The reconstruction of Caltex Australia that is now formally in train was originally designed to help finance the petrol retailer’s alliance with Harbour Energy’s ultimately failed $US14.4 billion takeover bid for Santos.
Ahead of Harbour’s Waterloo moment in Adelaide last May, Caltex joined the Harbour bid consortium in a deal that would have seen it contribute $US250 million in equity and emerge with marketing rights for Santos’ liquids production and acquisitions rights over the Cooper Basin infrastructure.
The proposition, which was apparently well understood by the Santos negotiating team, would have seen Caltex become a bridge between Harbour and the solution to reported federal government concern over control of critical national infrastructure passing into the hands of a consortium of investors led by US private equity.
Multiple sources have told The Australian Financial Review that Caltex approached Harbour with a deal that extracted full strategic leverage from Harbour’s need for an Australian-made Cooper exit strategy.
The acquisition rights Caltex would have earned covered Santos’ share of the Moomba and Point Bonython processing facilities and the various pipelines that link those facilities to the Cooper oil and gas fields and to the wider east coast networks.
The engagement with Harbour’s failure fitted neatly with Caltex’s Freedom of Convenience strategy that was affirmed in February and is now reaching some level of fulfilment with moves to progressively monetise the company’s $2 billion national real estate footprint.
Caltex’s two wings
That strategy divides Caltex into two wings of opportunity, “convenience retail” and “fuels and infrastructure”. And it is the pitch for growth in that second wing that moved in lock-step with the arrangements with Harbour.
Caltex’s uber acute managing director, Julian Segal, took the opportunity of Tuesday’s release of a sturdy but flat set of interim numbers to confirm a plan to raise up to $500 million through the sale of as much as 25 per cent of his retail sites.
Segal indicated that over the longer term Caltex could reduce its ownership of the property portfolio to just 25 per cent. So, based on the $2 billion value he put on his retail real estate on Tuesday, Segal is out to gather and redeploy at least $1.5 billion in capital that currently sits on his balance sheet.
As we understand it, moves to release that capital from the balance sheet were originally designed to cover the cost of entering the Harbour game. Given that Harbour was rejected and Santos remains both independent and fully motivated to fulfil the logic of rejection, the $500 million question is whether Caltex retains a live interest in rebuilding its place in Australia’s upstream oil game and whether Santos might have any interest in monetising its Cooper infrastructure legacy.
Either way, Caltex has decided that it will continue to own 100 per cent of whatever the upside is going to be in the fuels and infrastructure business.
Back in February, Caltex listed the priorities and opportunities for what used to be its core business as regional expansion, optimising its infrastructure position, growing its trading and shipping business, and protecting and growing the supply base of its customers. Getting its arms around the Cooper kit would have gone a fair way to achieving three of those four ambitions.
For its part, Caltex refused to confirm or deny that it was a player in Harbour or that it had any past or future interest in Santos, although the company noted that the South Australian has long been a “commercial counterparty”. Caltex has long been a customer of Cooper Basin liquids to feed its Australian refineries.
Lithium fulfilment
Lithium’s move to the mainstream of global resources ambition remains a work in progress but there is an increasing body of evidence that reinforces this is an industry that has moved from potential bubble to productive fulfilment.
The consensus among the lithium producers is that the spot market in China is not the weather vane that it is in more mature bulks markets and that there is a secular shift in demand at play. Some level of price reversion is inevitable given that the new production the market will need by 2025 and beyond will arrive with the lumpy timing characteristic of large-scale resources business.
Tuesday brought affirming news from two of the sector’s rising stars in the form of a promising profit and bullish pricing outlook from Orocobre and a capital investment-firming sale of a set of Argentine tenements by Galaxy Resources.
But it says a lot about how lithium as an investment class continues to polarise the resources investment community that, despite consistently positive news flow, both have consistently been targeted by short selling. Lithium remains a bulls and bears game. You either believe lithium will embed itself in the electricity storage business for the foreseeable future or you receive it as an asset class that remains vulnerable to over-investment, over-production and to the same sort of technology-driven market disruption that invited that investment in the first place.
The fact is that power storage is going to be a competitive game and the lithium business will need to get ahead of the demand-supply curve if it is to protect its share of market. The battery business is reaching a BetaMax vs VHS moment and the big bets being laid right now appear to include lithium.
Meanwhile, the likes of Galaxy and Orocobre are getting on with business.
On Tuesday, Galaxy announced a non-binding agreement to raise $US280 million ($380 million) through the sale of the northern portion of its Sal de Vida tenements to POSCO in late May and it told the market that the deal was running ahead of schedule earlier this month. And yet, such is the baked-in scepticism of the lithium bulls that the shorts were still left scrambling for coverage after the flagged deal was made binding on Monday.
Needless to say, POSCO is the quality of international investor that can be trusted to deliver on binding agreements so it would be fair to say that Galaxy will certainly get its money and very likely bank the synergies of aligned development of Sal de Vida that were promised in Tuesday’s announcement.
Galaxy’s plans to develop its southern share of Sal de Vida are well advanced and now seemingly well funded. But, outside of putting the finishing touches to the revised feasibility study that was delivered in May and that flagged a $US471 million project that included a $US31 million potash revenue stream, managing director Anthony Tse is busy marketing his project to potential partners,
According to Tse a long list of dozens has been whittled down to seven interested parties whose interest is sparked by a variety of different strategic needs.
“It is hard to pin down passports of backgrounds,” Tse said on Tuesday. “But we have had the gamut of interested parties from end users to industrial materials companies to other industrial groups and other miners,” he said.
Of the potential offered by productive alliance with his new Korean neighbour in Argentine lithium, Tse said:
“We have exchanged a lot of ideas with POSCO and we recognise that both parties are playing the long game.
“Where we have been talking a lot is about the opportunities for synergies in things like logistics, utilities and infrastructure. If it makes sense, if the cost of building them is one for us and the cost is one for them but the cost of investment in shared services is 1.6, then it makes obvious sense.”
And what of the over-production thesis that feeds the bubble theory that sustains the lithium bears?
“We are aiming to produce 25,000 tonnes of lithium carbonate. The consensus estimates of demand in 2025 is 800,000 to 1 million tonnes per annum,” a cool but ever so slightly irritated Tse explained.
“To match likely future demand the industry needs investment of $US9-$US12 billion. Track what has been raised over the last few years in public and private equity and you will probably fall shy of $US4 billion. So where is the rest coming from?”
On the available evidence, that is not a problem that Tse need worry too much about given the maturity of the JP Morgan-run marketing of his stretch of Sal de Vida and the contribution POSCO is going to make to Galaxy’s financial security.
“One of the things that is under appreciated about this sector is where the electric vehicle sector is going,” Tse continued. “This is not just another normal cycle or growth curve. This is a fairly disruptive type of growth. The vast majority of the AEMs [automotive manufacturers] globally have some sort of electric vehicle strategy.
“Around the world the emissions standards are getting tougher and tougher and the environmental controls are getting harsher. The existing manufacturers will not get by with just working on the old ICE [internal combustion engine] models. They are being pushed to change by governments and customers.”
Extracted from AFR