Archive for January 2016

Another story of how during good times so little due diligence is done on projects

 

THE REST OF THE STORY?  This railway due diligence alert is from the Middle East.

Previous sound second opinion advise  ABOUT THIS ETIHAD Railroad project from David Burns was apparently “dismissed”.Instaed, a huge capital cost project was approved.

Today, the same project he warned about is “in economic limbo”.

David participated in the early on market analysis for this railway and made the mistake at an important meeting of saying, in front of several “big guns”, that there might be a maret sizing issue.  Fo example, this then proposed railway might have a chance of being viable if it built inexpensively and with second hand locomotives and rolling stock.

That due diligence alert did not go over well.   Times were economically good back then. Why rock the boat?

Basically the only traffic on the railway is aggregate and that could go by water.

It appears that they are now realizing it.

Today’s headline is that Etihad Rail suspends Stage 2 tendering.  In a news report circulating in January 2016 and Written by Keith Barrow

ETIHAD Rail confirmed on January 26 that it has suspended tendering for the construction of the second phase of the UAE’s national railway network in a move which is likely to deal a significant blow to the GCC Railway project.

Stage 2 involves the construction of 628km of new lines, encompassing the line from Ghweifat on the Saudi border to the Omani frontier near Al Ain together with links to the UAE’s three principal ports at Khalifa, Jebel Ali near Dubai and Mussafah.

The project has an estimated price tag of around $US 11 billion.

Etihad Rail says it has informed bidders that tendering will be suspended while it reviews “the most appropriate options for the timing and delivery of this phase of the project.”

“Etihad Rail is one of the biggest and most complex infrastructure projects ever undertaken in the UAE,” says Etihad Rail chariman HE Nasser Alsowaidi.

In December the UAE’s Federal Transport Authority (FTA) granted Etihad Rail final safety authorization for Stage 1

The 264km Shah – Habshan – Ruwais line, clearing the way for the start of commercial operations on the first phase of the network. Etihad Rail says the decision to suspend tendering for Stage 2 will not have any impact on its preparations for the launch of operations on the first phase.

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It appears that they are now finally realizing that Mr Bruns rendered sound due diligence counsel.  Other project leaders should take note.  Always get and at least consider a second opinion.

The Big Short. Next movie version may cover Africa as a series of bad bond deals might unravel // Get a second opinion

EUROBOND FEVER

A few years ago, many African governments started issuing Eurobonds (bonds issued in a foreign currency) as a way to raise money. Nigeria, Zambia and Kenya are just a few to have tested their money-raising luck on global markets. Interest payments on some of these Eurobonds are due this year..

Important point… ….- most of those payments have to be paid in US dollars. That’s not great if your local currency has lost up to half of its value against the dollar.

Any one short these bonds?

Many investors have become increasingly worried about the ability of some African governments to repay their Eurobonds… …the credit ratings of many countries have been sliding to near-junk and junk status.

Need evidence?  CHECK OUT the related BBC report

Zambia issued its first Eurobond in 2012 at 5.4%. When they did, copper prices had already been falling. Where was the due diligence?

Falling copper prices, a power crisis and a credit rating downgrade now mean that investors who willingly lent money to Zambia in 2015 ignored the reality that these deals would actually be more risky than it had been in 2012.

When the country issued its third Eurobond last year, the rate was 8.5%. Now Zambia has to make those increased interest payments from declining tax revenues. And with much more expensive dollars. This will not end well.

Other projects from mines to railways and ports badly need due diligence second opinions.  When they don’t get them, buyers should beware.  Or the next Academy Award nominated best movie could be about you.

This includes massive mine/rail projects in Namibia, Botswana, South Africa, Senegal, and Mali…    …to name a few.

Most of these strategic plan paper projects lack due diligence pro forma assessments of their long term Income Statement outcomes against traffic risks projections ofrevenue volume being unrealistic.  Always get a second opinion.

Russian Hopper wagon contract reflects post World War-2 engineering design. –

RUSSIA: United Wagon Co has signed an agreement with fertilizer producer Uralkali to supply 400 hopper wagons from its Tikhvin factory.

The Type 19-9870 cars will have an axle-load of 25 tonnes and can carry up to 76·5 tonnes.

That design reflects engineering standards found in North America in the 1950’s

Modern North American rail freight wagons have typically been built and operated across the USA, Canada and Mexican rail tracks with 30 to as high as 3 metric tonne axle loading.

As a global benchmark, this is not good news for Russian shippers.

www.railwaygazette.com/newsfreight/single-view/view/hopper-wagon-contract-signed.html Sent from my iPad