Economists love abbreviations nearly as much as computer technicians and politicians – and, more importantly, the TANSTAALF principle sounds more like serious economics than ‘There ain’t no such thing as a free lunch’.
The meaning remains the same: Everything has a price, something must be sacrificed to gain anything.
Sasol’s sale of its oxygen plant at the Secunda synfuels site will net it around R8.5 billion, but will mean that in future the petrochemicals company will need to buy gasses needed in its production processes from the new owners.
Sasol announced that it has entered into exclusive negotiations with the SA subsidiary of the French Air Liquide group for the sale of its air separation plant, comprising 16 units that separate air into its different components to produce a range of gasses, such as oxygen, nitrogen and carbon dioxide. The separation process cleans the air from pollution at the same time.
Sasol said in an announcement to shareholders that the plant has the capacity to produce 42 000 tonnes of oxygen per day, as well as other gasses needed in Sasol’s synfuels and chemical production processes.
It added that Air Liquide has been involved at the Secunda plant since 1979 and it already owns one of the newer air separation units on the site. This unit was designed and built by Air Liquide and Sasol and commissioned in 2018.
Air Liquide is the world’s second largest supplier of industrial gasses and services. It operates in 80 countries, supplying gasses to various industries, including the medical industry.
Sasol expects that the specialised gas producer’s expertise will bring benefits above the R8.5 billion in cash it will receive. “Air Liquide owning and operating the full air separation fleet is expected to provide optimisation of management of the assets and energy efficiency benefits,” according to Sasol’s announcement.
It is also expected that greenhouse gas emissions associated with the production of oxygen will decline, helping Sasol to meet its promises of reducing air pollution.
Reticent on returns
The sale of the oxygen plant is part of Sasol’s strategy to reduce debt. It will make perfect sense if the interest rate payable on debt is higher than the perceived rate of return on the physical assets itself, and if Sasol can negotiate a favourable purchase agreement with Air Liquide to buy oxygen and other gasses needed to produce petrol and other chemicals.
However, Sasol told Moneyweb on Thursday that it does not disclose the internal rate of return for individual assets. Regarding how much Sasol will need to pay for oxygen and other gasses from Air Liquide in future, a spokesman said that “final definitive agreements are being negotiated and further information in this regard will be provided when and if appropriate.”
Obviously, Air Liquide would want to earn a return on its investment. Sasol announced that Air Liquide will supply gasses to the synfuels plant under a long-term gas supply agreement which will be negotiated as part on the purchase process.
Air Liquide will be able to sell the rest of the gasses, meaning that Sasol will lose a bit of income too – part of the costs associated with getting R8.5 billion in cash.
It will make a (small) dent in Sasol’s debt burden. The financial results for the six months to December 2019 revealed total debt of R258 billion at the end of December, while earnings fell to only R4.5 billion during the six months compared to R15.9 billion in the same period of the previous year.
Thus, the sale of the air separation plant “bought” more than six months of low earnings during a very difficult time. However, that the announcement mentions that the transaction requires Reserve Bank approval might indicate that Sasol aims to reduce dollar-denominated debt, effectively “buying” foreign assets.
Sasol indicated to Moneyweb that Reserve Bank approval is needed because it is selling local assets to a foreign group and part of the purchase price is payable in euro.
Selling an SA asset also indicates that Sasol is following its chosen path of growing internationally, as the huge investment in the Lake Charles Chemical Project promised years ago.
Sasol added in its announcement that investors should exercise caution when buying or selling shares as the asset disposal programme and other steps to reduce costs are still under way. This could affect the share price significantly.
The announcement of the pending transaction with Air Liquide seemed to have had an effect on the share price.
Sasol increased by nearly 9% by late Wednesday afternoon to R146.56 after touching a high of nearly R152. The JSE was basically unchanged, with the oil price and the exchange rate largely at the same levels as the day before.
However, by mid-morning on Thursday, the share was down
Maybe investors are just glad that Sasol is making progress with its plans and that the possible rights issue of $2 billion (more than R30 billion at current exchange rates) will not be necessary, although one gets the impression that shareholders will be quite willing to buy more shares – at the right price.
Sasol also told investors that the accelerated asset disposal programme is affecting the process of finalising results for the year to June and that a trading statement should only be expected early in August.
It added that the proposed transaction with Air Liquide is expected to be completed within the current financial year (ending June 2021). Previous announcements have indicated that the sale of other assets will also be completed this year, while the Lake Charles plant should start to make some serious money too.
Listen to Simon Brown’s MoneywebNOW interview with Alex Duys of Umthombo Wealth on the asset sale: