Palm oil player: Stockopedia speaks to Michael Frayne, the executive chairman of Equatorial Palm Oil plc

In February this year, Michael Frayne launched an initial public offering of Equatorial Palm Oil (LON:PAL) on the Alternative Investment Market – one of the few IPOs that got any traction in what were hugely uncertain conditions early in 2010. With £6.5m netted from the share placing and a further £5m from investors in India, the company’s executive chairman is now eyeing plans to kick off palm oil production by the end of this year. With a bold play in the West African state of Liberia, he is hoping to take a first-mover advantage from the company’s substantial land package, strong relationship with the government and responsible attitude to the environmental and social issues that have tripped up other palm oil players.

Equatorial Palm Oil currently has a land holding covering around 169,000 hectares in conditions ideal for growing oil palms. Over the next ten years it wants to develop at least 50,000 hectares in order to produce around 250,000 tonnes of crude palm oil every year. To start with, Frayne and his team are focusing on re-establishing a 3,000 hectare area at Palm Bay, where a plant and processing facility is due to be set up shortly. They are aiming to capitalise on huge African and international demand for the oil, which eventually finds its way into the likes of bread, chocolate and chewing gum, with 43 of the top 100 food brands in UK containing palm oil. In London, the company’s peers include New Britain Palm Oil (LON:NBPO), Anglo-Eastern Plantations (LON:AEP), M.P.evans Group (LON:MPE) and Asian Plantations (LON:PALM). Michael Frayne spoke to Stockopedia News about his plans for the development of Equatorial Palm Oil and the opportunities he sees in the market.

Michael, how did you get involved in Equatorial Palm Oil and how did you secure this land holding in Liberia?

We actually started life as an investment company looking for resource development assets. We were looking at mining, oil & gas and agricultural and we liked the palm oil sector because it is the biggest vegetable oil in the world. It is a good market - you only have to look at the huge number of food products and other things that have got palm oil in them. The second thing was that, a few years ago, you could see a lot of problems coming to Malaysia and Indonesia, which are the biggest palm oil producers in the world. You could see these issues that were looming in terms of environmental and socially responsible development. For a lot of people, palm oil is a byword for mass deforestation.

We were aware of those things, we liked the sector and we were invited out to Liberia to look at a few potential opportunities, including palm oil, through a network of contacts that we have. There were actually some mining and other resource opportunities there as well but we liked the fact that the government wanted to develop its palm oil sector. A lot of the land wasn’t primary forest; it was degraded land or subsistence farming. And while you’ve got to assume the right rainfall and locations – palm oil needs certain conditions to grow – those things meant you could actually develop the palm oil sustainably. Putting the right land position together with the right agreements and getting it ratified internationally and so forth all took time. We had everything pretty much ready to go in 2008. Mirabaud Securities have been our brokers since 2007; they liked the project, they liked the sector and they understood it. In May/June 2008 we looked to re-list on the market but there were two problems, first, everyone goes on holiday at that time and, second, we had things like Lehman Brothers which meant the world wasn’t quite ready for us, unfortunately. In the meantime things progressed on the ground and then we looked to re-list in February this year.

Very good shareholders came in and we raised £6.5m and then subsequently a number of people out there showed an interest. We have got a very good management team, we’re a listed entity with good financial shareholders and a very clear development plan and a good land position. So we spoke to a number of different groups and took a further investment for just under 30% of the company from a large Indian development group called Silva Group, who put in £5m. So we have got a very good cash condition. Our share price has gone up and down and drifted like a lot of things on reasonably low volume but we’re focused on fundamentals, we think there’s a lot of underlying value and we just need to demonstrate and implement what we’ve been given our money to do.

We have actually ordered our first palm mill, which will arrive some time in the next couple of weeks, because we have existing palm oil plantation there. The mill was built in Malaysia and their engineers are actually on site at the moment and the plan is that we start building it by the end of this month and to be producing palm oil at the end of the year.

Are you on track with your development strategy to get these oil palm plantations up and running?

It’s all still progressing as we expect. The other phase of our development strategy is that once we get some cash flow and some operations going, the real actual value is the extremely well placed, well held land position, which we will then look to start planting up. Our first nurseries have gone in. You get the seeds from specific nurseries so they’re guaranteed to be of a certain quality, you then put them in the nursery for a year and then you plant them out. The planting out is where the value will be.

So we’ve got cash flow combined with this medium to long term, very high asset growth – that’s our two-pronged development strategy and that’s all progressing as well. So we’re now building our team, we’ve got very experienced plantation developers who have been generally trained in South East Asia but have been working in Africa. This year we are looking to plant 1,200 hectares on our land position and then next year we are hoping to plant anything between 3,000 to 5,000 hectares. Then it is a question of how quickly can we can ramp that up. So that’s going very well.

One of the other reasons we were attracted to Liberia is that everyone speaks English. It is the closest thing to a US colony in Africa because it was the freed African American slaves who went back and formed the country of Liberia in the 1840s. Monrovia, the capital, was named after President Monroe, who was president at the time. So there’s a very close link to the US there. Everything is conducted in US dollars which has certain benefits in terms of exchange rates and so forth.

Politically, things have settled down in Liberia since the end of the civil war but presumably there are still challenges when dealing with the government?

Yes, always, but they are very focused on foreign investment. They have put up a very good investment framework, they’ve given us a number of clear tax concessions, they understand the lead time to encourage people to make the capital investment that we require and they provide tax incentives. So they are happy to try and encourage you to spend as much money on the ground. Their key focus is how many people can you employ – and palm oil is a very good employer because it’s a regional developer.

The other thing is that they understand the agricultural sector, they’ve got a huge rubber industry, which is their main business. The original Firestone rubber plantation was first developed there in 1926 and it is still operating. So there are a lot of rubber estates and there is a very good plantation culture or mentality. The other thing is that 20-25% of our development land will hold what are called smallholder or out-grower schemes. That’s how the local people have ownership – you provide the seeds and it’s done on a micro-finance basis. That’s done in Papua New Guinea very successfully and it is done in Indonesia and Malaysia very successfully, so we’re just applying those models.

Elsewhere, there’s a lot of good gold exploration and iron ore development going on. Arcelor Mittal (NYSE:MT), BHP Billiton (LON:BLT) and Severstal (RTS:CHMF) with African Aura Mining (LON:AAAM) are there and I think Frank Timmis has got something there. They’re now finding oil offshore so it’s an extension of all that West African coastal exploration – Tullow Oil Plc (LON:TLW) and Repsol (MCE:REP) are all looking along there. It is deep water oil but certain companies seem to have a good understanding of what’s going on there, so they’ve got some opportunities.

The other big thing in the palm oil sector is that where we have got a significant land position in Liberia, either side of us there are two other big groups coming in. One is Sime Darby (MYX:4197), which is the biggest listed oil palm group in the world. Their chief executive last year said that the company had to find new areas to develop and, in the case of Liberia, couldn’t wait until it looks totally perfect otherwise it would be too late. The other group is called Golden Agri-Resources which is actually a subsidiary of another successful Indonesian company Sinar Mas, but which has actually attracted criticism recently for not managing environmental issues that well. Unfortunately, in palm oil you’re going to attract attention even if you try to do everything correctly, any resource is like that. Our clear strategy is to get our production going from existing planting and then just try and plant out as fast as we can. We’ve got the shareholders and a broker who understand what we’re trying to do and want to build with us.

You came to the market in February 2010 when conditions were still very uncertain. Was it easy to sell to investors at the time?

There was a lot of interest and everyone liked it but everyone was pretty nervy, and there were not many IPOs occurring, obviously. We priced it competitively and actually got the share price back up but it has drifted a bit since then. One criticism was that we are a bit small, which we are. There are a lot of people who would like to see us with a bigger market cap, but that implies a liquidity issue, which creates opportunities for other people. It was tough, we really had to push to get along the line but we knew there were other people we could bring in once we were listed.

On that subject, Siva Group’s BioPalm Energy operation invested in the company during May. What is behind their thinking and strategy?

BioPalm Energy is a group based in India and India is a huge consumer of palm oil. They use it in a lot of their cooking products but it is also in shampoos and lipsticks and all sorts of things. So BioPalm Energy is a sector investor and they think palm oil is a big area – they are almost like a private equity group. Their thinking is that if you’ve got good land positions and you’re planting out now, in three or five years, if not sooner, it’s going to be worth a hell of a lot more. So they are looking to acquire and invest in palm oil projects all around the world. They want to help build us and they’re saying ‘this is a big story and we’re here, we can help with other things’ and I think there are future opportunities down the track with them. Ultimately, they are saying that if you can get in at the early stage of palm oil development; the value creation will be very, very significant.

So with production set to begin later this year how do you see the value of the company changing?

The trees take three and a half years from seed to first production but clearly a two year old tree is worth more than vacant ground. It’s like building up your reserves as you go. If you’ve got a land position and you’re planting it out and developing it, even though you might not be getting cash flow yet, it can still be worth a lot of money. The examples are the companies sitting on big oil and gas reserves or sitting on big iron ore reserves that have a lot of value attributed to them because the future cash flow is there. But once you’re planting it’s very easy, it’s very predictable, there’s no exploration risk, the thing is just going to increment all the time, so there’s very good predictability.

Once the new mill is up and running how straightforward will it be for you to begin production?

Very straightforward. You harvest from your trees all year round. There is a team that is responsible for checking a number of hectares of trees. They’ll check a tree every couple of days but they’ll only harvest from one perhaps every couple of months. What happens is that once the tree starts growing it produces fruit the whole time. So within an area the team will collect them, put them on wheelbarrows, which then go to tractors, which then take them to a central area and the mill and then they get processed. The mill is going to process five tonnes of this fresh fruit per hour. We bought it as a turnkey project off the shelf and their engineers and construction guys will build it, train the staff, commission it and hand it over as a fully working plant. There’s no new technology, a lot of it is about training staff properly so they know when to harvest the fruit at its optimal ripeness.

Do you face a competitive threat in this market?

Marketing and off-take is very straight forward, I could sign up five off-take agreements tomorrow because it is an internationally priced product. Felda, which is actually part of the Malaysian government and the local Landowners Development Association, is actually the biggest producer of palm oil in the world. It’s a collective of all smallholders and other groups in Malaysia but they only account for probably 8% or 9% of the total world market. So you haven’t got someone who produces 60% of the world market. There’s an enormous market for it and the price is very good, it is around $820 a tonne at the moment. We work on $600 a tonne for long term price but it will go to $1200 a tonne and it’ll probably go down to $500. The price is there and it’s very easy to work off it. We’re looking to produce for $250 a tonne in the longer term. It’s just a very quiet but very good business. You’ve just got to get in there and plant and go forward.

Could you be tempted to try and negotiate more land from the Liberian government?

Well we’ve got 180,000 hectares at the moment but if we planted out 100,000 hectares we’d be a $1.5bn to $2bn company. There’s definitely more land available but that will come to us over the next four or five years if we want it. Potentially yes, and what you generally do is once you have established production you generate lots and lots of cash, it’s just a question of how much goes back to the shareholders and how much is reinvested.

Finally, on a personal note, are you enjoying running a palm oil company?

Absolutely. I think we’re at an exciting stage, there’s a lot that can go on. I’ve got very good management who, on the operational side, I defer to. They really know their stuff and it’s really a case of me supporting them. I think there’s a lot of opportunity and I’m certainly leveraged to the success; I’ve bought a lot of shares. We funded the company for two years whilst trying to get it listed so I’m very keen to make a success of it.