In order to address these issues, the Department of Minerals and Energy is aiming for 4.5% of road transport fuels in South Africa to be replaced with bio-fuels by 2013. This would require a significant and comprehensive effort to establish agricultural producers and production plants. Although interest is high, the bio-fuels industry is still eagerly awaiting the formal announcement from the ANC government with regards its bio-fuels policy. Bio-fuels are a complementary and alternative energy source to fossil fuels and can contribute to further increasing agricultural efficiency, creating new job opportunities in agriculture, industry, infrastructure and science, while also reducing green house gas emissions.

The big question around bio-fuels is whether it is economically viable, given South Africa’s abundant coal resources? When crude oil was trading at $145 a barrel in 2008, developing a bio-fuel industry may have made economic sense, but at the current crude oil price around $82 a barrel, it may not seem so profitable. Along with lower sugar prices, South African sugar cane production has been falling in recent years. The sugar industry is viewing expansion into electricity co-generation and bio-fuels as a way to broaden its horizons and improve its prospects.  The challenge, however, is that government policies have not yet been formulated, while policies so far have not presented a viable investment case. The bio-fuels industry in South Africa suffers from a lack of subsidies to build large facilities, combined with an apparent lack of raw materials for large-scale production.

Tongaat-Hulett produces a range of refined carbohydrate products from sugar cane and maize. It has considerable expertise in downstream agricultural products, bio-fuel production and electricity cogeneration. The Amatikulu sugar mill represents the most likely opportunity to produce ethanol from the sugar and molasses not required for sale in local markets. The envisaged project could include the construction of an ethanol plant using all of Amatikulu’s molasses and 108 000 tons of export sugar to produce 80 million litres of ethanol as a fuel blend. At roughly $2.18 for a litre of E85 grade ethanol, this would translate into about $174-million or R1.27-billion in revenue. Trading on a rolling PE ratio of around 15.9 times and 2.4 times NAV, we consider the share to be fully valued and recommend investors to sell their shares. The technical chart of Tongaat shows that the trend remains bullish as it is still trading above its moving averages. The share price, however, is pulling back from overbought territory. Investors are encouraged to rather wait for the share price to pull back to about the 10100c level.