HCI: taking a punt on resources
Johnny Copelyn’s investment group has been ignored by the market. But bets on oil, gas and platinum could change that
Investment company Hosken Consolidated Investments (HCI) may be far more resourceful than the market is giving it credit for.
The deeply discounted market value of HCI is pegged largely to its 49% stake in gaming group Tsogo Sun.
This stake is worth around R7.25bn against a market capitalisation of R9bn for HCI. That infers a scant value on HCI’s listed investments like transport company Hosken Pax, broadcast group eMedia, leisure property group Tsogo Sun Hotels and industrial group Deneb as well as a sprawling unlisted property portfolio, participation in the national lottery and coal mining interests.
But what is being completely overlooked by the market is HCI’s recent forays into oil and gas exploration as well as palladium mining.
At the AGM last week, HCI CEO Johnny Copelyn said R1.3bn had already been invested in its 49%-owned Impact Oil & Gas. A further $30m will be invested over the next year, bringing HCI’s total investment to R1.75bn.
HCI carries a sizeable debt load but has a strong record of smart capital allocation. It says it is most comfortable making investments that range in size from R350m to R500m.
So the Impact investment, equivalent to 20% of HCI’s market value, is a big play — or, as Copelyn remarked, "an uncomfortably big bet".
But HCI holds high hopes for success at Impact, hence the rapidly stacked-up investment number. "Exploration does not just stop … if you don’t follow through to the next round you get diluted."
The bet, however, has already started paying off with Impact having an indirect stake in the well-documented Brulpadda well off Mossel Bay – one of the most significant gas discoveries made in local waters in recent years by energy giant Total.
In December Impact bought an indirect interest in Brulpadda through an arrangement to fund the BEE interest in Main Street, a joint venture company that owns a 10% interest in the exploration block.
The issue, at this juncture, is that it is difficult to estimate the potential return for Impact. Copelyn was optimistically vague: "We think we should make good money off this thing. How much? I don’t know."
He later said the potential value of Brulpadda was "one way or another more than the value we have put into it".
Officially (according to HCI’s annual report) "the Brulpadda discovery lowers the risk on four additional high-graded prospects in the block and is likely to see the joint venture follow up with three additional wells between 2020 and 2021 on these prospects".
In addition to Brulpadda, Impact is also participating in the Venus prospect in the Orange River Basin off Namibia. Block 2913b of the Venus prospect will be drilled next quarter or in early 2020 by Total.
The HCI annual report noted: "This is an exciting time for Impact, as it sees through several ‘company-maker’ events."
The market clearly does not share the same level of excitement. At the AGM Copelyn added: "The HCI share price does not reflect Impact in a single cent … if we just walked away from the investment it probably would not affect the share price."
What will yank HCI’s share price out of its relentless slide is anyone’s guess.
The stock peaked at R180.68 in July 2014, before plunging to R98 in February 2016. It then staged a recovery to hit R154 last February but has since retreated to its present level of R99.
Copelyn emphasised that the next nine to 12 months would be the key to more accurately evaluating Brulpadda, when the results of drilling at the three additional wells are known. "Shareholders at next year’s AGM will get a much clearer picture of the potential of Impact."
HCI is also optimistic that its recently acquired 20% stake in Platinum Group Metals Ltd (PGM) will pay off in the short to medium term. HCI is in the process of upping that to closer to 30% of PGM, perhaps disclosing a determination to be the gatekeeper for any takeover offers. PGM is a New York-and Toronto-listed venture, whose Waterberg platinum and palladium project is in the final feasibility stage.
Copelyn is optimistic that Impala Platinum, the JSE’s second-biggest platinum producer by market capitalisation, will exercise its option to develop the project. "Every indication is that Implats want in, and we should know for certain by year-end." He did concede that if Implats did not take up the option, PGM would become a "financially onerous exercise".
The market, currently in a jaundiced mood, might be forgiven for dismissing HCI’s oil and gas and platinum ventures as high-risk sidelines. Nitty-gritty financial detail is in short supply, and even the most optimistic investors are not gazing lovingly at blue-sky opportunities.
That said, it’s worth remembering that HCI’s coal business – which still hardly registers on investors’ radar – is the group’s third-biggest investment by income, having collectively generated over R650m in after-tax profits over the past two financial years.
Replicating this success won’t be easy, but it might be difficult for the market to overlook progress at both Impact and PGM over the next 18 months.