Kinetiko Energy Ltd (ASX:KKO) is trading higher on strengthening its position in gas-hungry South Africa by securing 100% of the Amersfoot Project, a near-term commercial production asset.

The company has executed a binding terms sheet with Badimo Gas Pty Ltd to acquire the remaining 51% of Afro Energy Pty Ltd, making Kinetiko sole owner of all exploration rights and production approvals.

This move streamlines the exploration and development of nearly 7,000 square kilometres of the geologically and infrastructure rich land position which hosts a 4.9Tcf (2C) resource.

Shares have surged more than 27% to A$0.14 intra-day on the news.

“Achievement of a major milestone”

Executive chairman Adam Sierakowski said: “This union between the historic joint venture partners represents the achievement of a major milestone for the derisking of the development of what is potentially the largest onshore gas project in South Africa.

“Years of significant cooperation between the Badimo and Kinetiko teams have enabled this acquisition to be realised and will result in delivering substantial shareholder value”

The transaction metrics highlights are:

  • The ownership of 100% of the South African assets under one listed entity provides a wide range of financing options to develop the project;
  • Alignment of one board and management team will streamline development and exploration initiatives and deliver cost efficiencies;
  • Delivers a net contingent resource of 4.9Tcf (2C) to KKO1; and
  • Provides a larger, more suitable market capitalisation for institutional investment which will enhance liquidity.

Merged entity will accelerate development

Badimo executive chairman Don Ncube said: “We have worked for over a decade to explore and develop a significant onshore non-fracking gas project in the Mpumalanga, Orange Free State and Kwazulu-Natal regions of South Africa.

“This merged entity will now be able to raise capital for accelerated exploration, production and downstream development in international markets.

“Such foreign direct investment was previously not available to Badimo and this merger facilitates and reinforces the foreign direct investment initiative of our President.

“It will provide new employment opportunities and development of technical skills in the regions where such gas production is established and contribute to the reduction of harmful polluting carbon dioxide emissions.”

JV partners since 2010

The two companies have been joint venture partners since just before Kinetiko’s IPO in July 2010 and shareholders in Afro Energy since April 2015.

Under both relationships, the parties were obligated to contribute various amounts toward the operational activities being agreed and approved in South Africa.

This mechanism has at times been inefficient and caused delays in exploration and development programs.

The proposed acquisition will eradicate these inefficiencies and expedite all South African operational activities.

Purchase price

KKO will issue approximately 595 million consideration shares to Badimo as total consideration for the proposed acquisition.

Since the inception of Afro Energy, KKO has been paying most of the exploration costs incurred by Afro Energy.

As a result, Kinetiko has loan amounts owing to it which will be satisfied through the reduction of the consideration shares being issued.

On or before completion of the merger, KKO shall facilitate the sale of $6.5 million of consideration shares to third-party investors at a 30-day VWAP discount to the KKO share price.

Upon completion of the proposed acquisition and subject to the price paid for the consideration cash, the beneficial shareholders of Badimo will own approximately 46% of the post-merger issued share capital of KKO.

An independent expert will be engaged by KKO to opine as to whether or not the proposed acquisition is fair and reasonable to KKO shareholders.

Board appointment

The respective boards and major shareholders of Badimo and KKO are supportive of the acquisition, with Badimo representatives and experienced South African energy and gas directors Donald Ncube and Robert Bulder to join the board.

Ncube carved his professional career in the mining industry, working for Anglo American Corporation for 22 consecutive years and was the first South African indigenous individual to sit on the board of Anglo American Corp.

He has a performance track record as chairman of successful corporations such as Sun International, Oceana Fishing Group and the Atomic Energy Corporation.

Bulder is a chartered accountant with more than 30 years of commercial experience in various areas holding numerous senior management and executive positions in the manufacturing, financial services, IT and airline industries.