GCM Resources

GCM
GCM powers forward on coal project progress, but can it continue?

GCM Resources has enjoyed a great couple of months, rising from 11.7p to 30p and hitting highs of 39.6p in January. The business has been boosted by the news of a tie-up with state-backed engineering construction business PowerChina at its flagship Phulbari coal and power asset in Bangladesh. But with hurdles still standing in the way of the project’s construction, can this positive momentum continue?

Power play

GCM has located a high-quality coal resource of 572MMts at Phulbari, which it expects to support a long-life, low-cost mining operation. Using the latest technology, GCM says the mine is capable of supporting power plants of up to 6,000MW. It plans to use this to deliver power that can provide the cheapest electricity in Bangladesh and generate an estimated $12.5bn in foreign investment.

To realise its vision, GCM is pursuing partnerships with what it describes as ‘credible, internationally-recognised strategic partners’. It took a significant step forward here in November when it announced that it had agreed on a six-month memorandum of understanding (MOU) with PowerChina.

PowerChina is owned by the People’s Republic of China and has completed power plants with 242.75GW of installed capacity. It has been ranked the sixth largest global contractor in the world and placed second in a poll of the world’s top 150 engineering design companies.

The MOU set out the principles of a relationship between the two entities to develop GCM’s proposed coal mine and power plants generating up to 4,000MW at the mine site. It also marked the first step towards a joint development agreement between the two companies.

Under the MOU, PowerChina will undertake feasibility and viability studies of the coal mine and power plants and facilitate the inclusion of Phulbari in China’s One Belt, One Road initiative. For its part, GCM will provide technical and regulatory assistance for the studies and support PowerChina in forming an investment consortium.

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JV agreement

Several weeks later, in January, GCM announced that it had agreed a one-year joint venture agreement and definitive engineering, procurement, and construction contract (EPC) with PowerChina. This covers the development of two 1,000MW coal-fired power plants, progressing GCM towards its broader strategy of generating 6,000MW of low-cost electricity.

Under the agreement, GCM will be entitled to an 80pc interest in the power plant, while PowerChina will hang on to the remaining 20pc.

Meanwhile, the EPC gives PowerChina the exclusive rights for engineering, procurement, and construction of the power plant for an agreed initial cost of $3.5bn. This works out at a $700m contribution from PowerChina and a $2.8bn contribution from GCM. While PowerChina is likely to be able to pay its share, one would assume that it is both business’s best interests to work together in ensuring GCM’s portion can be covered through third-party funding.

Digging deeper

 

This may all sound promising, but several barriers still stand in the way of GCM realising Phulbari’s value for its investors.

The most obvious hurdle is getting regulatory clearance for the project, something which is entirely GCM’s responsibility under the JV agreement. The business has set itself a deadline of 28 February to submit a formal proposal to the government of Bangladesh for the construction of the mine and power plants.

To help meet this deadline, it extended its short-term loan facility with 17.8pc shareholder Polo Resources by £1.2m to £2.3m at the end of November. However, if it cannot get this clearance, then it is currently unclear what would happen – presumably nothing until an appeal has been lodged, reviewed, and a decision is made on whether to overturn the refusal.

GCM must also facilitate the preparation of an environmental impact assessment for Phulbari while PowerChina is yet to carry out its feasibility and viability studies on the project. If the number returned from these studies are weaker than expected then Phulbari could lose much of its current economic appeal and prospective value. In turn, this is what is underpinning GCM’s £28.5m market. In this case, it is not like GCM has another huge project to fall back on.

Assuming clearance is granted, and the studies come back with attractive figures, there is then the question of where GCM is going to get the cash to pay for the project. It is likely that this could dilute its position in Phulbari further, or increase its debt considerably. This would reduce the amount of project value that is returned to investors or used to create value.

It is important to remember that these are just risks that are worth considering before investing GCM. The company still has a strong position in a project that it believes to hold a huge amount of value. If you think this prospect outweigh the potential risks, then the stock could be worth a look ahead of a busy period for newsflow.

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The author was remunerated but does not hold shares 

 



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