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Rurelec – bad news from Argentina (again)

By Nigel Somerville | Sunday 10 September 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

At 4.18pm on Friday AIM-listed Rurelec (RUR) issued an Update – Energia del Sur, S.A. Judging by the timing of the announcement (more-or-less no-one-is-watching o’clock) it wasn’t going to be good news.

The company stated that it had been informed of damage to a turbine blade within the steam generator of its 136 MW CCGT power plant in Southern Patagonia, and the entire plant has been shut down.

The plant, in which Rurelec has a 50% interest, is owned and operated by Energia del Sur which is examining various engineering solutions and we will have to wait to see what they come up with. The unfortunate outcome for Rurelec is that there is once again a question mark against the income, although we are told that Energia del Sur has is business interruption insurance in place.

The worry is that it could cause problems, as were told in the FY16 accounts (released 28 June) that:

Until there is a disposal of assets, the Group is dependent upon joint venture receipts from Argentina in order to comply with payment arrangements made since the year-end with its creditors

There has been no disposal of assets yet….

This is the second outage at the plant this year, after a (very) late previous notification of problems at the end of March, the resulting shutdown having lasted almost two months. We are not told, this time, when the problem occurred.

For a company with strings of outstanding debts and payment arrangements based on the plant in Argentina which is once again shut down, it seems that once again the board is going to have to keep a lot of balls in the air.

The FY16 results were, themselves, a worry. Whilst the company was happy to offer a NAV per share of 5.6p (a long way above the current share price of 1.125p) the (new) auditors had a few concerns in the form of an Emphasis of Matter regarding the going concern statement:

In forming our opinion on the financial statements, which is qualified, we considered the adequacy of disclosures made on Page 23 of the financial statements concerning the going concern status of the Company. In order to meet trade payables and borrowings falling due within one year, the Company is dependent on the continuing receipt of loan repayments from Energia del Sur SA. There is no formal agreement in place for the repayment of the loan resulting in a material uncertainty that casts doubt on the Company's ability to continue as a going concern.

…and another Emphasis of Matter regarding the realisation of assets:

In forming our opinion on the financial statements, which is qualified, we considered the adequacy of disclosures made in Note 9b and 16b to the financial statements concerning loans to Group undertakings and inventories.

The realisation of amounts due from Group undertakings of GBP10.34m included within the Company Statement of Financial Position are dependent on the realisation of assets held in those Group undertakings which is uncertain.

The realisation of inventories of GBP9.7m included within the Company Statement of Financial Position is dependent on achieving either the sale of these assets or the successful development of the Illapa project, which are uncertain

And there is a Qualified Opinion too:

The Annual Report discloses the Group's share of assets and liabilities of Patagonia Energy Limited, in which it holds a 50% interest. Included within the joint venture's liabilities of GBP54.5m, as disclosed in Note 26, is US$6.31m payable to Basic Energy Limited, the joint venture partner. No accrued interest has been reflected in these financial statements and we were unable to obtain sufficient audit evidence in respect of potential accrued interest. The Group did not have appropriate evidence that no accrued interest was payable and Basic Energy Limited have not confirmed the total accrued interest that is owed to them.

The bottom line is that there remains a whole host of risks associated with the business and I’m not sure the share price fully reflects this. Friday’s news simply underlines that, with debt payments out of cash coming in from Argentina seemingly in jeopardy. You would be tempted to wonder whether this might be the final straw, but somehow the board has come through before. It may do again, but the music could stop at any time too.

But the management team of Mr Simon Morris and Brian Rowbotham, recently joined by Andy Coveney as FD, have somehow kept the ship afloat while hoping for calmer waters and asset sales which still have not arrived. You sometimes have to acknowledge the efforts and I do – the company was a complete basket case when they stepped up. It still is, mind you, but one perhaps senses that some progress has been made.

But the risk/reward balance still leaves me standing well clear.

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