Founder: Turnaround Talk
When BRPs flag mismanagement as a root cause of financial distress or a massive financial loss in a company, Those on the outside – typically the public, media and shareholders – are left a bit in the dark as this term can be left open to interpretation.
However, the CEO of Renergen is currently caught in the middle of a significant storm as his comments recently led to a massive loss by the company, which is upsetting shareholders.
The beginning of trouble
The News24 article pointed out that Renergen CEO Stefano Marani could never have predicted that his curt response to a social media post would rapidly snowball into a public relations nightmare, causing the company share to crash 40% over the following two weeks and forcing it into damage control mode.
The post in question was from self-styled activist investment manager Albie Cilliers, who accused the company of misleading stakeholders about the progress in its helium production.
The article adds that this comes as the company has suffered two setbacks at its Virginia gas project in the Free State – one in December last year and one in January this year.
In refuting the insinuation that something sinister might be afoot, Marani first told Cilliers his comments were “sailing close to the wind”. In response to another post – which questioned the reported fault in the cold boxes, Marani warned: “The JSE has clear rules on misinformation.”
Poking the bear
Cilliers was taken aback, telling News24: Why would you try to intimidate me? … That, for me, is always a red flag.
The article points out that, unfortunately for Renergen, it spurred Cilliers on to investigate further. “Normally, I just do it when I have a position. But in this case, I thought there are many people in this stock, and they have a right to know,” he says.
What followed was a barrage of posts over almost three weeks in which Cilliers poked holes in Renergen’s story and raised numerous concerns. These include key shareholders selling out of the stock when share prices peaked and why a significant funding deal with Ivanhoe Mines lapsed. He also questioned whether the extraction of helium is covered by the Virginia project’s production right.
The article adds that, while Renergen was at first dismissive of the accusations, the share price reaction and critique from some investors over the company’s handling of the matter prompted it to this week put out a comprehensive response to the concerns raised and to invite Cilliers to engage further.
Speaking from Renergen’s Sandton offices, Marani says he could have handled it better from the get-go.
“There’s nothing wrong with people asking questions,” he says. “I think the key here was that the market ended up getting very jittery because answers weren’t forthcoming.”
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Skin in the game
The article points out that, although Cilliers maintains he has no skin in the game, market speculation is rife that he is shorting the stock, profiting from a fall in a share price, or otherwise acting on behalf of someone who is.
Cilliers says he’s simply providing a public service. “I was young and naive 30 years ago, and I learnt my lessons the hard way with companies, where I found out information that would have changed my view or decision to invest in the stock,” he says, adding:
I haven’t made a rand. I thought I was doing people a favour in highlighting these issues so they can make an informed decision. Now, I’m perceived as a shorter. I think it’s ridiculous.
The article adds that Cilliers also doesn’t think his posts on social media are solely to blame for the fall in the share price. Especially since PSG Financial Services in June this year also highlighted key risks associated with Renergen, noting in a web session that they see the share’s intrinsic value as R10, compared to R20 at the time.
The stock has recovered a bit this week and currently trades at around R13 per share. It is, however, down more than 50% in the past year.
Renergen is an emerging liquefied natural gas and helium company which is developing the Virginia Gas Project in the Free State and holds the only onshore petroleum production right in South Africa.
While the natural gas is one thing, the resource is particularly fascinating because of the high concentrations of helium discovered there. Global demand for helium is strong as the rare gas is a critical input in the medical and defence industries.
The News24 article points out that Renergen will produce 50 tonnes of LNG and 350kg of helium per day in the fully funded first phase of the Virginia gas project. In the second phase, for which capital continues to be raised, the company expects to expand to 700 tonnes of LNG and five tonnes of helium per day.
As production ramps up in coming years, the loss-making development company expects to transform into a fully fledged gas producer with core profit of between R5.7 billion and R6.2 billion.
The article addsthat Renergen believes any company such as itself embarking on early-stage development of a large project will be vulnerable to negative sentiment driving down the stock.
“We’re at a critical phase in our development. We’re very close to the helium module coming online, and we are in the throes of executing a number of transactions which are critical to us executing the phase 2 project,” says Marani, adding:
Add to that the fact that we’ve been transparent and forthcoming about the project delays – that is the perfect cocktail to make you significantly more susceptible to these kinds of situations.
Massive risks
The News24 article points out that, in presenting his analysis in June, PSG equity analyst Pierre Muller said that while the company’s growth prospects are indeed exciting, “we just think there are quite a lot of risks”.
These relate to commodity and currency price fluctuations, capital raising, and operational success.
While Renergen has secured $750 million (R14.34 billion) in funding from US International Development Finance Corporation and Standard Bank for phase 2 of the project. But to draw this down, it first needs to raise $200 million in equity.
The article adds that a private equity transaction is in the works to raise $50 million, while the remaining $150 million is to be raised through an Initial Public Offering on the Nasdaq in the US. A successful fundraising will be a crucial milestone.
PSG’s Vaughan Henkel said that the key issue around the Nasdaq listing is that these shares and cash flows will be needed to service the hefty debt Renergen is expected to incur while it builds out the phase 2 project.
The level of dilution will be an important outcome for investors.
The News24 article points out that Marani believes this is one of the reasons the share price has come under pressure, but says Renergen is “heavily focused” on ensuring it gets the equity with the least amount of dilution.
For a company with current revenues of R12 million and forecasted earnings of R6 billion, the “execution risk is massive”, and any delays would dramatically increase costs, PSG said.
PSG also highlighted that Renergen’s auditor, BDO South Africa – as reflected in the company’s annual report for the year ending in February 2023 – gave an unqualified opinion expressing material uncertainty related to regulatory and other approvals as well as the completion of funding initiatives, which could impact the company’s ability to continue as a going concern.
Renergen COO Nick Mitchell told News24 that it’s important to distinguish between the existing operations and Phase 2. He notes that once ramped up to nameplate capacity, phase 1 will support itself as a going concern.
“The infrastructure is there, the operations are producing, we’re moving LNG to our customers, to our target markets,” he says. “Obviously, the helium is critical. That’s the next piece … it will flow before year-end; we’re very confident on that.”
Through the ringer
The News24 article points out that, as the drama unfolds online, not many people are prepared to weigh in publicly.
Speaking anonymously, one investor noted that Renergen had been through massive due diligence from Standard Bank to the Industrial Development Corporation, the US government and now the Securities Exchange Commission.
It’s more than most SA companies would ever endure. “Obviously, the project is also very profitable. That’s why they are getting the funding,” the investor said.
Some see the helium as the “kicker” to the Renergen investment case, while the LNG itself is a valuable resource given that Sasol will soon cut off supply to industrial customers as its own gas reserves offshore of Mozambique dwindle.
The article adds that Sasfin’s David Shapiro says exploration companies are volatile by nature and almost destined to be bought out by larger companies with the financial might to see projects like this through.
“Not only do these projects take time, they take resources and money,” he says. “I think it’s too much for one person to undertake. Stef [Marani] has a lovely team; he has honest and good people there. But somewhere down the line, you need someone to come and hold your hand for the next stages of development.”
He notes that the social media noise creates a longer-term issue for the company.
“The story goes sour; it goes sideways. And it’ll take a long time for them to get it back [on track],” Shapiro says.
The News24 article points out that, dealing with critique – whether fair or not – is simply par for the course of a listed company. Shapiro added: That’s the market. If the kitchen is too hot, get out.
Mitchell says the way everything has played out in the media constitutes an attack on the culture, ethics and values the business subscribes to. “For us, that’s probably the biggest damage that’s been done outside of the economic value. It’s those issues that we take quite personally,” he says.
Activist investor Chris Logan told News24 he had not delved into the issues enough to comment on the debate between Cilliers and Renergen. But he added that engagement was always the best way to go, even when critique is coming from short sellers.
In fact, short sellers play a key role in uncovering irregularities and even fraud, he says:
The News24 article points out that, short sellers, the proper ones, do an extraordinary amount of work …. You need guys like them who actively look for things. Sometimes they bark up the wrong tree, but with interaction between the two parties, there’s more chance of the truth emerging.
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No regrets
The News24 article points out that Marani says Renergen’s primary concern is to regain market confidence.
Mitchell says it’s not a case of trying to manage the share price. The market will do that. “But we do need to make sure that the market knows that the same two guys that came to the market back in the early days are the same two guys that are sitting here today – dealing with this head-on and ensuring that the story is exactly what we’ve reported through the various stages of our progress.”
The article adds that, while Marani wishes he had handled the social media situation differently, he has no regrets about how the business was put together.
“This path has been the best path for the business. And in time, we are fairly confident the share price will correct and find its natural home. And we will fulfil our strategy of becoming one of the world’s dominant liquid helium providers, both upstream and downstream. And that sets us apart from pretty much any other gas company globally.”
As for Cilliers, he faces a conundrum following Renergen’s invitation to engage with management – and a counteroffer from himself to rather partake in live debate. He doesn’t believe this would be accepted.
“I would have to spend even more of my time, and then what? What’s the benefit to me? I won’t ever invest in Renergen; I don’t trust them.”
For now, he has resolved to submit questions in writing and will take it from there.
“But it’s a difficult position because I have to make a decision. Do I just let it go, or do I take it further?” he says. “You know, one just wants to feel sometimes that there’s some appreciation for what you do.”
Corporate coaching needs to happen at every level of distress
The above situation is a perfect example of how corporate coaching needs to happen at every level of distress.
Every company faces a significantly disruptive environment where pressure is exerted on many fronts. Any of these challenges can potentially become a root cause of financial distress.
In this environment, a misplaced comment will accelerate losses and cause significant negative sentiments to increase. As pointed out in the News24 article, this will anger shareholders who hold leadership responsible for safeguarding the company’s value. Leaders need to learn about the value of a good communication campaign and be coached about acceptable comments and when to make them. They also need to know how to respond to tough questions so that value is not compromised.
