22/09/2011 (Proactive Investors UK) - Equatorial Palm Oil (LON:PAL) plans to take advantage of a growing demand for palm oil in foodstuffs among both traditional markets and regions where palm oil has not generally been used for food products.

The firm’s long-term plan is to become a sustainable, low-cost African producer of crude palm oil through the reactivation and development of both existing plantations and the company's land bank in Liberia.

Palm oil is a highly-important food ingredient, found in a variety of everyday food products including chocolate, margarine, pies and even bread. Meanwhile, non-food consumable products like soap often contain palm oil.

Demand for palm oil remains strong and is even increasing with countries like China and India showing significant growth in demand, while the US is beginning to see palm oil as a good substitute for soya bean oil.

Liberia is a country rich in oil palm trees and Equatorial has plans to build on the oil palm plantations it already owns in the country.

Emerging from a decade-long civil war, Liberia’s new government is led by Africa’s first elected female head of state: the US-educated Ellen Johnson Sirleaf. Her government has implemented a number of initiatives in tandem with international development agencies designed to rebuild the country’s infrastructure and economy.

These new initiatives encompass the development of agriculture, mining manufacturing and general commerce aimed at utilising the resource potential of the country.

Major firms that have invested in the West African country since the new government took over include: Arcelor Mittal, which has increased its Liberian iron ore investment; and Firestone National Rubber Company, which has a rubber plantations agreement running to 2041. Meanwhile, BHP Billiton, Severstal and Chevron are also involved in Liberia and the country is seen as strategically important by both the US and China.

Equatorial is currently involved in reinstating thousands of hectares of abandoned oil palms while planting further hectares as part of a ramp-up towards production. Speaking to Proactive Investors last year, Michael Frayne likened 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,” he told us.

“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 sustainably, then you are on a roll. There is a value re-assessment. By getting the initial planting going you upgrade the whole value.”

Equatorial has interests in three projects in Liberia: the Palm Bay Plantation, the River Cess County area and the Butaw Plantation.

At Palm Bay, Equatorial has been working with a local surveying firm, Earthcons, to survey and accurately map the plantation. Located 160 kilometres south east of Liberian capital Monrovia, Palm Bay benefits from its close proximity to facilities at the Port of Buchanan, and Equatorial plans to re-establish these facilities.

In June last year the firm established a pre-nursery site at Palm Bay to received the first batch of germinated hybrid oil palm seeds (which had been ordered from Unipalm in the Democratic Republic of Congo). A total of 240,000 seeds were planted in the pre-nursery between July and October.

Meanwhile, a 20-hectare main nursery was also established at Palm Bay into which the seedlings from the pre-nursery were transplanted after the first round of selection at three months of age.

Equatorial also begun land preparation operations to remove and replant 1,200 hectares of redundant existing oil palms at Palm Bay in December 2010. The work is being undertaken without using the traditional ‘fell and burn’ technique previously used in the region, while replanting is due to have commenced by now.

According to Shore Capital, Equatorial’s key recent development was the construction of a 5-tonne oil mill at Palm Bay which was completed earlier this year. This allows the company to begin generating revenue by processing fresh fruit bunches into crude palm oil that can then be sold.

At River Cess, where Equatorial plans an 80,000 hectare development with tribal landowners, the firm signed a memorandum of understanding with community groups to establish a joint venture.

At Butaw, the firm has had some issues with exceptionally heavy rainfall and failed bridges that meant it had to switch its planned 2011 planting programme there to the Palm Bay estate.

Last year, the firm began a relationship with BioPalm Energy – a subsidiary of Indian conglomerate Siva Group. In May 2010, BioPalm invested £5 million into Equatorial and earlier this year the two firms finalised a US$60 million joint venture.

The JV deal involved BioPalm contributed US$22.5 million in equity funds, with Equatorial Bio-Fuel (a subsidiary of Equatorial) contributing US$7.5 million, for a 50 per cent interest in Equatorial’s Liberian oil palm assets. Additionally, BioPalm is arranging, and will guarantee, an additional US$30 million loan facility to the JV.

The resulting US$60 million is being used to accelerate the development of the 169,000 hectare land position at Palm Bay, Butaw and River Cess.

In its most recent set of results, which cover 2010, Equatorial reported that its operating loss had increased to £4.2 million (2009: £1.2 million) while its pre-tax loss also increased to £4.4 million (2009: £1.5 million).

As of December 31 last year, the firm had cash and cash equivalents of £6.8 million on its balance sheet (December 31 2009: £100,000).

After having reached a high of 32 pence near the start of the year Equatorial’s shares are currently some way off this peak, trading for around 13.5 pence each.