This Company Has the Makings of a South African National Champion

To Investors,

In previous letters, while researching and writing about the significance of the recently imposed U.S. trade tariffs and various trade dynamics, I’ve also become increasingly aware of companies or projects which are deemed national champions. One example that I can’t get out of my mind is a rare earths producer and soon-to-be permanent magnet producer called MP Materials — a U.S. national champion. Another broader example is how China, through its top down economic and political structure, picks important industries and supports them through various means – which naturally breeds national capabilities such as minerals processing companies and companies that manufacturer finished goods – that's why generally speaking, minerals refining of almost any kind is largely done in China, and why China is the manufacturing hub of the world. But today I want to talk about Renergen, a company that has the makings of a South African national champion.

Now in my own words a national champion is a business that has all of the tailwinds that come about because of a supportive economic and regulatory landscape. Those tailwinds enable a company to produce goods that are of critical importance for domestic consumption at scale and/or for international exports – so much so that when you think of a particular product, the company that produces it at scale is the one that comes to mind first. I’ve mentioned MP Materials, but an example in the oil industry is Saudi Aramco; another example is Reliance Industries in telecoms; Huawei is an example in IoT; Airbus is an example in Aerospace, and there are many others.

In the South African context, the country is grappling with energy shortages, a coal-heavy energy grid, and South Africa needs more inspiration for innovation and rapid industrialisation. Renergen could be that game-changer. Renergen has the potential to create a value chain that powers transport, diversifies energy, supplies critical materials to high tech industries, and encourages further innovation in South Africa.

Quick Intro on Renergen

Renergen Limited, listed on the Johannesburg Stock Exchange (JSE: REN) and Australian Securities Exchange (ASX: RLT), is South Africa’s sole onshore producer of liquefied natural gas (LNG) and liquid helium. Operating through its flagship Virginia Gas Project in the Free State, Renergen taps into the Witwatersrand Supergroup – a geological minerals formation packed with high-purity methane (over 90%) and reportedly one of the world’s largest onshore helium reserves. This dual-resource play sets Renergen apart – making the company a key supplier of clean energy as well as a key supplier of a critical material that is in high global demand (liquid helium).

The Virginia Gas Project has also been deemed a Strategic Integrated Project under South Africa’s Infrastructure Development Act, which underscores its national importance and ensures regulatory tailwinds.

In Phase 1 of its operations, Renergen is supplying LNG to a few customers with revenues reaching R29 million in 2024.

Phase 2 of the company’s operations will see not just a ramp-up of LNG production, but also increased liquid helium production.

Phase 2, planned to go live in 2027, will reportedly add 350 new wells, 400 km of pipelines, and a beefier liquefaction facility, backed by a fleet of tankers and dispensing infrastructure.

Another aspect that makes Renergen special is their “wellhead-to-tank” supply strategy — a vertically integrated approach where the company not only extracts natural gas and helium from its wells but also processes (beneficiates) these gases and supplies the refined LNG and liquefied helium products directly to customers without the need for third parties. That takes care of the upstream and midstream processes in the respective LNG and liquid helium supply chains.

Further down the supply chain is where things could start to get interesting.

South Africa’s Energy and Industrial Future

In the broader picture, Renergen can add significant capacity to South Africa's energy outputs as well as to South Africa’s industrial capabilities.

Energy

On the energy front, we can look at two key points that supporting Renergen on a national scale could address:

* More than 80% of South Africa’s energy currently comes from coal. This needs to change if South Africa cares about reducing its carbon footprint.

* South Africa needs to add additional energy capacity to address rolling blackouts from energy shortages and poorly maintained infrastructure. In addition to other sources, natural gas should be taken more seriously. Natural gas is a widely used source for electricity globally. Russia, the U.S., Italy, Spain, the UK, and Japan are among the world's largest consumers of natural gas for energy production.

Another point to consider is that natural gas has a global cost that is around the same for coal according to the chart below from Bloomberg NEF. Additionally, according to Perplexity, natural gas emits significantly less carbon dioxide than coal when used for energy, producing about 50 to 60 percent less CO2 per unit of energy generated.

That said, the chart above shows the levelized global cost of energy, but it's important to note that if there’s no infrastructure in place, or if there’s no efficient way to source and distribute the energy then that cost won't necessarily be realised for that country. In South Africa, comparing the cost of natural gas vs coal is near impossible for now given the lack of natural gas power infrastructure in South Africa vs other sources. Therefore it may be difficult to reach that levelized cost initially, but that doesn’t mean we shouldn’t try.

Fuel

In transport, LNG can be used as an alternative fuel for vehicles, including trucks, ships, trains, and buses. LNG reportedly gives out 20-30% less CO2 compared to diesel, supporting cleaner transport solutions.

Industrial Capabilities

Liquid helium has broad applications, but keeping in line with my idea that Renergen has the makings of a national champion, I want to make a note of two pain-points I’m considering in this section: The first is that once their helium capabilities are up and running in their Phase 2 operation, Renergen plans to export their liquid helium internationally; and the second pain-point is the fact that we can’t begin to discuss industrial capabilities without going back to the energy discussion.

Regarding that first pain-point – one key use case for liquid helium is cooling during semiconductor and electronics manufacturing. Against the current backdrop of trade conflicts, I’ll give you one guess where that liquid helium will likely be exported to. I’m not happy about that “export-first” approach, but these are the cards that we’re dealt. Supporting Renergen as a national champion will help us solve for this.

On the second pain-point; another use case for liquid helium is as a coolant in nuclear reactors. Why don’t we champion a nuclear power producer that uses liquid helium to cool reactors and make them significantly safer and more productive. Besides adding additional power for the national grid, additional nuclear energy plus natural gas energy sources would put South Africa on a path towards energy abundance. When was the last time someone talked so positively about South Africa’s national energy grid?

Energy abundance matters because it supports industrial output. The two largest economies in the world understand this. According to information from “Our World in Data”, China currently produces ~9 400 TWh of energy with a production per capita of ~6 700 kWh.

The U.S. produces ~4200 TWh of energy and their energy production per capita is ~12 700 kWh.

South Africa produces ~200 TWh of energy which amounts to a per capita of ~3 600 kWh. This is an oversimplified comparison and obviously ignores a lot of complexities, but it gets the point across – which is that it is imperative that we increase our energy capacity in South Africa significantly if we want to resemble an economy that can support large scale industrial output. Natural gas and liquid helium-to-nuclear energy could be a reasonable path – paved by Renergen.

That type of activity will also encourage innovation in other industries where liquid helium is used, such as in MRI and NMR machinery, and cutting-edge scientific research.

Remember that in almost any natural resource supply chain it makes sense that where you would see the highest return is in the capabilities further downstream because you can tack on value premiums for specialisation. I’d like to see more capital allocation towards downstream capabilities in South Africa.

Wrapping Up

All things considered, standing up refineries and manufacturing facilities takes time and tons of money. But that’s the point of the national champion idea. When creating an environment for a national champion to succeed you consider the entire supply chain, always asking “what does this lead to?”; then all of the forces needed to stand up the relevant supply chains will reveal themselves. Early in their rare earth mineral discoveries, China imposed export restrictions for their rare earths mineral producers and that led to the country controlling 90% of the rare earths supply chain. I’m not suggesting export restrictions for Renergen, I’m suggesting we create incentives for building local downstream capabilities.

Do you think Renergen can become a South African national champion? What do you think that path would look like and what other industries can be positively impacted in South Africa?

On my journey to becoming a master capital allocator, one lesson down, a billion more to go.

Hope you all have a great day

-Mansa

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