Friday, 22 February 2013

Altona Energy - Partnered with CNOOC-NEI

http://www.altonaenergy.com/

Altona Energy Logo

Altona Energy (LSE:ANR) is a ~£7.52m market capitalised mining company with 545m shares in issue with a share price languishing below 1.5p/share. The company was admitted to trading on the AIM in 2005 and has traded to highs of 20p/share and lows of 0.9p/share. The company is involved with a 'Coal-to-Liquids' (CTL) project in the Arckaringa Basin, South Australia alongside a subsidiary of Chinese resource giant CNOOC, and recently acquired a mining licence in China. With the share price down 75% over the past year, the company is trading at a major low, but is this justified?


As previously mentioned, the company is partnered with CNOOC-NEI, a wholly owned energy subsidiary of CNOOC, in the coal-to-liquids (CTL) project Arckaringa project (Altona has a 49% working interest). The CTL process converts coal to hydrocarbon liquids which transfers them to an energy source. With crude oil and natural gas prices outside of the US increasing primarily due to the growth of newly-industrialising countries, alternative sources of energy have been sought after, and whilst CTL is not a particularly 'green' method, is is comparatively lower cost than oil or gas. The process involves crushing coal, mixing it with water and heating it. This releases 'syngas' which is composed mainly of hydrogen and carbon monoxide. Following this, the syngas is 'cleaned up' which removes the majority of the solid particulates within it and heavy metal matter. By-products int he form of sulphur and carbon dioxide is siphoned off (with the C02 stored - see later). The steam produced it used for a 'combined cycle power plant'. A liquid chemical is added to the remaining syngas which effectively splits and sorts the elements within it. Through a catalytic process known as Fischer-Tropsch synthesis and a refining process the syngas is turned into very clean, usable hydrocarbons. If oil and gas prices further increase then this type of fuel exploitation is likely to become more popular - currently the majority of these CTL projects are located in China. Altona's Executive Technical Director commented that the breakeven point for coal-derived fuel is around $10-20/bbl less than oil counterparts.

The Arckaringa project has 'been unpinned by an estimate of 7.8 billion tonnes of coal' with 1.287 billion assigned via a JORC assessment. A BFS (Bankable Feasibility Study) is currently being worked on to determine the economics of the proposal for both a mine and power plant for exploiting the coal resources. CNOOC-NEI (now denoted as CN) has committed ~£27m towards funding and operating the BFS with CN having the option to increase their working interest from 51% to 70% if they procure the entire debt for the project construction estimated at $3.5 billion. However, the BFS is in its very early stages so the first stage drilling here will be the next point of focus (to be completed by H2 2013) - prior progress has been delayed due to CNOOC being state-run hence decisions attract significant Chinese government scrutiny before being accepted. The project "has the potential to create a leading Carbon Capture and Storage (CCS) facility" (Broker Old Park Lane Capital)

CNOOC LogoDespite this, there are factors that have to be accounted for when looking at the Arckaringa project. The presence of CNOOC does add credibility to the project and it is likely that work programmes will be financed through debt as opposed to equity. Payback is also stated to be around 4 years which could be a problem in itself as the debt will be accruing interest over this period, and in the absence of being able to pay its share, Altona may be ejected from the licence. When investing in Altona you would have to assume this would not be the case as the company would probable issue shares to cover any shortfalls. The inherent obstacle is also that this project may be put on a backburner if the global economy deteriorates particularly as oil and gas prices would fall - the low costs involved with the coal method should outweigh this. Positively, the current CTL plans would see output at 30,000bbl/day equivalent once production is running and this could be maintained for many decades due to the supposedly huge coal resource. Regional demand would first be fulfilled, however the regional demand actually is smaller than the production levels hence the surplus would be sold to Asia, likely China considering the state connection. The catch to this is that this is far in the future and whether Altona will still be taking part in the project is disputable.

Altona also is looking to explore its indirect 95% stake in a coal exploitation licence in the Xinjiang province of China which has been a ridiculously long, drawn-out process that started in February 2012. The project is in an advanced stage such that for profitable production to start, only a relatively small amount of initial expenditure and time would be required. However, the project is located in Xinjiang, a region that has been long disputed over by the muslim Uyghur population and the native Han Chinese. Riots in the area have been sporadic with large hydrocarbon resources not being tapped due to the land arguments.

Despite this, the cultural instability in the region will likely not affect Altona. Under the agreement, the company will be granted a licence named (EL1) with an option to acquire a second licence (EL2). The project entitled Project Dragon, will not require Altona to pay any cash sums until progressive production milestones are met which means that funding for the project will not come under strain - it will effectively be self-sustaining. If all conditions are met, total cash paid by the company will total £3.875m and 20m shares will have been issued at an average 14.75p/share with a further cost on completion of the transfer to a mining licence.


Stockbroker HB Markets commented: "Under the Amended and Restated Share Purchase Agreement the Seller must convert EL1 to a mining licence by 30 June 2013. The Mining Licence application for EL1 is underway with the aim of commencing coal production during the spring/summer period when mining conditions are at their best."

courtesy of Jeffrey Beall on flickr
If production does start during the spring/summer period, a period of share price uplift should entail as the total coal resource has been estimated at 1.17 billion tonnes by the Chinese authorities. A JORC resource estimate will be released as part of the mining licence application process. Altona has also said that "The vendor has warranted that each ML will be capable of generating annual net operating profit in excess of £6m per annum." With final confirmation of the acquisition only granted last week, the company will be keen to make some progress which is what has been lacking over the last 12 months and is what has drowned out some investors.

The financial position of the company is not great with only £1.25m available as at 1st July 2012. The company also recently announced a placing which has been partially completed, but assuming that this extra £1.35m will be raised in due course, the cash is unlikely to last for another year especially since the loss for 2012 from operating activities stood at £1.86m and 7 months have passed since the 2012 cash balance. In addition, one of the conditions whereby Altona must pay part of the total cash consideration for the Chinese licences is when there is the 'transfer of the Mining Licences to Altona's designated local subsidiary'. Whilst I have no idea when this will take place, it would make sense if it had to happen shortly after the mining licenses are granted and this would command more cash - hence a placing in the future looks likely (in the absence of a debt facility or other means of raising cash).


courtesy of Philip Jagenstedt
The last update on Project Dragon noted the following: As announced on 12 December 2012, the timeline for the conversion of EL1 to a Mining Licence in which Altona will have an indirect 95% beneficial interest ("ML") was extended to 30 June 2013. Since that announcement, good progress has been made towards securing the necessary approvals from authorities for issue of the ML. In meetings between representatives of Altona and the local government responsible for sanctioning mining in the area where EL1 is located, the local government representatives have given verbal approval for mining to proceed. This verbal approval is subject to the conditions to be attached to the ML (likely to relate to the boundaries of the licence area, permitted production volumes etc). In that regard, the ML application has been fully prepared with all supporting technical and mine planning information, and has now been submitted to the Xinjiang Regional Government for final written approval, which is now expected to be received prior to 30 June 2013. Once again though, progress has been painfully slow for shareholders and it is difficult to see where the upside actually could begin. Operational RNSs are few and far between with each seemingly adding little new information to the last - the PR at Altona is weak in my opinion although this may simply be down to a lack of progress

It's fair to say that Altona's broker targets certainly will not be reached anytime soon without the release of exceptional news that nowhere can forecast. HB Markets had given the company a 13.5p/share target with Old Park Lane Capital rather more optimistic at 27p/share. Altona finds itself in a very unique situation. The company is participating in a potentially world-class CTL project with a world-class partner in the form of CN, but as a junior company with a market capitalisation less than £10m and financing issues. Consequently it is interesting to consider what CNOOC think of the situation - are they really happy to let a tiny AIM listed company have a 49% stake (potentially 30%) whilst they stump up most of the costs and know that Altona cannot contribute a significant amount of financial or capital resources. If the BFS comes in positive then it would not be surprising to see Altona pushed out of the licence through a sale of their interest. Altona is a speculative, high risk investment that has the potential to increase its market cap significantly, but is a long-term investment that is more likely to reap rewards in 2014/2015 (regardless it is hard to see how this can  fall below 1p. Equally there may be a share price uplift from the lows, but it is hard to see this be maintained without substantial news). Despite this, the timeline for operations and the financial position of the company lack clarity hence I am neutral on the stock.

Update May 2013: Moved to neutral at 1.41p/share following strong uwpard movement

12 comments:

  1. A fair reflection of the company. I used to hold it but sold at 3p. Would buy at 0.80p though

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  2. Super write again. Keep up the good work

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  3. FINALLY someone has said what we are all thinking. more jam tomorrow from alnotany energy

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  4. 22feb 2013 time and efort 10 out of 10 thankyou

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  5. So you'd release a structured timetable before receipt & confirmation of a licence? Rather presumptuous, disrespectful & most definitely not a Chinese custom. Regarding general mining in Xinjiang, would your indecision become either a buy or sell call, if in this volatile region, Altona just kick the door in and declare to all what's going to happen before they've received permission from the local government hierarchy?

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    1. Good joke! Especially since the transaction has taken a year. They are taking liberties now.

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    2. Ohhhh... a whole year, what have you done this year?

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    3. More than Altona!

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    4. Sell & take your loss then.

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    5. Patience people...

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  6. The biggest issue here is lack of shareholder patience. To many day traders after a quick buck. China was a communist state & thus their ideas are still beneficially structed towards improving living standards of those who work in the powerhouse that is the People's Republic. Altona would still be at 5 to 7p if more understanding had been employed. The CNOOC joint venture & Project Dragon are both Asian deals & these are people who move historically at a slower pace.

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  7. Projects of this nature always take time, there has been good ground work done by Altona, getting the stall set up. Yes, there could be a takeover .However I believe that this is squeaky bum time. I have been here before and held on for a good profit.

    Mini

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