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Equatorial Palm Oil agrees US$60m joint venture with India’s Siva Group

The Siva Group, who is already the company's largest shareholder, will invest US$22.5m into the joint venture, and provide a US$30m loan. The deal is expected to 'fast-track' the development of palm oil plantations in Liberia.


Equatorial Palm Oil (LON:PAL) (EPO) is in the process of setting up a US$60m joint venture with an Indian conglomerate, the Siva Group.

EPO and Biopalm Energy - a wholly-owned subsidiary of Siva Ventures - will establish a new 50:50 joint venture company, which will own EPO’s entire 169,000 hectare land position.

With the signing of a Memorandum of Understanding (MOU), EPO has secured a US$22.5m investment and a US$30m loan facility, to accelerate the development of its palm oil operations in Liberia. EPO will itself invest US$7.5m to the new JV company.

EPO chairman Michael Frayne told investors that the agreement will “significantly mitigate the financial risk” of the Liberian palm oil project.

BioPalm is already the company’s largest shareholder with a 29% stake in the company, after the Indian investor subscribed for £5 million in new equity (33.3m shares) back in May.

"The Siva Group has an excellent track record of working with investment partners to unlock value to the benefit of shareholders ... this JV solidifies our relationship as we work together to achieve our longer term objectives,” Frayne commented.

In Liberia, EPO plans to develop 50,000 hectares in oil palm plantations within 10 years, the ‘strategic plan’ targets a 250,000 tonnes per annum (tpa) crude palm oil (CPO) operation.

CPO currently trades at US$925 per tonne (CIF Rotterdam).

Initial CPO production is slated for Q4 2010, and the first palm oil processing mill is already under construction. 

"We have already made significant strides forward in our development plan with the establishment of nurseries and the construction of our first mill which is underway,” Frayne added.

“We will now accelerate our activities as we build a West African focused palm oil company."

The joint venture, and the extra capital it brings, is expected to fast-track the development of the plantations in Liberia.

EPO highlight that all operations across its three plantation areas - Palm Bay, Butaw and River Cess – will be ‘fast-tracked’ as well as the active ‘out grower’ programme.

Investment in associated and downstream infrastructure will also be accelerated. 

The proposed joint venture is subject to shareholder and regulatory approvals. Now EPO will post a circular to it shareholders and a general meeting will be convened.

EPO joined the AIM market in February following a £6.5m IPO. The company aim is to become a sustainable, low-cost producer of crude palm oil in Africa through the reactivation and development of existing plantations and its agricultural land bank in Liberia.

According to EPO, palm oil is the most important and widely produced edible oil in the world, and demand is projected to grow at 5-6% per annum over the next five years.

Palm oil is to food production what iron ore is to heavy industry. It is an ingredient found in everything from Galaxy chocolate to Goodfella’s pizza. It even crops up in Persil soap powder. And in common with many basic minerals and hard commodities, demand for palm oil is buoyant and expanding all the time.

Liberia is a politically stable country and is becoming a fast growing investment destination for multi-national corporations, EPO said. Furthermore, the oil palm is indigenous to West Africa and cultivating it in this region avoids the adverse environmental impact the plant has on countries across Southeast Asia, where large areas are affected by a significantly lowered water table as a result of oil palm growing.

EPO believes the application of South-East Asian techniques and the latest seed genetics may enable Africa to become a key player in the world palm oil market again.

The company is currently in the process of reactivating 3,000 hectares of palms and will plant up to a further 1,200 hectares next year. However it is sitting on almost 170,000 hectares of land suitable for sustainable palm oil production.

EPO’s 10-year plan is to be a 50,000 hectare producer, moving to 100,000 hectares five years after that, with output totalling 250,000 tonnes of oil.

Frayne likens the process to developing a mine, or proving up the reserves of a major oil and gas project.

"You need to take time to set up a palm oil project properly .... but if you plant out your first 10,000 hectares and you can show you can go on to 100,000, especially if you plan to plant out sustainably, then you are on a roll," he said recently.

"There is a value re-assessment. By getting the initial planting going you upgrade the whole value."

Quick facts: Equatorial Palm Oil

Price: 0.38 GBX

Market: AIM
Market Cap: £1.35 m

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