CASE STUDIES

Supporting the creation of an environmental technology holding – from Commercial Due Diligence to long-term value enhancement

1. Acquiring the nucleus

Our client had made a strategic decision to invest in the environmental technology sector. Specifically, the client was seeking to acquire “German Mittelstand” water and waste water SME players.

Singular was tasked to conduct a bankable Commercial Due Diligence (CDD) on the first relevant target which would – assuming a completed transaction – become the nucleus for the new holding company.

Our team set out to understand the target company’s business model, its market and competitive landscape. Working closely with our client, we developed several business plan scenarios reflecting various value levers we identified in the CDD project. While the target company was doing an outstanding job in terms of engineering and quality, there were obvious gaps in the areas of sales and operations as well as customer service. Furthermore, the company was lacking ambitions to grow and not seriously considering a ramp-up of work floor and production staff – which would have become critical once sales were up.

Based on our report, our client eventually decided to acquire the target company.

2. Executing a buy-and-build strategy for the holding

Not long after the transaction had been completed, our client identified several targets in the same space, but with a different product offering along the value chain.

Over the course of the next months, the same project team was assigned to conduct three further CDD projects with a focus on synergies between the businesses. It turned out that while some synergies could be identified pertaining to procurement, IT and overhead functions, the most important synergies were in sales, marketing and distribution channels.

Overall, there was tremendous potential to build a strong integrated environmental technology platform with a diverse product portfolio and a global distribution network.

All three target companies were eventually acquired as part of the new holding.

3. Initiating value creation

Our team was asked to validate the value creation hypotheses together with the portfolio companies’ management teams, and to ensure a quick and thorough implementation.

As a first step, we conducted a two-day strategy workshop with the portfolio companies’ CEOs to discuss the synergies and – perhaps most importantly – for the CEOs to grow together as one team. After validating our hypotheses and prioritising the most promising ones, we assigned responsibilities for each synergy. We engaged in working sessions with each CEO, defining the required steps to be taken in detail, and supported the responsible CEOs to secure the internal resources required for successful implementation.

4. Accompanying value creation long-term

Due to our project team’s traction and trusted relationships with the client as well as the portfolio companies’ management, we were asked to accompany the implementation process with a lean project set-up for the next 12 months. We then implemented a Project Management Office (PMO) to keep track of all implementation measures, to drive and provide support on specific issues, and to escalate if required.

Lithium – world’s hottest commodity or investment hype?

In the context of 21st-century governments and corporates increasingly looking to renewable alternatives to achieve long-term sustainability, Lithium – the lightest of all metals – is currently regarded as one of the most promising commodities, notably due to battery market fundamentals and its numerous industrial applications. The growth of Lithium demand is unquestionable, and ever increasing (8-12% p.a. till 2020). This is driven by electronic vehicles, mobile electronics and energy storage. In parallel, that rapid growth is facing a limited supply (3-7% p.a. till 2020) and unable to match future demand – an optimal set-up to drive Lithium prices in the short- to mid-term. Singular explores the story of lithium and the exciting investment opportunities it presents:

Climate change and price volatility in the energy markets have made governments, businesses and consumers acutely aware of energy and environmental issues in the 21st century. Businesses have slowly started to accept that 20th century fossil fuels do not make economic sense in the long run and as such, are now actively seeking renewable alternatives. Within the renewables pack, lithium seems to be playing a pivotal role and has been tipped as “one of the world’s hottest commodities” in several recent publications.

But what does this mean for the lithium market from an investor’s perspective?

Any successful investment decision to enter this market requires a sound understanding of the full lithium story. A complete picture needs to be established which covers both the demand and supply dynamics as well as an assessment of the various investment options.

Demand

At approximately 35% of total use, lithium-ion batteries are not only the main application for lithium, but they are also the foundation of the lithium hype. The Li-ion batteries segment can itself be divided into three main application areas: electric vehicles, energy storage and portable devices. Owing to favourable legislation and incentives, electric vehicle volumes are expected to surge globally.

Innovative energy storage solutions using batteries are being developed and marketed by companies like Tesla Energy – targeting mass markets, businesses and utilities. Li-ion batteries with their high performance, declining production costs and superior features are well placed to capture most of this anticipated demand. According to our research, substitution of Li-ion batteries by alternative technologies seems to be very unlikely over next five to seven years. The mega-factory projects of Tesla, LG, Foxconn, etc. are indicative of the anticipated increase in lithium demand.

Assuming the growth case for electric vehicles is accurate, the most convincing argument as to why the impact on lithium demand will be huge is the following: a smartphone (of which approximately 2 billion exist today) contains between 2 and 5 grams of pure lithium, while an electric vehicle contains anywhere from 20 000 to 50 000 grams. If one now assumes that, say 25%, of the world’s 1.2 billion cars will be electric vehicles by 2030, this alone would lead to an exponential increase of the lithium demand. In our analyses we have considered many other lithium applications and have concluded that a rather conservative growth estimation for lithium demand is around 10% annually by 2022. In a scenario where the adoption of electric vehicles happens quicker than anticipated, the compound growth rate would be significantly higher.

Supply

Lithium is not a scarce metal, its reserves are abundant and spread over the world, especially in South America and Australia. Even sea water contains lithium. The difficulty facing miners is to find lithium rock or brines which contain amounts of lithium that can be extracted in economically viable terms.

Until now, lithium supply has been able to match increasing demand, with current supply dominated by four traditional suppliers. Sustained demand growth and limited supply have driven lithium prices from around $3 000 per ton in 2006 to well over $13 000 today. Sensing opportunity, new market entrants have started extensive exploration and development programmes. We have identified several lithium projects globally which are anywhere between pre-feasibility studies and a few months off reaching their nameplate production capacity. In addition, numerous exploration projects are underway.

While lithium resources are abundant and market participants have realised the growth story, the biggest obstacle is that it takes at least five to ten years from early exploration to reach marketable production. In fact, no project, according to our research, has ever been completed under six years.

Assuming the 16 global projects (including expansion of existing mines) which have already surpassed the earliest stage, all develop according to plan – which is rather unlikely given some overly optimistic plans – and they reach their nameplate production capacity, global lithium supply will increase by approximately 6-8% per annum by 2022. We conclude that it is highly unlikely that newer lithium sources could be developed between now and 2022.

Therefore, even with conservative growth in Li-ion battery demand, future lithium supply is very unlikely to meet growing demand until at least 2022. This widening demand / supply gap is likely to lead to steep price rises.

Investment

The number of publicly traded lithium companies is limited, with an even smaller number of companies focusing almost exclusively on lithium. Most of these ‘pure play’ companies have not yet fully developed their projects and hence come with significant operational and financial risks. Many also come with hefty valuations – the lithium hype has caused share prices to soar anywhere between 200-800% over the last two years (for lithium pure plays). There may be more to come: as a hedge against lithium price increases, manufacturers of Li-ion batteries and electric cars are likely to secure supplies by acquiring significant stakes in lithium assets.

From an investor’s perspective the key to success is picking the right lithium stocks. In our analyses we have identified a strong correlation between the development stage of assets (from pre-feasibility to close to nameplate production capacity) and the producer’s valuation per ton of production of lithium (nameplate capacity), as one would expect. However, upon close inspection, some stocks seem to have been at the centre of the lithium hype without a sound justification while for others the best is yet to come.

Organisational restructuring of a CIS agribusiness

Companies often overlook the significant intrinsic value that lies in the appropriate design of their organisational structure. Adequately tailoring the structure to suit the company’s size, scope of operations and strategic objectives can generate strong savings, ensure business processes are functioning optimally and guarantee that the right people are in the right place, doing the right things.

The organisational structure, or ‘operating model’ in this context, answers the question of how an agricultural business portfolio is managed along farm clusters and business functions to deliver on the overall group strategy. This split of accountable business units and a broader group strategy is critical to the client’s competitive advantage. The operating model focuses the organisation on the key value drivers and on creating synergy across the portfolio of activities.

We understand that optimally structuring the operating model is of particular importance for agribusinesses in the CIS region, given the nature of the strategic challenges they face. The wide spread of operations and the need for centrally defined practices create a difficult tension to balance. Best practice sharing between highly dissociated farms and clusters is typically quite low, a process which can be significantly enhanced by solid organisational structuring at the group level. Also, the recurrent problem with theft on the field makes effective central control of utmost importance to prevent losses.

Singular helped our client, a leading CIS agribusiness, with a large-scale organisational restructuring to reduce its cost base, enhance decision-making and improve business processes.

The project was conducted over four major phases:

• Outlining the strategic boundaries of the operating model, mapping the current situation of the organisation and deriving key learnings from industry benchmarks and interviewing senior management to understand the internal perspective.
• Stage 2 involved defining the role of the centre, detailing the key pillars of each major function and identifying the level of centralisation of key functions within the company.
• Stage 3 followed the core deliverables of the project, including detailing the new organisational blueprint, drafting job descriptions and defining key business processes.
• Finally, stage 4 implemented the updated organisational model with an elaborate and structured transition plan and communication plan.

The major project deliverables produced at the outset of Stage 3 included:

• Revised organisational charts based on the newly-defined organisational blueprint
• Job descriptions for each new position and Key Performance Indicators (KPIs)
• A detailed breakdown of all major business processes indicating who is accountable, responsible, consulted and informed throughout each process

The exercise was very successful, enabling the company to centralise key decisions, unlock economies of scale, ensure best practice sharing and improve its interface management.

Setting up an investment fund for a family office

A prominent family office approached Singular to support the set-up of a mining fund. They wanted to know where they should invest. The office was overwhelmed by differing expert opinions.

Singular’s Partner for African Operations explains that most funds would have dived into assessing mining assets. Instead, we started by asking “why”. The team questioned: “Why should we invest in mining in Africa? At what stage of the lifecycle? In what commodity?” We looked into the demand side of the commodity market, before hunting for assets.

Singular explored the growing high-tech/clean-tech applications most likely to increase demand for these niche commodities.

A clearer picture emerged from the demand analysis. Assessing which commodities were attractive culminated in a market attractiveness vs. strategic fit matrix for the investor. Niche commodities such as rare earths, manganese zinc, vanadium, and cobalt were prioritised.

Singular’s top concern was getting the fund’s focus and strategy right. Following this, the next step was to set up governance, the operating model and develop a toolkit and processes to handle the large volume of origination needed to find exceptional investments.

Singular’s leadership says: “As a rule of thumb, I want to make sure we always reject 95-98% of the deals we look at.”

There is no such thing as superior access to good deals or superior screening skills. Setting up the tools and processes to handle this large volume of screening is critical for success.

After answering “why”, it was much easier to answer “what”. Having understood why they were investing, Singular assisted the family office in defining their investment focus.

Singular built the fund from scratch, developing the strategy and filling the investment pipeline with over 50 opportunities.

Singular, together with the client, narrowed down the vision and created a successful venture capital fund with a full deal pipeline.

Enabling investment decisions in fast-growing economies

West Africa is on a fast growth track with import substitution in the minerals and metals and industrial goods sectors emerging as a common investment theme. Our client was excited by the opportunity, but we knew several players who were pursuing similar opportunities – and hence wanted to make sure that our client was not following the bandwagon and had a bullet proof business case before proceeding further. Some of the key questions we wanted to answer included:

1. Is there opportunity for a new player in this market?
2. What is our client’s unique value proposition to the customer?
3. How can our client compete effectively without triggering a price war?

Our goal therefore was to validate the business potential, stress test the key assumptions, assess the risks and challenges and assess internal capabilities. Breaking these questions down into a detailed business case enabled us to determine the size of the opportunity as well as take the client through a logical path to arrive at an investment decision.

We validated the business opportunity by looking at three angles:

1. Analyse the value chain and determine where and how to play
2. Assess potential in the domestic markets, considering competition from imports and other domestic players
3. Assess potential in export markets, within West Africa and beyond

This approach allowed us to identify additional revenue streams and target markets which the client could easily tap into and faster market entry options which were not in the original scope of the business plan. At the end of this three-month exercise, the client was able to take an informed investment decision looking at the comprehensive landscape we developed as well as from a group portfolio view. Furthermore, we identified the gaps that the client needed to close to be successful, which paved the path to implementation of the client’s future plans.

Revamping the business model of a leading CIS agribusiness

One of the largest producers and exporters of crops in the Black Sea region – exporting >2Mtpa of wheat, corn, soya, rapeseed and sunseed from 400kha of farmland – solicited Singular’s advice to transform its business model and increase its service offering to its customer base in order to improve its overall margins.

In 2015, Singular was asked to assist the company in evaluating a number of growth strategies aimed at enhancing value creation. We concluded that transforming its production-based business model to become more service-oriented would be a strong platform for growth. Our recommendation was focused on the hypothesis that increasing the service offering to its customers (farms) would generate value both for the company and its customers.

Singular evaluated the range of services offered by the company to its customers, identified a list of further service areas it could integrate into, and detailed the value potential, risks and requirements of including each new area into the business model. These services included distribution, elevators, barging, origination and blending as well as financial services such as lending, financial derivatives and crop insurance.

Fully-fledged business cases were developed individually for each new service to quantify the profit potential. This included listing challenges and key assumptions, defining pricing and deriving the revenues each service can generate. We also provided an extensive detailing of the costs allocated to each service. The profitability analysis provided a comprehensive view of the EBITDA contribution on a per-service basis. These services were then ranked by attractiveness / profit to produce a prioritised list.

Applying start-up thinking in large corporations to achieve competitive advantage

The South African platinum sector needs urgent attention. South Africa holds 80% of the world’s known platinum reserves. It employs 188 000 people and is an important contributor to tax revenue and GDP. But many mine shafts are closing and jobs are being shed, as the platinum price has plummeted 40% since 2014 to below 1000 USD/oz. Both demand and supply challenges in the platinum market are to blame.

The industry has been affected by violent strikes limiting supply. This would ordinarily have resulted in a price increase, but reduced platinum demand for jewellery and autocatalysts (the two largest applications) has caused a price slump.

In 2014, a leading platinum player trying to keep its mines operating approached Singular to explore a long-term solution to these structural industry challenges.

With jewellery and autocatalyst demand for platinum in retreat, the industry needs a new application to grow. Mining companies are not known for innovation, so how could a mining giant unlock growth at the other end of its value chain? Singular set out to identify new sources of demand by identifying new platinum group metals (PGM) applications and creating a mechanism for platinum leaders to invest in these future sources of platinum demand.

The solution was to create future demand by investing in new PGM applications. Singular has spotted an opportunity as the automotive industry shifts away from petrol and diesel, and electric drive trains are being perceived as a threat to autocatalyst and PGM demand.

Electric drive trains are reliant on batteries and certain leading technologies rely on platinum. Thus, the question became, how can platinum mines support a nascent PGM-based technology to become mainstream? Singular scanned the venture capital market and identified a high-potential technology company that would offer diversification, improved demand and attractive investment returns. The client invested and continues to benefit from the relationship.

While cutting costs is necessary for many mining companies to survive in the short-run, failing to invest in the future could cost companies, and countries like South Africa, even more in terms of missed growth opportunities. Through innovative solutions, a giant mining company can become a champion for green-tech start-ups and invest in a better future for all.

Shaping the landscape: Energy investments in emerging markets

In emerging energy sectors and developing countries, there is a distinct lack of reliable power supply and consistent support for energy needs. In remote locations, including Africa, the Asian sub-continent and islands, access to reliable energy supply comes in the form of expensive and dirty diesel generators. National power grids go down several times a day for several hours at a time.

Considering the current climatic and economical needs to find cleaner and cheaper alternative energy sources, solar energy is an obvious solution. However solar energy is only available during the day. The need to find a storage solution for solar power resulted in a 2015 partnership with Electro Power Systems (EPS).

Singular is helping develop EPS as a leading clean energy storage solution to provide reliable power sources to the telecommunication, commercial real estate and mining space. EPS offers self-contained modular units which convert existing energy into hydrogen gas for later use in a fuel cell component to generate electricity. The EPS solution is already commercialised and has been installed in 18 countries globally in the mission critical telecommunications tower backup industry. Singular will assist EPS in leveraging off their successful technology into larger scale applications and into new industries and geographies.

Nigeria has been noted as an ideal market for EPS. The country is substantially under-electrified due to grid unreliability. Lagos is the largest location of privately-owned diesel generators globally. EPS will leverage off the relatively cheap grid costs and excellent solar radiance of the country to provide autonomous and cheaper electricity solutions on a levelled cost basis.

Singular noticed an energy need and linked it to cutting-edge technology – EPS. Singular and EPS are now partnering to change the world.

How incumbent sectors in emerging markets can remain competitive

The South African government has prioritised beneficiation as a means for creating employment and boosting economic growth.

There are significant challenges, however, to maintaining existing beneficiation capacity. A key example of this is the impending closure of South Africa’s ferroalloy smelting industry. Ferroalloy smelting is an important part of the economic capacity of South Africa, consisting of 13 companies, operating 22 smelting plants in a number of different locations. The industry employs approximately 9 800 people (excluding contractors, suppliers, logistics and local businesses). The industry has a turnover of $US 5.5 billion, with a 95% export rate for output.

What is the problem?

The ferroalloy smelting industry has been adversely affected by current economic conditions, electricity reliability and increasing costs in power, labour and transport. The lack of industry competitiveness has forced certain South African companies to go abroad. Four local smelters are currently under business rescue (IFM, Tata KZN, Evraz Highveld Steel and ASA Metals) and with current market conditions, this number could increase. Local companies have made efforts to keep their doors open, with continued efforts to sustain productivity and efficiency, but this may not be enough. Without intervention, South African smelters will continue to be globally uncompetitive.

Singular was approached by a consortium of smelting companies, representing the interests of the ferroalloy producers of South Africa, to provide potential solutions to these challenges. Singular’s study resulted in various medium- and long-term solutions to address South Africa’s competitive challenges, all with the buy-in of stakeholders Eskom and the government.

Firstly, Singular analysed South Africa’s competitive smelting environment to that of its competitors. Reliable power supply turned out to be a key differentiator and a quick win. Bringing together all key stakeholders, power load management synergies were identified and production planning (seasonal and daily) was optimised accordingly.

Secondly, in the longer term, Singular proposes investing in modern smelting technology for South Africa’s many smelters which are still using old and less competitive furnaces. Lower power requirements, higher smelting efficiency, increased production, lower maintenance, lower environmental impact and a safer and healthier working environment will be brought by the appropriate investment in new technologies. These strategic investments would benefit from government-supported funding schemes, making them accessible and economical.

Independent power generation is the third part of the solution. Off-grid power can help lower overall generaltion costs and avoid costly blackouts and load-shedding. Government and the national power regulator should support such independent power production including efficient co-generation technology. There is already some development in this space, however, progress is very slow and needs to be accelerated for the survival of the industry.

Singular is proud to work with individual smelting clients as well as the South African ferroalloy industry as a whole, to find effective business and national industrial policy solutions to maintain the competitiveness of this vital, value-creating South African industry.