viable option in a reasonable time frame as:
a) Kibo is unable to issue shares at a price below par value under Irish company law;
b) equity providers are highly unlikely to subscribe to a placing for shares at a significant premium to the prevailing share price (i.e. at par value or above). Kibo notes that on the day prior to the announcement of the Sanderson Transaction (being 4 March 2019) its ordinary shares closed trading at 0.95p, against a par value of approximately 1.30p; and
c) the lead time necessary to adjust the Company’s par value (to enable a capital raising) is significant in the context of funding requirements, given the process includes the calling and holding of a general meeting to obtain shareholder approval to amend the capital structure of the Company. There is also no guarantee the resolution to do so would be passed by shareholders.
The Company also notes that the longer the process to obtain additional funding goes on, generally the weaker the position of the party seeking funds becomes to negotiate terms with potential funding providers, which typically translates into ever more expensive funding (if funding is available at all).
Sanderson was under no obligation to maintain Kibo’s access to the Forward Payment Facility, and the securing of its continuation provides the Company with the option of short-term funding, with first draw-down amounts of GBP 100,000 and GBP 400,000 agreed and any subsequent draw-downs to be agreed on a case by case basis, as necessary according to funding requirements within the Facility limit of USD2,940,000. The repayment terms of these subsequent draw downs will be the same as the initial draw downs.
The Company believes that the certainty and immediate availability of the continued Forward Payment Facility brings with it considerable value for Kibo shareholders as it:
· provides a certain and immediately available source of funding allowing Kibo to:
o overcome its short-term funding challenges
o have confidence that in the medium term it can retain access to critical funding if necessary
· provides flexibility to not draw the entire amount, leaving the option open to source additional funds at potentially more attractive prices in the future to:
o refinance (or even close out) the Sanderson Forward Payment Facility should it wish to do so
o utilise instead of drawing down further from the Sanderson Forward Payment Facility
o retain competitive tension for the provision of funding to Kibo
· provides Kibo the opportunity to consider the best course of immediate action with respect to its par value/capital structure without the pressure of having to avoid a potentially damaging funding shortage
· ensures that the Company has access to sufficient working capital to continue its operations on its projects even in the very difficult prevailing market conditions and uncertainty that was caused by unforeseen events in Tanzania. This will enable the Company to maintain momentum behind its on-going development work across its African and UK projects while also examining a range of additional funding options, which would be expected to be greater with a higher share price (which would deliver increased value to all shareholders).
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