Proactive Investors | Wednesday, July 28, 2010
by Ian Lyall
Rarely is Liberia cited as one of Africa’s emerging, vibrant economies.
This tiny nation of three and half million people, sandwiched between Sierra Leone and the Ivory Coast, is probably best known as the birthplace of international footballer George Weah.
And during the 1980s and 90s, it was synonymous with violence as the country was gripped by two bloody civil wars.
The United Nations maintains a strong presence there and the influential CIA World Factbook tells us the ‘security situation is still fragile’.
However today under President Ellen Johnson Sirleaf, Liberia’s very own ‘iron lady’, its economic potential is slowly being unleashed.
And it is becoming a magnet for some of the giants of international commerce.
BHP Billiton PLC, Severstal and Arcelor Mittal have beaten a path to this west African backwater, while China has invested significant sums.
Against this back-drop, London-listed Equatorial Palm Oil aims to build a world class oil palm plantation business in Liberia.
Palm oil is to food production what iron ore is to heavy industry. It is an ingredient found in everything from Galaxy chocolate to Goodfella’s pizza. It even crops up in Persil soap powder.
And in common with many basic minerals and hard commodities, demand for palm oil is buoyant and expanding all the time.
The Chinese are recent converts as are the Indians. But the biggest surprise is America is slowly switching from soya bean oil to palm oil as a result mainly of the scare over trans-fats.
EPO has almost 170,000 hectares of land suitable for sustainable crude palm oil cultivation and its aim is to be a 100,000 hectare producer with output totalling 250,000 tonnes per annum.
However it will take a decade to have 50,000 hectares under cultivation and a further five years to hit its ultimate target, according to executive chairman Michael Frayne.
The near term aim is more modest: to reinstate 3,000 hectares of abandoned palm production this year while planting a further 1,200 hectares in 2011 as part of a planting ramp up.
Road links from EPO’s two plantations to the nearby ports of Greenville and Buchanan are decent and a palm oil mill imported from Malaysia is expected to be on-site by the end of the month.
Frayne likens the process to developing a mine, or proving up the reserves of a major oil and gas project.
"You need to take time to set up a palm oil project properly .... but if you plant out your first 10,000 hectares and you can show you can go on to 100,000, especially if you plan to plant out sustainably, then you are on a roll. There is a value re-assessment. By getting the initial planting going you upgrade the whole value."
Initial production will be modest, but it will contribute to financing the company’s ambitious planting programme.
The firm raised £6.5 million from the market when it listed back in February and went on to raise a further £5 million from a strategic investor in May.
But at the current burn rate - and even with cash coming in from palm oil sales - EPO will need a fresh injection of cash in around two years, Frayne estimates.
Whether the group taps the market again probably depends on the share price, though there are other sources of finance including development banks, which will lend cash on very "attractive terms".
"We are not a cash-flow story we are an asset growth story," Frayne asserts. "However we will be self funding in five or six years."
In the world of natural resources, a junior prospector sitting on a world-class asset might expect to be taken out by one industry’s majors.
The analogy is not lost on Frayne, particularly with EPO’s plantations sandwiched between the operations of Sime Darby and Golden Agri – the heavyweights of the industry.
"That could create opportunities down the track, particularly as we are a sustainable palm oil developer," Frayne concedes.
One wonders then, if the story is so straightforward why the share price has traded down to 11.5p from the 17.5p listing price.
Frayne refutes the suggestion that Liberia is the reason. Most of the world’s palm oil production takes place in Malaysia and Indonesia. So Liberia, with all its baggage, would seem to be a bit of punt.
Not so, says Geoff Brown, the company’s plantations director and an industry veteran with 40 years experience.
"Liberia has come a long way" Brown says. "It has put the framework in place for stable government with US support.
"It has a very good leader who is keen to encourage foreign investment. So it is a good west African nation. It has set up some very good frameworks."
Frayne blames a "trickle of selling" for the depressed share price. He knows signs of clear progress in accordance with the timetable set out at the time of the February listing will shore up sentiment.
The chairman also hopes to attract a number of new blue chip investors onto the share register after the traditional summer lull on the stock market.
That said, the current list of backers is impressive. On it are JP Morgan, Henderson and Blackrock.
But perhaps the most interesting is the Siva Group, the conglomerate run by Indian billionaire C Sivasankaran, which owns 29 per cent of the firm. Frayne says: "He’s looking to invest in palm oil assets of scale with management. He brings a lot of firepower and access to other funding routes."
Sivasankaran will also have looked at the fundamentals for palm oil - the fact the demand cannot be sated while finding new, sustainable sources of the product is proving difficult.
And this is reflected in the palm oil price, which at US$837.50 a ton, is buoyant for a market emerging from recession. The recent high is US$1,200 a ton and the low around US$500.
Frayne says the EPO model works all the way down to around US$250. Not that it is ever likely to get this low, with demand from the biofuels market keeping the price well above this break-even figure.
"The price outlook is very good," Frayne says. "No one company dominates the market. It is a fundamental supply and demand story."
It also means that economically, Liberia becomes a very attractive destination, even for the normally risk averse giants of palm oil."China and the United States are investing in Liberia in a big way," Ahmad Zubir Murshid, chief executive of Sime Darby said recently. "We cannot wait until everything is perfect and then invest. By then it will be too late."