Today’s announcement that micro-cap Australian coal-to-liquids firm, Altona Energy (LSE: ANR), has secured two-year extensions for its three Arckaringa project exploration licences provides me with the ideal opportunity to explain what I believe this tiny firm is a compelling buy.
Hold your horses…
Before you hotfoot it to your broker’s website and invest your children’s inheritance in this stock, let’s be sensible.
Altona Energy is a tiny, speculative natural resources company with a market cap of £8m. It has no productive assets, no revenue, and no means of getting either without the backing of its large, wealthy joint venture partner. It is risky, and it’s quite possible that in a few years time, Altona shares will be worth about as much as used chip wrappings…
A powerful partner
On the other hand, this interesting little firm does have a few things going for it, which is why I made a small investment in the firm some months ago.
I mentioned Altona’s joint venture partner above, and in my opinion, this is one of the reasons that it’s a credible investment.
The company in question is CNOOC New Energy Investment Co Ltd (CNOOC-NEI), a subsidiary of the China National Offshore Oil Corporation (CNOOC), which employs 51,000 people globally and is China’s largest offshore oil and gas producer.
CNOOC-NEI is putting up A$40m to perform a Bankable Feasibility Study (BFS) for the Arckaringa project, in which it has a 51% stake; the remaining 49% is owned by Altona. To earn its share, Altona is leading the technical operations necessary to complete the BFS.
Should the project proceed to construction, CNOOC-NEI can increase its interest in the project to 70%, if it procures all of the funding necessary, which is currently estimated to be $3.5bn.
The Arckaringa Project
Back in the dim mists of time, Altona secured three exploration licences in South Australia, which it was planning to turn into coal mines.
In 2006, Altona realised that the project might offer a far more attractive and lucrative opportunity — a large-scale coal-to-liquids (CTL) plant, along with associated gas-fired power plant.
The reason for this is that early indications are that these coal resources could provide vast amounts of commercially viable synthetic transportation fuel and gas. At the lower end of the range — a JORC-compliant estimate for the Wintinna licence (EL4512) alone — it might be possible to convert the coal to 419 million barrels of transportation fuel and 5.3Tcf of gas.
At the other end of the scale, Altona’s non-JORC compliant estimate for all three licences in the Arckaringa project is that it might be possible to produce 2.5 billion barrels of fuel and 32Tcf of gas.
By way of comparison, proven reserves in the North Sea are 8.7 billion barrels of oil and 114Tcf of gas (BP figures, 2009).
What’s the plan?
The main focus of the BFS is to demonstrate the commercial case for an integrated CTL plant and gas-fired power plant.
An open cut mine would be created at Wintinna producing around 10mtpa of coal, which would be used to produce:
- Around 30,000 barrels per day of fuel, with a forecast break-even cost of $55-60 per barrel (significantly less than U.S. shale oil);
- 1,140MW of power, of which 560MW would be sold into the national grid;
- Potential coal and liquid exports to China and Asia.
Altona says that one tonne of Wintinna coal will yield one barrel of liquids plus other products, creating potential value far greater than that offered by conventional coal-powered electricity generation.
All aspects of this project would have the potential to be expanded, and Altona says that South Australia currently imports 10 million barrels of transportation fuel per year and faces a 1,000MW power shortfall over the next decade, highlighting the commercial viability of the project.
A bet on China…
Although I like the concept behind the Arckaringa Project, I would never have invested in Altona Energy if it didn’t have such powerful backing.
In essence, I see this as a bet on Chinese money and political will. As an example, the Chinese authorities are currently helping Altona to acquire two productive coal mining licences in China, which it will be able to use as a source of funding while the Arckaringa Project is developed.
Naturally, any such deal has the potential to be arbitrarily reversed, but there does seem to be quite strong political and business will behind this deal.
Is it a buy?
I believe Altona Energy is an attractive, if speculative, buy. I’ve only invested a small amount in this firm, but I do think it has the potential to deliver.
Chinese money is flowing into a lot of energy and natural resources firms at the moment, and I believe that investing in such projects — at attractive valuations — could be quite rewarding.
Altona Energy is one of two companies I’ve invested in that have high-conviction Chinese backing, and I’m looking forward to finding out whether this hunch pays off over the long term.
Disclaimer: This article is provided for information only and is not intended as investment advice. The author may own shares in the companies mentioned in the article. Do your own research or seek qualified professional advice before making any purchase decisions.