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Rame Energy looking to power up with Chilean growth

Rame Energy has come to the market with what, on the face of it, looks like quite an interesting investment proposition – bringing renewable energy to the industrial sector in Chile.
Rame Energy looking to power up  with Chilean growth

Rame Energy (LON:RAME) has come to the market with what, on the face of it, looks like quite an interesting investment proposition – bringing renewable energy to the industrial sector in Chile.

When you drill down and assess the company’s expertise in this sector and couple this with its unique funding deal, you realise the group has a very well thought out strategy.

The essence of the opportunity is found in Rame’s engineering heritage, in particular its decade-long track record in managing specialised wind power projects.

The breakthrough came when the group was asked to build, from scratch, a solution to Barrick Gold’s energy needs, in the Andes.

“It is the highest operating wind turbine in the world,” said chief executive Tim Adams of the giant wind turbine Rame built.

“We thought it [the project] was going to be all about logistics, but in fact it was also about developing core technology that worked at altitude.”

“So we gained a lot of experience of what’s in the box. It took us into Latin America and exposed us to the mining industry and was our first demonstrable turnkey power project at scale.”

Rame immediately became recognised as a leader in this particular niche sector - and it was obvious there was an opportunity to build, own and earn yield from these projects.

At the same time, project funding for wind energy, which had been problematic in the aftermath of the global financial crisis, became easier to source.

This all led to a decent starting point for Rame.

The company is being bankrolled by a local subsidiary of Santander under a quite intricate funding formula that appears to be a win-win.

Santander has committed US$69mln; however, this isn’t subordinated debt.

It will invest at an equity level, acquiring its stake of up to 90% of the project, on an agreed price per megawatt hour.

Under this formula, the amount invested by Santander to acquire its stake will be more than it costs Rame to develop the asset – so there is a profit there for the company.

It also makes a margin from the building phase itself. Rame’s expertise in project management and construction should minimise the leakage of cash out to a subcontractor.

“Less than a year down the line, Rame will have the opportunity to buy Santander out of its share of the project,” Adams said.

"This should see the bank receive a private equity level of return for a short hold period, while still generating a strong return for Rame for the life of the project.”

The deal could be funded through a traditional bank facility, although it is considering all of its funding options, including a bond.

The last stage of the value creation process would be to sell 49% of the forward revenue stream to financial institutions such as cashed up Chilean pension funds, seeking to invest in long term and low risk cash flows.

“They are hungry for low risk, stable income project investment and are increasingly recognising the potential of energy projects, in addition or as a substitute to traditional infrastructure projects such as toll roads or hospitals,” the chief executive explained.

“We would then be left with a majority holding of a project which, in addition to the immediate revenue from the sell down which can be re-invested in new projects or returned to shareholders, will provide the company with a long term, stable income stream.”

As he points out, 100 megawatt (MW) sold on this basis “would see substantial cash inflows”.

The group expects to build 300MW of capacity by 2017 and the Rame chief executive is confident the demand is there to achieve that target.

The group cemented its relationship with Santander on the 15MW Raki-Huajache Project that should be completed by the end of the year.

Rame has already completed the bulk of the development and thus Santander is benefiting from short lead times.

Transforming itself into an independent power producer (IPP) is just one of three divisions which provide revenue streams to the business.

The company also has a small-scale generation division, which is focused on the fuel replacement market.

As highlighted by its partnership recently established with Mandalay Resources (TSE:MND), there are plenty of opportunities for this division, which adds renewable energy such as solar, wind or heat recovery systems to create hybrid power generating systems.

Because of the stated short life of Mandalay’s Cerro Bayo mine, in southern Chile, few traditional renewables companies and power producers would see an opportunity to make a fuel displacement power project work, CEO Adams said.

Meanwhile, its size, small at 1.5MW, would also be off-putting to companies without the requisite expertise and background, he pointed out.

However, Rame is making the leap, knowing where others can’t, it can make a good return over the stated remaining life of the Cerro Bayo mine.

If, as Rame anticipates, the life of the mine is extended, then Rame’s investment would continue to see the benefit.

“In fact these small fuel replacement jobs segue quite nicely with the larger projects, while the income stream will also be aided by the income generated by the base engineering business,” Adams said.

He also believes Rame could start paying out dividends from some of this growing earnings stream in the next two years.

“We are currently saying the sweet spot for us is when we have circa 100MW. So there is no reason why we couldn’t dividend in early 2016,” the Rame boss explained.

As outlined above, the company’s expertise has been derived through its Engineering Services Division, which supplies bespoke power generation solutions to the industrial, mining and utility sectors.

This third division operates in both the UK and Chile, and continues to generate a significant revenue stream.

In fact, Rame recently acquired a long-established UK solar business to bolster its capabilities in this area, and this could also provide opportunities for the Large Scale Power Generation Division in the future.

Rame also sees strong opportunities for growth in this area and this will be another focus for the management team in the coming months.

It is this flexible and diversified ability to provide power solutions to a range of different projects, as well as build its own, which makes Rame such an interesting and solid proposition.

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