Shahrukh Khan was watching television at home in London with his daughter, when he turned it off using the remote control.
“What has happened, Daddy?” asked his daughter. “Has there been a power cut?”
That would not be the normal reaction of a child in London. But in Pakistan, where Khan’s family has spent much time, power cuts are commonplace. Pakistan’s power industry is in crisis. Its indigenous oil and oil supplies are running dry and it is being forced to pay top dollar for imported oil and coal just to keep the lights on.
Next year it is facing 628MW shortfall of electric power and this deficit is set to hit 14200MW by 2020 on current trends. Khan wants to do something about this and although his plan to develop Pakistan’s largest domestic coal mine has a very sound commercial logic, he makes no secret of his desire to do something useful for the country.
I described Oracle’s coal project in Penny Sleuth in October when its share price on PLUS Markets was around 3p. Now it is nearer 10p and Oracle is closing in on a transfer of its listing to AIM, a move that should take place in the second quarter of this year.
When I caught up with Khan last week he brought me right up to date with Oracle’s impressive progress. They make this company look like an exciting share…
The desperate demand from local companies
Oracle has a license on the massive Thar coal deposit in Pakistan’s south-eastern Sindh Province. Today, it’s crawling with consultants checking the extent of the coal deposit, assessing the impact on the local water table and considering the consequences for the local flora and fauna. The latter include wild camels, peacocks and snakes!
All of this work will contribute towards a feasibility study, the basis for financing the project. The latter is scheduled to take place in the second half of the year and Oracle could be producing its first coal next year.
Pakistan needs this coal urgently, and Oracle has two customers lined up. The first of these is Lucky Cement. Judging by comments in it recent interim report Lucky is not so lucky now.
“The major reasons for decline in growth”, it explained, “were heavy monsoon rains with massive devastated floods, lack of government spending on public sector development projects, hyper inflation and deteriorated law and order situation across the country”.
To make matters worse, “cost per ton of cement increased by 20.5% as compared to same period last year. Fuel cost comprising of heat and power, the major cost component which accounted for 67.2% of total cost of production, increased by 14.2%. Further, prices of coal in the international market have increased tremendously and reached a new height of $140”.
Lucky, which also exports cement to the Middle East, is desperate to wean itself off imported coal and is pressing Oracle for supply as soon as possible. The longer term plan, however, is for Oracle to supply the Karachi Electric Supply Company (‘KESC‘).
Claim your special FREE report: 10 simple rules for maximising your penny share profits
- Receive the stock market wisdom of a top-level penny share expert
- Your essential guide to playing the small caps market
The gatekeepers of Pakistan’s mammoth coal reserves
Speaking at a recent conference, Mr. Ammar Ali Talaat, the KESC’s Strategic Planning and Business Development Manager said that “Pakistan’s huge reserves of coal provides the best solution for its energy crises”. He added that a switch from oil-fired power plans to coal “could save the country approximately one billion dollars”.
Given the political imperative to provide reliable electric power to the 180m Pakistani population, the Government is clearly keen to see the new project succeed, and the plan is for KSEC to build a new power plant next door to Oracle’s Thar mine.
This leaves Oracle’s immediate future somewhat dependent upon KSEC. As shareholders in South Africa’s IPSA (LON:IPSA) have discovered to their cost, that is not always a good thing. But KESC is drawing up its own plans and will seek to raise finance for the power plant concurrently with Oracle’s fund raising for the mine. Initially this will be for a 300MW plant, with a view to scaling this up to 1100MW.
This cosy arrangement also raises the question of Oracle’s future profitability. The Government wants to see the provision of cheap power, and can regulate the electricity tariff. This will determine the price that KSEC can charge, and consequently can afford to pay for its coal.
So Khan accepts that Oracle will not make the super-normal profits that could be generated by exports. On the other hand, a long-term supply agreement with KSEC will give it a secure income stream from which it can look to expand the company.
Either way, Oracle will be a welcome addition to AIM’s mining sector and I’ll be keeping an eye on how it does.
You should make sure you take a look here
Now just before I leave, I want to make sure you had the chance to check out the interesting ‘Monopoly’ idea I told Penny Sleuth readers about last Friday. I reckon my colleagues have picked a potentially excellent long-term way to play a major theme you need to know about. And it looks like Penny Sleuth readers thought so too – response was substantial.
The Zurich Club is a regulated product issued by MoneyWeek Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Customer Services: 0207 633 3780
• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
Claim your special FREE report: 10 simple rules for maximising your penny share profits