20 July 2017
Week In Brief: BUSINESS AND THE CITY
ITS BENEATH YOU: Alternative energy continues to emerge from all sides. The latest challenger to oil is geothermal energy – gathering heat from hot rocks deep below the earth’s crust by pumping water through them for conversion into steam to power turbines, or to use directly as hot water. Iceland is the leader in this source of power and heat – about 60% of her power requirement comes from such sources – and Italy is also starting to see a measurable contribution from sources in the Alps. After several false starts – most of which failed on cost – the UK looks as though it may be close to exploiting similar sources. Technology has in this area, as in so many, meant that the costs of deep rock drilling and utilisation is much reduced from what it was thirty years ago, and local power generation is much more feasible within national power networks. Abundance, an investor in alternative power sourcing, is most of the way through a crowdfunding investment drive to raise £5m to complete a £18m fund to drill the UK’s first commercial geothermal power source. Only £5m is to come from the risk taking public directly; £10.6m is coming from an EU fund, and £2.4m from Cornwall County Council – the site of the power station is in Redruth, Cornwall. Cornwall has perfect geology for geothermal power – it is sitting on very deep granite which (usually) produces reliable drilling, and is thus ideal for a trial project and to further refine the technology.
If the money is raised – about which Abundance is very confident, not least because it carries a 12% coupon – and providing there are no nasty surprises in the rock layers deep down, it is expected that the power station should be producing power by mid 2020. If so, the initial investors will be refinanced by more conventional debt and equity. The output will not be huge – Abundance forecasts enough for at least 1,500 homes (about 1 megawatt), but possibly up to 3 megawatts which would supply 4,500 homes, potentially taking care of the power needs of Redruth and the neighbouring town of Camborne. A modern wind turbine has an output of about 1 megawatt, but geothermal power is much easier to manage – it is constant and can be switched on and off to cope with needs, rather than just working when the wind blows. And it has a much less intrusive effect on the environment. Cornwall has, as United Kingdom locations go, a good supply of wind – too much in the winter, but turbines are controversial in the beautiful landscape. And Redruth and its neighbouring towns have suffered from the collapse of the tin mining industry. the main employer for a couple of centuries. Geothermal power will not produce a lot of jobs in itself, but it will mean that local power supplies are reliable and cheaper, thus encouraging new users and employers.
Abundance is likely to be followed soon by Cornwall’s most popular tourist attraction, the Eden Centre, which has several times attempted to raise finance to create such a power source directly beneath its garden and geodome site, both for its own needs and to supply power to the local town of St Austell, whose china clay industry would benefit from cheaper power. In the longer term, most of Cornwall’s power sourcing could be from geothermal in a generation’s time or so.
DIGGING DEEPER: JCB: The UK builder of construction machinery founded and still owner by the Bamford family has long been held up as an example of how UK businesses can succeed internationally. Current market conditions are far from ideal for makers of construction machinery – activity has declined for several years in most major world locations, and JCB’s rivals such as Caterpillar of the USA have shown in their results the effects of this weak demand. Not so the Uttoxeter based manufacturer – it has just released its 2016 results and turnover is up once again, by a remarkable 12% to £2.6bn, with EBITDA (earnings before balance sheet charges, tax and interest) up 34% to £287m. The company said this is partly because of continuing expansion in India, now a key market and one that has largely kicked international declines, but also because of continuing heavy investment into improving and renewing its products. As a privately held company JCB can take a long term view and plough back profits into future growth. The company also agreed with construction industry analysts who say that there are signs that the decline in the business is nearing its end – expansion, and renewals of equipment whose replacement has been deferred, should help further growth.
CRACKS WIDENING: Carillion, which was in the news last week as it revealed major write-downs on UK and Middle Eastern construction contracts and the departure of its chief executive, saw its share price fall a further 30% over the week, following a fall of 40% on the initial announcements. Just at the moment the share price is probably the least of its problems (although it makes much more difficult a rights issue to raise new capital to plug what appears to be a larger financing gap than first anticipated). The risk is that it falls into the classic difficulty of a company in trouble – ability to procure new contracts falling away as third parties worry about its future, existing customers seeking alternative contractors at any opportunity, and, most damaging in the short term, suppliers becoming reluctant to supply goods without up-front payment, Withdrawal of normal credit terms can kill a company very quickly. In the construction trade, with customers generally paying in arrears for work done, and margins very thin, closing off credit would be a very serious impediment indeed. Word is that the company is trying to find a partner to stabilise its financial position, by takeover if necessary. That is likely to mean a foreign bidder who wants to get into the construction sector on a large scale and has deep pockets in case further problems emerge.
SPORTING GAMES: Mike Ashley, the straight talking, binge drinking (he said it, not us) boss of Sports Direct might be thought to have his mind pretty occupied at the moment with the court case he has been fighting over allegations of promises made to an investment banker. But Mr Ashley can multi-task – Sports Direct has bought 26% of Game Digital, the video games company which has had financial issues following announcement of problems in the supply of Nintendo consoles, used by many of its customers to play on-line games. Mr Ashley likes to buy on share price weakness, and whilst he has not announced what attraction he sees in Game Digital, it has a similar customer profile to that of the typical Sports Direct shopper, so there should be some good cross selling opportunities.
DON-NING THE GOWN: Cambridge has won yet another accolade – it is officially the British city with the highest economic growth rate, having replaced Milton Keynes at number one. Cambridge has invested heavily into all the current growth sectors – computer science, advanced engineering, and biological and pharmaceutical research and production, often on the back of the capital of the various colleges and the research of the university.
KEY MARKET INDICES: (as at 18th July 2017; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, (unchanged): 3 month 0.29% (slight fall); 5 yr 0.81% (fall).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.19% (fall)
US$: 1 mth 1.23% (rising); 3 mth 1.30% (rising); 5 year 1.87 (fall)
Currency Exchanges:
£/Euro: 1.13, £ steady
£/$: 13.0, £ strengthening
Euro/$: 1.15 € weakening
Commodities:
Gold, oz: $1,236, slight rise
Aluminium, tonne: $1,900 slight fall
Copper, tonne: $5,965, rising
Iron Ore, tonne: $66.09, rise
Oil, Brent Crude barrel: $48.61 rise
Wheat, tonne: £143, rise
London Stock Exchange: FTSE 100: 7,405 (rise). FTSE Allshare: 4,051 (rise)
Briefly:
Iron ore continues its strong recovery with back stocks being absorbed; copper also moved very close to the $6,000 mark. Sterling interest rates continued to disobey the Bank of England eyebrow wiggling and moved down; dollar short rates, in contrast, moved up.
If you enjoyed this article please share it using the buttons above.
Please click here if you would like a weekly email on publication of the ShawSheet
