Leigh Creek Energy Bidding for Incitec Pivot's Fertiliser Business

Leigh Creek Energy (LCK) 13c

Speaking of special situations …

Claimed to own Australia’s biggest uncontracted gas reserves, the Adelaide-based coal gasification pioneer has ambitious plans to enter the fertiliser sector.

We take it that Leigh Creek has filed a formal offer for Incitec Pivot’s fertiliser business, IPF, which accounts for 60 per cent of the local market for the soil nutrient.

UBS has been gauging buyer interest on behalf of Incitec Pivot, which last year announced a “strategic review” of the underperforming IPF.

While this does not necessarily mean an outright sale, Incitec Pivot wants to focus on its better performing explosives business based on the acquired Dyno Nobel.
IPF is speculated to be worth anywhere between $300 million and $1.5 billion, with the most likely price in the mid range of $500-700m.

Making fertiliser requires not just phosphate, but a lot of gas. With a gas reserve of 1153 petajoules at its eponymous site in outback South Australia, Leigh Creek looks to be well positioned to supply IPF’s two eastern seaboard manufacturing operations.

Leigh Creek’s master plan also entails adding value to the gas by building an in situ plant at Leigh Creek to produce urea, widely used in fertilisers as a source of nitrogen.

Costed at $3.2bn, the plant would produce the material at a rock bottom $US100 a tonne.
With annual capacity of 975,000 tonnes, IPF’s Phosphate Hill facility near Mt Isa in northern Queensland turns mined phosphate rock into ammonium phosphate.

IPF’s Gibson Island, in Brisbane, is the biggest supplier of anhydrous ammonia, another fertiliser material.

Phosphate Hill’s current gas contract has eight years to run. Gibson Island gas is supplied by the APLNG joint venture but subsidised by the Queensland government up until 2023.
A few things have to go right for the $70m market cap Leigh Creek to realise its dream of becoming the new force in fertiliser.

Firstly, the energy project is still subject to a final investment decision (FID), having operated as a pilot project for six months early last year. The company estimates it needs $60m of funding over two years just to get to FID stage.

Secondly, it needs a deep pocketed cornerstone investor to stump up the billions of dollars needed for the energy project and urea plant.

Leigh Creek is 24 per cent owned by China New Energy and the parties are in initial negotiations to form a joint venture. These chats, however, have been delayed by the coronavirus threat.

Of course, Incitec Pivot needs to accept Leigh Creek’s offer.
In December Incitec Pivot chief Jeanne Johns reported “plenty of interest” in the asset, but said it was too early to tell who was serious. The company is not in a hurry, citing an end of year (September) deadline to wrap it all up.

IPF recorded an underlying (ebitda) loss of $80m in the year to September 2019, the result of decade-low prices, flood-related outages and drought related slump in demand.
But in the previous two years the division chalked up earnings of more than $100m and presumably that’s a more normal performance.

Finally, coal gasification remains on the nose with investors because of the earlier mishaps in Queensland exemplified by Peter Bond’s hero-to-zero Linc Energy.

A year ago Leigh Creek shares spurted from sub 10c to beyond 40c, but a more sceptical investor mindset now prevails.

Leigh Creek argues its project bears no resemblance to these past failures.
Otherwise, Leigh Creek CEO Phil Staveley is staying mum: “We naturally look at all options in the fertiliser space,” he says.