For Peter Earl, 2010 was the year when just about everything that could have gone wrong did go wrong.
The annual report of one of his two quoted vehicles Rurelec (AIM: RUR), shows a photograph of armed Bolivian security guards. They are posing for the cameras outside Rurelec’s office on the day they kicked down the glass doors (although they were unlocked) and marched the finance director out at gunpoint.
President Evo Morales had decided to nationalise Rurelec’s Bolivian assets, delivering a hammer blow to its shareholders, of which Peter Earl is one of the largest.
The share price of Rurelec is still depressed. And yet, in spite of this summary expropriation of one of its main assets, it was able last month to sell 200 million new shares for nine pence each, an issue that left Sterling Trust owning more than 50% of the company.
Sterling Trust is obviously not ready to give up on Rurelec. And when I met up with Peter Earl last week it was evident that he is far from giving up either. In fact he was positively optimistic and convinced that, in this spat with the Bolivian Government, Rurelec might have the last laugh.
The shares offer an interesting gamble. Let me explain why.
Caught in a spate of wildfire asset seizures
Rurelec is an off-shoot of the Independent Power Corporation, a specialist developer of power stations founded by Earl in 1995. It was set up to invest in power projects in South America and in 2006 acquired a 50% interest in the Bolivian power business Guaracachi.
It was confident of a continuation of the long history of good relations between Bolivia and the UK. Since then it has built new plants, providing crucial power for this fast growing, gas and oil-rich nation.
Despite this contribution to Bolivia’s economic advancement, shortly after Rurelec had boasted of its ‘excellent relations’ with the government, on May Day of last year President Morales seized Rurelec’s assets.
This was part of a programme in which it also seized two other privately-owned power generating companies, a regional distribution company and a national electricity transmission company.
Bolivia now has a powerplant it cannot run…
That, though, was not the end of the story. British investment in Bolivia is protected by the UK Bolivia Treaty of 1988, and Rurelec immediately demanded compensation. Unless this is settled privately, the matter will go before UNCITRAL – the United Nations Commission on International Trade Law. Earl is confident that this body will demand that the Bolivian government pays compensation.
In its claim, Rurelec has two things in its favour. The first is that having taken over Rurelec’s brand new, state-of-the-art, combined cycle power station (in which the waste heat is recycled to boost power output) the Bolivians have been unable to run it.
Morales called in Cuban operatives, who promptly blew up the generator. Rurelec answered a call for help, sending some of its own engineers to sort out the mess.
Nothing upsets the electorate more than power black-outs and Bolivia needs more power. Rurelec has added some 20% to Bolivia’s power generation capacity and is willing to do more on the right terms. With the Bolivians seemingly unable to help themselves they may see the sense of settling with Rurelec in return for the latter’s continuing support.
How Rurelec could double its share price
Rurelec’s other trump card is that the word of UNCITRAL is law. No country has ever gone against its arbitration ruling and if Bolivia tried to do so it would have its foreign assets frozen and become an international pariah.
Unless the Bolivians settle with Rurelec before the end of the year the matter will go to UNCITRAL, where they may face an even higher penalty. This is because UNCITRAL may award Rurelec a settlement based upon its loss of future earnings, a figure that could exceed $100m.
The alternative is to settle the claim posted by Rurelec which is based on the value of the Bolivian net assets plus a small amount for unpaid dividends. This comes to the lesser sum of $73m. What could either of these outcomes mean for Rurelec’s shareholders?
Aside from its involvement in Bolivia, Rurelec also owns 50% of a power station in the Argentine province of Patagonia. The recent financing involving Sterling Trust enabled Rurelec to pay off all the debt over this project, allowing it to get its hands on its $13m of annual cash flow.
Deducting Rurelec’s group borrowing of $3m, this plant should be worth at least $35m, or over five pence per share. Compensation of $73m for the Bolivian assets would add another 11p to this, giving a total of 16p – double today’s depressed share price. I’ll be keeping a close eye on this one in the months ahead.
• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
The Penny Sleuth.