Australia’s Kinetiko Energy signs JV with IDC to develop 500MW gas power plant in Mpumalanga

• Afro Energy (Pty) Ltd1(“Afro Energy”), a subsidiary of Kinetiko Energy Limited1 (“KKO”), has executed a non-binding Term Sheet (“Term Sheet”) with the Industrial Development Corporation of South Africa (“IDC”) to co-develop a new joint venture (“JV”) for the appraisal and production of LNG to deliver 50MW growing to 500MW gas equivalent energy. 
• The first stage 50MW equivalent project is estimated to cost approximately A$138M2 comprising A$90M2 equity and A$48M2 debt. 
• IDC will provide equity funding of approximately A$52M2 for 30% JV interest. 
• Afro Energy will provide equity funding of approximately $A38M2 for 70% JV interest.
• Afro Energy has the right to introduce third party investors to the JV for part or all of its 70% interest and can stage payment.
• The second stage intends the parties expand the JV to 500MW LNG gas equivalent, which would be the largest on shore LNG project in South Africa.
• The IDC intends to fund 30% of the second stage development.
• The IDC has been granted the option to participate in the co-development of further 1,000MW LNG gas equivalent projects, totalling 1.5GW.
• The Term Sheet underpins the Company’s strategic objectives to unlock over 2TCF in gas reserves and become a sustainable cleaner energy solution for the South African economy.

Kinetiko Energy Limited currently holds 49% economic interest in Afro Energy (Pty) Ltd, being the entity which holds the exploration permits. Kinetiko notes, however, that it has recently obtained the necessary shareholder approvals allowing it to, among other things, acquire a 100% economic interest in Afro Energy, and expects to complete the transaction shortly.

Once the acquisition is complete, Kinetiko will be the sole shareholder of Afro Energy and therefore all the obligations noted for Afro Energy under the Term Sheet will then be assumed 100% by KKO.

Kinetiko CEO, Nick de Blocq, commented:

“This is a step change in the scale of the Company’s development and represents a national project to support South Africa’s transition to cleaner, reliable, affordable energy. I cannot overstate the importance of this massive step we have taken in collaboration with our IDC joint venture partners, as it represents a level of confidence in our project from high layers of Government. The project has been registered under the Strategic Infrastructural Projects management mechanism that operates from the Office of the President. This is expected to expedite all State and Government-related processes in terms of permitting and licensing and minimising of red-tape. We are beyond delighted to be able to say that our journey towards a large-scale project commercialisation and production has now begun.”

Material Details of the Term Sheet

The Industrial Development Corporation of South Africa (“IDC”) and Afro Energy have executed a non-binding Term Sheet to jointly develop the appraisal and production of natural gas (“NG”) within Afro Energy’s granted Exploration Rights for commercial liquified-natural gas (“LNG”) use, being the equivalent size of 50MW developing to 500MW. The project consists of the following:

1. a)  “Block 1” – a 50MW-equivalent LNG size operation for commercial development of on-shore wells within the existing granted Exploration Rights.
2. b)  “Further Blocks” – being the commercial development of additional on-shore natural gas wells within the existing granted Exploration Rights, for the balance of gas for 450MW-equivalent LNG size operations, being incorporated via further block SPV’s.

Block 1 costs of upstream and midstream activities for natural gas development are approximately R1.68B (One billion and six hundred and eighty million South African Rand). The Sproule Report (attached in full to this announcement, and also summarised in Company’s ASX announcement dated 21 August 2023) outlines the capital expenditure and operating costs assumptions that provide the Company with a reasonable basis for the Block 1 project having positive economics The gas is intended be sold to an LNG-offtaker to supply 50MW of equivalent LNG.

While off take agreements are not in place KKO has executed a memorandum of understanding with FFS Refiners (refer Company’s ASX announcement dated 2 March 2023) and letter of intent with Gruner Energy (refer Company’s announcement 16 February 2023) for the potential off take of LNG. The envisaged capital and funding structure of the Project for Block 1 is as follows:

1. a)  The R1.68B (A$138M) of required funding to be split: 1. Equity R1.09B (A$90M) (65%); and
   2. Debt R0.59B (A$48M) (35%)
2. b)  The IDC will invest equity totalling R630M for a 30% share of the equity in the Block 1 SPV: a. R435M (A$52M) on the effective date of the Shareholders Agreement; and
   b. R195M (A$16M) on successful completion of the bankable feasibility study
3. c)  Afro Energy can invest the remaining R456M (A$38M) for a 70% share of the equity in Block 1 SPV;
4. d)  The IDC to provide debt funding of R210M (A$17M) of the R590M (A$48M) debt funding on successful completion of the bankable feasibility study; and
5. e)  The IDC shall underwrite any equity shortfall on Afro Energy’s 70% equity portion for the 50MW-equivalent project. The IDC underwriting shall be limited such that it shall be restricted to no more than 49.99% equity Block 1 SPV.

Afro Energy is not obligated to invest the R456M (A$38M) and has the right to introduce a third party investor for part or all its 70% interest in Block 1 but only with the prior written consent of the IDC which shall not be unreasonably withheld. The Term Sheet does not stipulate a timing obligation on Afro Energy to invest for its 70%. However, given the existing binding joint venture the Company has with the IDC it anticipates that it will need to provide funding contemporaneously with the IDC’s investment and the formal terms of such investment will be set out in the formal transaction documentation, including shareholders agreement, to be entered into by the parties shortly and disclosed to the market in accordance with KKO’s continuous disclosure obligations under the ASX Listing Rules.

The scope of the bankable feasibility study has not been defined, however the Company anticipates given its existing binding joint venture with the IDC that it will work with the IDC to agree economic parameters for the bankable feasibility study expected to be completed with the conclusion of IDC internal approvals.

The parties estimate that Block 1 for 50 MW equivalent of LNG will be developed over 2-3 years and Further Blocks for 450 MW equivalent of LNG will be developed over 9-10 years.

Block 1 SPV and Further Block SPV’s will only deal with the upstream activities. The parties hereby agree to create another SPV (“SPV2”), for downstream and midstream activities, where the LNG off- taker/investor will directly invest into, which until then is initially held 70% by IDC and 30% by Afro Energy.

For the Further Blocks the IDC will participate as 30% equity investor for the gas required for the 450MW equivalent in LNG and Afro Energy has the right to introduce a third-party investor for part of its 70% share in SPV 1 and Further Blocks but only with the prior written consent from the IDC, which consent shall not be unreasonably withheld.

Afro Energy shall retain gas resources for IDC participation for the 500 MW-equivalent LNG of 0.7TCF plus an option in favour of IDC for another 1000 MW-equivalent equating to 1.4TCF, totalling 1500 MW-equivalent or 2.1 TCF.

The IDC has been granted a 60-day exclusivity period in which the parties will endeavour to complete the formal legal documentation and obtain necessary internal approvals to give rise to binding obligations. The IDC internal approvals include the execution of finance documents comprising joint venture agreements, shareholder agreements and loan agreements which must be approved by the IDC investment committee and board.

About the IDC

The Industrial Development Corporation is a national development finance institution whose primary objectives are to contribute to the generation of balanced, sustainable economic growth in Africa, and to the economic empowerment of the South African population, thereby promoting the economic prosperity of all citizens. The IDC achieves this by promoting entrepreneurship through the building of competitive industries and enterprises based on sound business principles. www.idc.co.za

Author: Bryan Groenendaal