Sasol's U.S. Plant Cost Estimate Jumps to $12.9 Billion

(Bloomberg) -- Sasol Ltd., the world’s biggest maker of fuel from coal, said the cost of its giant Lake Charles chemicals project in Louisiana will balloon to as much as $12.9 billion, or about 50% more than initially planned.

The cost blowout is a further setback for the development that’s part of the South African company’s plan to expand internationally. It has already suffered a number of budget increases because of factors including weather delays. Sasol shares slumped the most in 20 years after the announcement on Wednesday.

“We’re extremely disappointed with the increase” in costs, co-Chief Executive Officer Bongani Nqwababa said on a conference call Wednesday. The company said in a statement it’s taken measures since February to “further strengthen the oversight, leadership for the project and frequency of reporting,” and will accelerate a previously announced asset-sale program.

The Lake Charles Chemical Project -- dubbed LCCP -- will, once completed, boost the portion of chemicals in Sasol’s sales mix to 70%. It’s one of two massive plants originally planned in the U.S., but the second -- a gas-to-liquids project -- was abandoned during the oil-price crash. The chemical plant was approved in 2014.

Sasol announced on Wednesday a new cost range of $12.6 billion to $12.9 billion for the LCCP project, about $1 billion more than it forecast three months ago. Back in 2016, then-CEO David Constable had said an increase to $11 billion was a “worst-case scenario.” The company attributed the latest hike to a “correction for duplication of investment allowances,” higher contract expenses, unanticipated work and defective materials.

The shares tumbled as much as 15%, the biggest intraday decline since September 1998, and traded down 12% at 379.01 rand as of 3:41 p.m. in Johannesburg. The yield on $750 million of notes due 2028 jumped 12 basis points to 5.32% at the same time, the most in a day since the bonds began trading in September.

The cost increase is “illustrative of lackluster controls and oversight throughout the four to five years LCCP has been in design and construction,” said Wade Napier, an analyst at Avior Capital Markets in London. “Sasol needs to address its leadership and culture.”

The changes at the project, Sasol’s largest, won’t alter the company’s overall “capital-allocation strategy,” according to the statement. The company still plans to cut gearing -- or the ratio of debt to equity -- to about 30%, though the internal rate of return estimated for Lake Charles has now declined to as low as 6% from 7.5%, it said.

--With assistance from Colleen Goko.

To contact the reporter on this story: Paul Burkhardt in Johannesburg at pburkhardt@bloomberg.net

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Christopher Sell, Rakteem Katakey

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