Olam International - Appoints Technip to Gabon fertiliser project (DBSVickers)

HOLD S$2.37 STI : 2,743.58

Price Target : 12-Month S$ 2.55

Olam announced that the Gabon Fertiliser Company (GFC), a joint venture between Olam, Tata Chemicals and the Government of Gabon, has signed a Pre Construction Services Agreement with Technip S.A. (Technip) for the proposed construction of a 1.3m MT p.a. urea fertiliser project in Gabon.

The due diligence work has been completed to confirm that the designated gas fields for the project had 857 bscf (billion square cubic feet) of 1P reserves, 1054 bscf of 2P reserves and 1300 bscf of 3P reserves, sufficient for the required 750 bscf over a 25 year period. The due diligence also confirmed the quality of the gas required and the presence of existing pipeline to transport the gas to Port Gentil where the proposed plant will be located.

The JV also signed a 25-year fixed price contract with the Republic of Gabon for the guaranteed supply of 750 bscf of gas over the 25 years last week. Olam has yet to disclose the financial terms of the gas contract, except that it would be price competitive.

The project is now expected to follow a Convertible Lump Sum Turn Key (LSTK) process, which involves two concurrent phases:

1. Front-End Engineering & Design (FEED) which fully defines the parameters of the project.

2. A project costing process which uses an Open Book Estimation (OBE) methodology.

Once the FEED and OBE are completed (expected within the next 7 months), the contract with Technip will be converted into a Lump Sum Turn Key Contract. Olam expects the above processes to result in significant savings in capital expenditure and project schedule. Commercial production of urea is anticipated in 31 months.

We see the completion of gas due diligence, signing of fixed price gas contract and appointment of Technip as positive developments. We are confident of a financial close on the project by end 1QCY12.

There is no change to our numbers at this point in time, as the project has not been given the final go ahead, pending financial closing. The Gabon urea project is estimated to provide c.S$0.47 per share upside to our current valuation. Our Hold rating is maintained with TP of S$2.55.