Jinesh RamaniKyle SamaniEd C h iEd Cohenani

THESISTHESIS

Value OpportunityValue Opportunity

• Market’s negative valuationMarket s negative valuation– Opportunity to buy against pessimism

• Provides reliable dividends• Provides reliable dividends

• Beneficiary of sticky demand for energy– Long‐term supply concerns

• Keystone of African energy market

Market ValuationMarket Valuation

OPERATIONSOPERATIONS

Sasol OverviewSasol Overview

• World’s Largest producer of motor oil from coal o d s a gest p oduce o oto o o coa(CTL)

• Only competitor in gas‐to‐liquid (GTL) is Shelly p g q– Analysts anticipate no new entrants in 2011

• Licensing Fischer‐Tropsch process to other companies

• Based in South Africa– Started during Apartheid as nationalized oil producer– Privatized after fall of Apartheid

Revenue Breakdown ‐ ProductRevenue Breakdown  Product

South African

International

Ch i lChemical

GrowthGrowthRevenue

2006

2005

N t I$‐ $20,000  $40,000  $60,000  $80,000  $100,000  $120,000  $140,000 

2008

2007

2005

Net Income

2008

2007

2006

$‐ $5,000  $10,000  $15,000  $20,000  $25,000 

2008

Operations OverviewOperations Overview

Operations DetailedOperations Detailed

• Inputs: Coal mining, oil and gas exploration and purchase from open market

• Syngas produced from coal and natural gas• Syngas turned into fuel components, chemicals, coproductsSyngas turned into fuel components, chemicals, coproducts

(ammonia, sulphur, crude tar acids)• Some raw materials sold to open market

• Syngas – no other competitors have it– Using proprietary Fischer‐Tropsch conversion to make 

hydrocarbon fuels from syngashydrocarbon fuels from syngas• Vertically integrated – exploration to retailing of goods

India RelationsIndia Relations

• Trade with India is supposed to double to $12Trade with India is supposed to double to $12 billion by 2012

• Sasol is among top companies in this bilateral• Sasol is among top companies in this bilateral trade

S l h bid f l bl k i E t I di– Sasol has bids for coal blocks in East India

Fischer‐TropschFischer Tropsch

• Competitive AdvantageCompetitive Advantage– Very little unreacted Hydrogen

Low methane plus ethane yields– Low methane‐plus‐ethane yields

– Flexible Product Spectrum

Al t tit h it– Almost no competitors have it

– Will be licenscing the tech and making royalties

SOUTH AFRICASOUTH AFRICA

Sasol & the South African EconomySasol & the South African Economy

• Economic growth at 10‐year lowEconomic growth at 10 year low

• Recession is unlikely

l i l l b i i i• Relatively low exposure to subprime securities

• Sasol is well placed in South Africa– Produces 38% of South Africa’s fuel needs

– Is responsible for 4.4% of its GDP

Government RoleGovernment Role 

• Previous consideration of a windfall profits taxPrevious consideration of a windfall profits tax on the CTL industry

• Potential increase of royalty payments for• Potential increase of royalty payments for mining

C ’ f k hil h• Current  government’s free‐market philosophy

• Even if domestic intervention occurs, Sasol is a well‐diversified company with global operations

TECHNICAL CONSIDERATIONSTECHNICAL CONSIDERATIONS

Reliable Dividend PerformanceReliable Dividend PerformanceAnnual Dividend

1.4

1.6

1.8

0.8

1

1.2

0 2

0.4

0.6

0

0.2

• MultiplesMultiples

Projected Energy Demand GrowthProjected Energy Demand Growth

Sources of Demand GrowthSources of Demand Growth

Currency QuestionsCurrency Questions

• Rand valuation and outlookRand valuation and outlook– Fund ~80% in EUR & USD

Swap back to Rand for asset matching– Swap back to Rand for asset matching

10

11

12

7

8

9

10

6

7

Feb‐08

Mar‐08

Apr‐08

May‐08

Jun‐08

Jul‐0

8

Aug

‐08

Sep‐08

Oct‐08

Nov

‐08

Dec‐08

Jan‐09

Feb‐09

5‐yr Average

RISKSRISKS 

Critical RisksCritical Risks

• Oil Prices remain lowOil Prices remain low– Oil Prices have dropped ~75% since July– Upward Pressure on oil pricesp p

• Reduced supply of oil because of decreased investment & OPEC production cutsD d i OECD t i i i• Demand in non‐OECD countries is growing

• Dollar is weakening

– Demand for synthetic fuels is expected to growDemand for synthetic fuels is expected to grow– Sasol’s breakeven estimates vary from $20‐50/barrel

Critical Risks (contd.)Critical Risks (contd.)

• Failure to comply with anti‐trust/competitionFailure to comply with anti trust/competition regulations– Fine of R3 7bn for involvement in a paraffin wax– Fine of R3.7bn for involvement in a paraffin wax cartel

– Internal competition law compliance reviewInternal competition law compliance review initiated

Other RisksOther Risks

• Expiration of patents for Sasol technologiesExpiration of patents for Sasol technologies

• US government sanctions due to Iranian investmentinvestment

• Government intervention/expansion of l iregulation

• Exchange Rate fluctuations

SO IN CONCLUSION…SO IN CONCLUSION… 

Final ThoughtsFinal Thoughts

• Market’s negative valuationMarket s negative valuation

• Reliable source of dividends

il f l d d ill di• Fossil fuel demand will not disappear