Mining, Oil & Gas ARIANA RESOURCES GOLDPLAT OILEX SOLO OIL VAST RESOURCES
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ARIANA RESOURCES
GOLDPLAT
OILEX
SOLO OIL
VAST RESOURCES
Mining,
Oil & Gas
SEPTEMBER 2015 | ISSUE 18
I N C LUD ES NEWS , DATA , COMPANY P ROFILES, COMMENT AND ANALYSIS
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INTRODUCTION
T
he latest theme among large cap
CONTENTS
miners is production cuts. 'Finally!'
cry investors in the resources space.
It may seem counter-intuitive to
want companies to produce less, but it is
necessary to stop the rout in commodity 04 EDITORIAL: GOLD MINING
prices. STOCKS
We've had delays and cancellations 08 ARIANA RESOURCES
to growth projects, cost efficiencies and 10 GOLDPLAT
cherry picking high grade areas of existing
mines. Companies like Rio Tinto increasing 12 OILEX
production of iron ore may have seemed 14 SOLO OIL
unusual in the grand scheme of things – 16 VAST RESOURCES
as this added to an already well supplied
18 EDITORIAL: OIL FEATURE
market – but it succeeded in squeezing some
of the smaller players out of the market. 22 DATABANK
Now we have large caps realising that they
have to reduce supply in order to balance the
market in the wake of lower-than-expected
demand. Freeport-McMoran and Glencore
have recently undertaken major copper
production cuts; Chile's state-owned miner Editor Head of Production
Daniel Coatsworth Michael Duncan
Codelco is expected to do the same soon.
Advertising Designer
It remains challenging times for investors Roland Spencer Will Haywood
in resource stocks, but certainly not Peter Beecroft
Chris Williams Junior Designer
Rebecca Bodi
disastrous. Stocks like African Potash have
shown it is possible Printed by Wyndeham Group (Plymouth and Roche) Ltd,
Distributed by Marketforce (UK) Ltd, Fifth Floor
to still make money; Low Rise, Kings Reach Tower, Stamford Street,
its share price has London SE1 9LS.
Telephone: 020 7633 3300
increased tenfold
since July 2015.
We hope you DISCLAIMER
enjoy reading the IMPORTANT
company profiles Shares Spotlight is a mix of articles, written by Shares magazine’s
and features in this team of journalists, and company profiles. The latter are commercial
presentations and, as such, are written by the companies in
issue of Spotlight.
question and reproduced in good faith.
Daniel Coatsworth, Members of staff may hold shares in some of the securities written
Editor, Shares about in this publication. This could create a conflict of interest.
Where such a conflict exists, it will be disclosed. This publication
contains information and ideas which are of interest to investors.
It does not provide advice in relation to investments or any other
financial matters. Comments in this publication must not be relied
upon by readers when they make their investment decisions.
Investors who require advice should consult a properly qualified
independent adviser. This publication, its staff and AJ Bell Media do
not, under any circumstances, accept liability for losses suffered by
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ANALYSIS: Gold mining stocks
How to value
gold miners
Daniel Coatsworth
B
efore you go shopping for stocks, it assume a significant price correction around
is important to rebase expectations. the corner. Miners either overpaid and got
Investors must no longer expect gold a poor return on investment; they bought
miners to trade on huge multiples of projects that weren’t economical at lower
their net asset value. Historically the market gold prices; or they acquired projects that are
has been happy to pay up to twice a company’s geologically complex and required expensive
net asset value as gold was considered to be processing – the type of capital expenditure
worth as much in the ground as it was out, that most boardrooms are no longer willing
since it is essentially a form of currency and to approve.
not a consumable metal. At the height of the gold boom, analysts
The multiples were effectively buying would typically value explorers and
options on growth, as few gold miners used developers at 0.5 times to 1.0 times net asset
to pay dividends; instead they reinvested value (NAV). They would value emerging
profits into the ground or made acquisitions. producers at 1.0 times to 1.5 times NAV; and
Investors also used to attach a premium to 1.5 times to 2.0 times NAV for mid and large-
certain stocks for intangible factors such as a cap producers. In order to take into account
particularly strong management team. production hits or misses, some of the more
In hindsight, most acquisitions during the sophisticated analysts would use a blend of
gold bull run turned out to be duds as miners NAV and one-year forward cash flow.
were caught up in gold price fever and didn’t Many analysts are now becoming more
realistic and reducing NAV target multiples.
Only premier league companies like
Randgold Resources are still expected to
trade above 1.5 times NAV due to a superior
track record and quality assets; the rest of
more towards 1 times NAV or below.
‘Gold stocks should never be valued on
multiples of NAV,’ argues Kieron Hodgson,
mining analyst at Panmure Gordon. ‘We
believe that many market participants fail to
apply appropriate discount rates and as such,
tend to over-inflate company NAVs. The idea
that gold miners offer leverage to the gold
price via operational efficiencies has been
proved wrong in recent years.’
For producing companies, a discounted
cash flow model is used to work out the
net present value (NPV) of future cash flow
4
GoLd mINING StockS: ANALYSIS
THE CASH
COST OF
MINING
DOESN'T
streams under specific commodity pricing PAINT
and operating cost assumptions. You add the
NPV of the project(s) to the company’s other
net assets (cash, debt, investments) to get
A TRUE
PICTURE
its NAV.
Some analysts value stocks using a blend
of NAV and EPS (earnings per share)
OF A
multiples; others also publish EV/EBITDA
(enterprise value to earnings before interest,
tax, depreciation and amortisation) ratios.
On the latter, remember that EV is enterprise
value which includes both the market cap
and debt. It is worth considering that debt
MINER'S
could be huge versus equity for a company
that has just gone into production, so you
need to focus on all-in sustaining cost
EARNINGS
(AISC) – NOT the cash cost of mining – in
order to get a true picture of how much
money is left to service the debt.
Gold miners used to only publish the
cash cost – and many still do so today – so
investors continue to presume this figure
taken away from the gold price equals the
money left in a miner’s pocket. Wrong. It
fails to factor in other items such as third
party smelting, refining and transport costs;
royalty and production taxes; and office
running costs.
Exploration projects are now harder
to value. The ‘gold boom’ method was to
have a starting point of $30 per ounce for a
company with a project at the resource level.
The higher up the resource category, the
greater the $/ounce figure. There are three
categories: inferred (the lowest confidence),
indicated and measured. For geographic
locations subject to large discoveries and/or
high levels of corporate takeovers, it wasn’t »
5
ANALYSIS: Gold mining stocks
All-in sustaining costs
US $ / gold ounces sold
On-Site Mining Costs (on a sales basis) Income Statement (a)
On-Site General & Administrative costs Income Statement (b)
Royalties & Production Taxes Income Statement (c)
Realised Gains/Losses on Hedges due to
Income Statement (d)
operating costs
Community Costs related to current operations Income Statement (e)
Permitting Costs related to current operations Income Statement (f)
3rd party smelting, refining and transport costs Income Statement (g)
Non-Cash Remuneration (Site-Based) Income Statement (h)
Stock-piles / product inventory write down Income Statement (i)
Operational Stripping Costs Income Statement (j)
By-Product Credits Income Statement (k) Note: this will be a credit
(l) = (a) + (b) + (c) + (d) + (e) + (f) +
Sub-Total (Adjusted Operating Costs)
(g) + (h) + (i) + (j) + (k)
Corporate General & Administrative costs (including
Income Statement (m)
share-based remuneration)
Reclamation & remediation – accretion & amortisation
Income Statement (n)
(operating sites)
Exploration and study costs (sustaining) Income Statement (o)
Capital exploration (sustaining) Cash Flow (p)
Capitalised stripping & underground mine
Cash Flow (q)
development (sustaining)
Capital expenditure (sustaining) Cash Flow (r)
(s) = (l) + (m) + (n) + (o) + (p) + (q)
All-in Sustaining Costs
+ (r)
Source: World Gold Council
6
Gold mining stocks: Analysis
on drill results, recently having reported
promising numbers from a project in Turkey.
Investors have not forgotten previous
disappointment with such companies as
Mariana, a classic small cap which has
failed to mind meaningful amounts of
economically-viable gold over the years.
The market also doesn’t forget companies
operational/financial problems such as
Avocet Mining where investors are primarily
concerned about when its meagre cash
pile will run out and ignoring the good
exploration results it has recently published.
The Panmure Gordon analyst says
his approach to valuing pre-production
companies is to calculate the theoretical
unusual to see $100 per ounce placed on minimum and maximum production
exploration projects. rate from a particular resource, apply his
In hindsight, that was madness, grossly commodity, inflation and costs assumptions
over-valuing businesses. Unfortunately many and then discount back the cash flow using a
investors still believe that’s the benchmark by market applied cost of capital. ‘Our valuation
which you should now value gold miners. We will then be subjected to further discounting
doubt there will be a return to such levels of depending upon whether the operation holds
exuberance for a long time. the relevant permits and licences, financing
‘You would struggle to get anything above and construction.’
$1 per ounce of gold for a company that has Hodgson says that if the financing
nothing more than an inferred resource,’ says requirement of a company is more than
Hodgson on current exploration valuation twice the current equity valuation, you can
levels. ‘As for a company with only drill reasonably expect existing equity holders to
results, it could be five to ten years before be diluted to a minority position as debt/
you see any cash flow, so the asset really can convertible equity funding remains the
only have negligible value right now due to preferred method of gaining the funding.
the huge risks a company must overcome This itself adds another layer of risk when
prior to achieving any tangible value for future debt obligations are considered.
shareholders.’ ‘The final consideration must be as to
The latter point might explain why the whether the project economics can sustain a
market presently is unwilling to mark up weaker price environment as this will be the
the value of stocks like Mariana Resources main reason for an operation’s existence.’
7
COMPANY PROFILE
Ariana Resources
Ariana is on the verge
of production
Why did you choose to The Red Rabbit gold project offers
operate in the geographic a significantly de-risked investment
regions where you are for shareholders interested in
active? investing in the gold exploration and
Turkey offers a unique gold production.
exploration environment on the Gold production at Red Rabbit is
doorstep of Europe. Located in near term, low-cost, fully funded and
the globally significant Tethyan fully permitted.
Ariana Metallogenic belt it hosts some of There is significant exploration
Resources the world’s largest gold, silver and upside in and around the project area
(AAU:AIM) copper deposits. With a supportive
governmental and legislative
and across Turkey.
Gold production is currently
environment for mining, Turkey is targeted for H2 2016 projected at
Website:
Europe’s largest gold producer. 21,000 ounces of gold equivalent
www.arianaresources.com
EMAIL:
per year during first five years
info@arianaresources.com What can investors of operation. The life of mine is
POSTAL ADDRESS: expect in terms of currently at eight years based on
Ariana Resources material newsflow over current resource base, but this will be
Bridge House the next six to 12 months? increased through further resource
London Bridge At Ariana’s flagship project Red expansion.
London Rabbit, news will be focused on Project economics are based only
SE1 9QR construction of the Kiziltepe gold on the Kiziltepe Sector – the Tavsan
United Kingdom mine. The company expects the story Sector represents immediate resource
PHONE:
to evolve through to mine start-up upside (capacity for additional
+44 (0)207 407 3616
and first gold production, which is 30,000 gold ounces annual
expected in the second half of 2016. production).
VITAL STATS In addition to mine construction
the Ariana team are focused on
B) Exploration & Development :
Western, NE and SE Turkey
Sector: Mining increasing the resource base which Shareholder value realisation
SHARE PRICE: 0.85p has the potential to extend both the through proposed sale of Artvin
life of mine and the gold output from project.
MARKET CAP: £7 million
the planned Kiziltepe operation. Strategic partnerships – exposure
Further to detailed planning, Ariana’s to new discoveries through
exploration team will focus resource associations with Eldorado Gold and
development at Kepez West and Royal Road Minerals.
Karakavak. The company is also Comprehensive exploration
ARIANA RESOURCES in discussions with a number of database covering Western Turkey in
1.40
interested parties over the sale of addition to Newmont’s Turkey-wide
the Salinbas prospect held in joint database.
Source: Thomson Reuters Datastream
1.30
1.20 venture with Eldorado Gold. Highly competitive all-in cost of
discovery (US$22 per ounce) versus
1.10
What differentiates your industry norms (approx. US$40 per
1.00
company from others ounce).
0.90 operating in the same
0.80 space? How do you mitigate any
0.70
A) Mine Construction and political and security
2014 2015 Production: Red Rabbit Gold Project. risks associated with
8
COMPANY PROFILE
Ariana Resources
operating in your position as a near term producer is producers in Turkey and globally,
chosen commodity and a different and significantly more being on the lower end of the cost
geographic areas? robust investment proposition. Once curve.
In our areas of operation there are Kiziltepe goes in to full production
no political or security risks – Turkey the Company will become self- How big an issue is cost
is for the most part, a very benign financing. inflation and how are you
exploration environment. Due to our going about handling it?
partnerships we are mitigated against What commodity prices There is a degree of increasing
most aspects of geographic risks, do your budgets assume in inflation in Turkey and we handle this
as we operate across two distinct your own models? through running a variable CPI in our
geographic areas. The base case financial model model to account for any impact of
provides a US$34.4 million Net inflation on our operating expenditure.
Are there any specific Present Value (8%) and a 37.8% In terms of other cost inflation for
technical challenges Internal Rate of Return using a base major components this has already
associated with the case gold price of US$1,304 per been factored in to our feasibility study
projects you are ounce and silver price of US$22.6 and consequently will not have a long-
pursuing? per ounce. term affect on the operation.
There are no specific technical The model was run at higher and
challenges with our projects. lower gold prices and unlike many How important a factor
Geologically and metallurgically global mining operations, Ariana’s is corporate governance
the deposits are relatively simple Red Rabbit project is likely to remain and management track
and clean. Our chosen process profitable even in the event of the record in assessing the
route at Kiziltepe is a tried and gold price reaching levels below merits of your company?
tested methodology used around US$1,000 per ounce. This is largely Ariana’s board identify that the
the world. Our partners, Proccea, due to significantly reduced energy quality of our business practices and
have significant experience building costs which have primarily reduced reporting are important factors with
these types of process plants and our mining costs. regards to investor community and
so there are no specific engineering key stakeholder satisfaction in the
challenges either. What is your budgeted company. The board leads company
cost per unit of strategy and regularly ensures goals
How do you fund production? and objectives are achieved with
your activities and is The C1 cash costs are currently minimal financial and business risk.
your financing model US$600 per ounce and comprise The board comprises Michael de
sustainable? of operating costs including on-site Villiers, executive chairman; Kerim
In the past we have tended to fund and all off-site charges and royalties: Sener, managing director; and William
our activities via the share market, inclusive of State royalty and 2.5% Payne, non-executive director and
although we have at certain times net smelter return. In June 2015 chief financial officer.
in the past used some debt which Ariana’s Red Rabbit Project was The board has a wide range of
we have long since paid back. granted Strategic Investment status experience with individual expertise
Alternative forms of financing have by the Turkish Government. This in financial management of gold
also included a $500,000 cash will result in an additional 50% mining operations, audit, compliance
component from the original Red reduction (90% total reduction) in and mineral resource exploration
Rabbit deal and proceeds from our corporation tax and exemptions and development. With a combined
original trial gold production in 2009. from certain customs duties and experience of 80 years, the structure
Although funding opportunities for VAT on components and equipment and size of the board is well matched
pure exploration through the market to be imported. These cash costs to the company’s current size and
are currently quite constrained, our compare very favourably with other stage of development.
9
COMPANY PROFILE
Goldplat
Goldplat bounces back
after refining hurdle
Why invest in Goldplat?
Goldplat’s primary business is
recovery, not primary production.
Recovery operations are surface
processing plants with low employee
numbers (roughly 460 total globally)
and hence have limited exposure
to mining and technical risk and
social and labour disruptions. The
Goldplat business model reduces exposure to
(GDP:AIM) commodity prices to an extent due
to contract structures. The company
has remained self-financing as is
currently returning to profitability
Website: after experiencing a period of severe
www.goldplat.com cash flow issues.
Gerard Kisbey-Green, CEO
G
VITAL STATS oldplat is an AIM-quoted
Profitable solution
The group sources by-products
Sector: Mining gold recovery company, including course and fine carbon,
SHARE PRICE: 2.88p producing 35,000 ounces woodchips, rubber and steel mill
Market cap: £4.8 million
of gold per year (20,000 liners, grease, plastic concentrate
ounces for own account) from bags as well as course tailings and
recovery of by-products of mining rock dumps and also assists in plant
operations and from primary mining. clean-up operations.
It has a JORC compliant resource These materials typically present
of 930,000 ounces, with recovery an environmental risk and cost to
operations in South Africa and producers but can be turned to a
Ghana, mining in Kenya and source of additional gold / revenue
exploration assets in Kenya, Ghana when processed by Goldplat. Clients
and Burkina Faso. include most of the gold producers
and an increasing number of PGM
Niche business producers in the areas of operation
Goldplat recovers precious metals as well as a number of refineries for
(primarily gold but also platinum processing of certain materials and
group metals (PGMs) and silver) for refining of bullion.
from by-products of mining. Its
GOLDPLAT
4.50 competitive advantage is gained Main operations
from a combination of the ability to Goldplat Recovery (Pty) Limited SA
Source: Thomson Reuters Datastream
4.00
process and recover metals profitably (GPL) is a well-established recovery
3.50
from materials which are a by- operation based near Johannesburg,
3.00 product and potential environmental South Africa. It services clients
issue to the operators; strategic within South and Southern Africa
2.50
geographic locations; diversity and and facilities include crushing,
2.00 flexibility of processing circuits and milling, wash-plants, spiralling, CIL,
extensive depth of knowledge and rotary kilns, eluting, shot-blasting
1.50
2014 2015 experience of the long-standing team. and smelting.
10COMPANY PROFILE
Goldplat
Gold Recovery Ghana Limited Goldplat has filled a five-month gold price in respect of 'own gold'
(GRG) is a recovery operation in pipeline through Aurubis Refinery production as well as working cost
the tax-free zone of Tema, Accra. in Germany with backlog material inflation and currency fluctuations
It services Ghana primarily, with which is now being processed and in country. Further risks include the
current growth focus on developing is cash flow generative. It has also amount of material held in stock –
this into a hub for West Africa as acquired additional elution capacity this stock is a risk-mitigant in terms
well as elsewhere in Northern Africa which is being installed at GPL. of supply disruptions.
and the America’s. This plant is Throughput from the existing
currently focused on spiralling and two 1-tonne elution columns has Financials
incineration with further processing been increased to five tonnes per Goldplat has a June financial
taking place in South Africa. day after installation of a new year end. The company made an
Kilimapesa Gold (Kili) is a small electric boiler. The first (of three) operating profit of £153,000 in 2014
producing gold mine in South 4-tonne elution columns should (profit of £2.64 million in 2013) and
Western Kenya. The mine has be commissioned at GPL during has reported an operating loss of
a 670,000 ounce resource and October 2015 – increasing elution £827,000 to December 2014.
currently produces about 2,800 throughput to about eight tonnes It expects full-year loss to be about
ounces per annum. Medium term per day. the same with operations having
plans are to double processing returned to normal towards the
and production as well as to find Recovery business model end of the financial year 2015. The
a joint venture partner for further Goldplat either purchases material company has not raised new capital
expansion. Kili produces bullion outright, processing and recovering since December 2010 and continues
which is refined in South Africa. precious metals for own account; to be self-funding, despite reported
processes material under various cash flow difficulties and the tough
Turning the corner forms of contract with transport, market environment.
Over the past 12 months, Goldplats’ treatment and refining charges, and The group has returned to
largest refiner, Rand Refinery, payment in cash or metal and in profitability, will complete processing
has been unable to process large some cases toll-treats material for of backlog material by December
amounts of material (primarily clients. 2015, is well-advanced in mitigating
ashes, carbons and certain The various models have differing 'single-refiner' risk and continues
concentrates) for the company. This risk and profitability profiles. to fund growth and capital projects
has resulted in a build-up of stocks The company is exposed to the internally.
and a cessation of material supply by
many clients with a consequent drop
in cash flow and operating losses.
During this time Goldplat has
worked on a number of strategic
initiatives to mitigate the risk
of using a single refiner and
processor of this material: Firstly
securing an alternative processor;
secondly building relationships
with alternative refiners for bullion
refining and thirdly, building in-
house capacity and capabilities to
process as much of this material as
possible to mitigate risk and capture
more of the value chain internally.
11COMPANY PROFILE
Oilex
Tight focus rewarded
at Oilex
PORTFOLIO BREAKDOWN
india
Oilex’s Cambay Field is located in
the prolific Cambay Basin, an area
with a long history of oil production
OILEX with over 38 wells intersecting the
Eocene formation and 18 testing
(Oex:AiM) oil and gas to surface. Oilex is
targeting tight siltstone formations,
the first company to do so in India,
with horizontal multistage fracture
WEBSITE:
www.oilex.com.au stimulated wells. The EIA has
identified the Cambay Basin as one
of the pre-eminent locations for the
VITAL STATS partial replication of the tight oil
O
and gas success in the United States.
SECTOR: oil & gas producers ilex is an ASX and AIM Oilex’s Cambay Field covers
SHARE PRICE: 1.65p listed independent E&P 161 square kilometres, contains
MARKET CAP: £41.1 million company with assets in around 20 million barrels of oil
India and Australia. With equivalent (mmboe) in proved and
a focus on sustainable production, probable ( 2P) Reserves, ~80mmboe
cashflow and reserves, the company of 2C contingent resources (net to
uses its extensive technical and Oilex) and a full 3D seismic data
commercial expertise to explore, set across the Block. The company
appraise and develop tight petroleum entered the asset in 2006 when it
resources around the Indian farmed into the Cambay Field Joint
Ocean Rim to meet growing energy Venture for a 45% equity interest
demands in the region. and operatorship. Oilex is partnered
Oilex’s core production asset is with Gujarat State Petroleum
located in India, the world’s fourth Corporation (GSPC). GSPC
largest energy consumer, a country operates the largest distribution and
with material forecast economic and marketing network in the state.
industrial growth and a significant The Cambay-77H well drilled in
unsatisfied gas demand. At present, 2014 delivered proof-of-concept that
gas fired power stations in the the tight formations in the Cambay
country run at less than capacity Field could be fracked and deliver
OILEX (LON) due to fuel supply constraints commercial production rates from
9
and industrial consumers suffer longer laterals. On an extended
Source: Thomson Reuters Datastream
8
shutdowns as well. This unfulfilled well test, Cambay-77H proved the
7
energy requirement provides the repeatability and efficacy of Oilex’s
6 basis for high sustainable current approach.
5 and future gas prices. Oilex’s assets In June 2015 Oilex announced the
4 are in Gujarat State, the industrial commencement of gas sales from
3 heartland of India, where in-place the Cambay-73 well into the low
2 pipeline infrastructure provides a pressure gas market around the field.
1
fast and low cost route to market for The production rate has stabilised at
2014 2015
Oilex’s gas. around 26 barrels of oil equivalent
12COMPANY PROFILE
Oilex
per day (boepd) and marks a major fracture stimulated production in the industrial region which
step towards Oilex’s targeted cash wells, five legacy well work overs includes Port Hedland, the largest
flow positive operations in India by and new production facilities. Once bulk minerals port in the world and
the end of 2015. the horizontal Cambay-78H and the Gorgon, Wheatstone and North
Oilex’s other asset in the state Cambay-80H wells are brought West Shelf LNG developments.
of Gujarat is the Bhandut Field, online, Oilex’s production and Integration of regional seismic
located close to the Lakshmi, Gauri cashflow will significantly increase. data and a recent gravity survey
and Hazira Fields. It is a depleted indicate that Oilex has captured
oil field which has produced 17,500 2017 and beyond the entire 200 kilometre Wallal play
barrels of oil since its acquisition by The 2P Reserves support a field fairway which is approximately 20
Oilex in 2007 and has conventional development plan of 50 mmscfpd kilometres wide.
gas reservoir above the oil zone. on plateau production and the Also, the petroliferous Ordovician
The gas zone flowed dry gas at a Company is currently undertaking sequence is interpreted to be
maximum rate of 6.5 million cubic engineering studies to support this preserved in its entirety with both
feet per day (mmscfpd) during an plan. The Company’s 2P Reserves conventional and unconventional
isochronal well test. Oilex holds a provide access to reserve based potential. Oilex is currently compiling
40% operated interest in this six lending opportunities and drilling a leads and prospects inventory
square kilometre field which has and well costs are expected to fall as and a farm-out process is underway
a contingent resource of around the programme is rolled out. Oilex which will see exploration drilling
425 million cubic feet gross. also believes that there is additional in late 2017. Oilex will maintain a
The company has commenced untested potential in four deeper low capital exposure to this asset
construction of a production zones on the field with Undiscovered and intends to drill the commitment
facility which will allow sales of P50 gross in-place volumes of 12.6 wells in conjunction with a new
Bhandut gas to the local market trillion cubic feet of gas. This deeper equity partner which will limit cost,
to commence, further enhancing potential is also the subject of an but maintain the Company’s upside
Oilex’s production base. independent Resource assessment. exposure to this very exciting asset.
Fully financed India work Australia Value catalysts
programme for 2015-2016 In 2013 Oilex secured a low cost The Oilex model is to target and
Oilex recently announced a US$23 entry into a three million acre develop high quality assets in deep
million capital raising programme to position in the Canning Basin, markets with compelling commodity
fully fund its 2015/16 Cambay and Western Australia. The Wallal pricing and a low cost of entry. This
Bhandut Field work programmes. Graben asset covers the last approach delivers the maximum
The Cambay Field work programme unexplored half graben adjacent to potential for value creation and a
will deliver two horizontal multistage the Pilbara Craton and is located sustainable business which is resilient
in a low global oil price environment.
Oilex’s experienced and committed
executive team are focused on
delivering this model for growth and
the great progress that the Company
has made in the last year is evidence
of the successful application of this
approach. The foundations are in
place for a period of operational
success and value creation as Oilex
develops into a successful and
sustainable hydrocarbon producer.
13COMPANY PROFILE
Solo Oil
Solo multiplies its efforts
S
olo Oil is a portfolio wells, Ntorya-2 and Ntorya-3,
investment company focused to better define the possible
exclusively on the oil and gas development of the discovery, which
sector and predominantly is already rated at over 1 trillion
in Africa. The company was set up cubic feet of gas in place.
as an investment company with
the target of acquiring an active Pipeline to profit
portfolio of oil and gas assets across Key to unlocking the value of
Solo Oil a range of maturities and geography. both Ntorya and Kiliwani North
(SOLO:AIM) Its exposure to deal flow allows it is the new 36-inch common-user
to select good quality assets with gas pipeline which runs from the
competent operators in which south of Tanzania to the Tanzanian
to invest. Exposure to assets at capital, Dar es Salaam. The pipeline
Website:
different points in the value chain and all associated facilities are likely
www.solooil.co.uk
from exploration to production, in to become fully operational during
different geographic areas and with third quarter 2015 and will provide a
different operators, systematically means of marketing any further gas
VITAL STATS reduces the risk in the portfolio discoveries at Ruvuma through a gas
whilst maintaining active news flow. sales agreement with the Tanzanian
Sector: OIL & GAS Investment
Using the skills of the existing asset authorities.
SHARE PRICE: 0.47p operators Solo gains their experience Gas from Kiliwani North on
MARKET CAP: £25.6 million whilst itself maintaining a very low Songo-Songo Island will also flow
overhead cost. into the new pipeline along with
Central to the current portfolio are gas already being produced by other
the company’s gas assets in Tanzania operators in the Mtwara area of
in East Africa. Solo holds a 25% south Tanzania. This is an exciting
interest in the Ruvuma onshore time for energy starved industries
petroleum sharing agreement in the Dar es Salaam area who
operated by Aminex, where it has are receiving their first supplies of
made a substantial gas discovery indigenous gas to fuel economic
at Ntorya and also has a number growth in this stable East African
of exciting follow on opportunities country.
in that licence. Solo also holds a The first of the planned Ntorya
6.5% interest in the Kiliwani North appraisal wells will be drilled
Development Licence, also operated about 1.5 kilometres up-dip from
by Aminex, which is due to come the discovery well in the direction
on stream later this summer. Once in which the reservoir sands are
gas sales agreements are signed predicted to thicken. If successful a
SOLO OIL
Source: Thomson Reuters Datastream
1.10
Solo plans to increase its interest in second appraisal well will target the
1.00
Kiliwani North by a further 6.5% in centre of the predicted channel sands
0.90 an existing agreement with Aminex. and will also test the continuation
0.80 Recent new seismic and of the sands seen in the earlier
0.70 independent resource estimations Likonde-1 well which encountered
0.60 have increased the size of the shows, but was not declared a
0.50 Ntorya gas discovery made in 2012 discovery.
0.40
and the emphasis this year will be With more than 2 trillion cubic
0.30
2014 2015 on the planning of two appraisal feet of prospective gas in place the
14COMPANY PROFILE
Solo oil
Likonde-Ntorya area is especially
attractive given the proximity of the
pipeline to the market in Dar es
Salaam.
Elsewhere in Africa Solo has
been working for some time on a
new country entry into Nigeria,
West Africa’s oil and gas production
powerhouse. In May 2015 conventional oil and gas prospect and consultations by government
Solo converted its existing seed in Surrey just north of Gatwick agencies have been completed.
investment in Pan Minerals, a Swiss airport last year and where oil was With the commencement of gas
company, to a 20% interest in a found, as anticipated, in the Portland production at Kiliwani North Solo
new UK company, Burj Petroleum Sandstones. will be in receipt of its first revenue
Africa Limited (Burj), which has The well, Horse Hill-1, is expected from its investments in Africa and in
made applications for a number of to be flow tested in late 2015 and if the future Solo will look to reinvest
so-called marginal fields in the Niger the results are similar to a number of its cash flow in new assets or to pay
Delta region of Nigeria. other nearby Portland Sandstone oil a dividend to its shareholders, and
In partnership with Global Oil and fields then production of oil could be will continue to increase the size and
Gas, a company with an excellent planned to start as early as late 2016 sustainability of its portfolio.
track record of accessing and or early 2017.
operating in remote areas, Burj hopes HHDL holds additional acreage Diverse portfolio
to take an active role in developing in the Weald Basin and there Solo has so far created a diverse
the discoveries previously made by are plans to explore and develop portfolio, with low costs, using
international majors and which are additional prospects in the next the experience of a small and
now being released by the Nigerian few years. The Horse Hill well also experienced management team.
authorities for smaller operators such revealed more mature Kimmeridge Solo has selected and invested in
as Burj. oil source rocks than had previously six opportunities; in Africa, the UK
The two adjacent fields applied been expected and there is evidence and Canada. The medium term plan
for by Burj and its partners contain a for thick limestone reservoirs in is to expand that to more than ten
total of ten wells that were drilled by the Kimmeridge that could yield opportunities. Since its creation
an international major. These fields additional conventional or even Solo has actively participated in
are believed to contain proven and unconventional oil production. the discovery of gas in the Ruvuma
possible recoverable oil reserves of Based on the early success of the Basin, oil in the Weald Basin
close to 60 million barrels. Horse Hill project Solo has jointly and now participates in a gas
Solo has also recently made a applied for an exploration licence in development at Kiliwani North that
small seed investment into the oil the UK 14th landward licence round. will be on production and generating
and gas sector in Morocco and will The 200 square kilometre licence, revenues in 2015.
monitor developments there with which covers a portion of onshore An exciting second half of 2015
a view to increasing its stake if the Isle of Wight, has been made in should be followed by a further
opportunity and prospects justify. partnership with a rapidly growing period of growth in 2016, supported
new start-up company, UK Oil and by gas revenues and fuelled by a rise
Back in the UK Gas Investments, who also hold the in opportunities for investment in a
Closer to home in the Weald Basin rights to licences offshore south of generally depressed market where
south of London, Solo has a 10% the Isle of Wight. Announcement companies with strong balance
interest in Horse Hill Developments of awards in the 14th round are sheets, zero debt and low overheads
Limited (HHDL), a special now expected in the second half of will have access to an increased
purpose company which drilled a 2015 once additional assessments number of opportunities.
15COMPANY PROFILE
Vast Resources
A golden revival
for Vast Resources
T
ransitioning from Reserves and Resource Reporting
exploration to a cash System of lead at 0.95%, zinc at
generative mining company 1.86%, copper at 1.17%, gold at 0.63
with an impressive portfolio grams per tonne (g/t) and silver at
of high-quality assets spanning 45.97 g/t.
Europe and Africa, Vast Resources The mine is located 26 kilometres
has been transforming itself in more from Iacobeni where a processing
than name alone. plant, consisting of crushing,
Vast Targeting opportunities that reflect milling and flotation circuits is
Resources its new emphasis on profitable located. Whilst Vast has identified
(VAST:AIM) mining operations, the AIM-quoted
resource and development company,
a number of ways in which to
improve operating efficiencies,
which changed its name from this established infrastructure
African Consolidated Resources undoubtedly positively impacts capex
Website: in January 2015, has focused on and opex for the project.
www.vastresourcesplc.com establishing itself as a significant
mining company. With three mines Growth plans
VITAL STATS presenting near-term revenue
potential in Romania and Zimbabwe,
Production at Manaila is targeted
at a rate of approximately 10,000
Sector: Mining Vast is committed to generating tonnes per month for a three-year life
SHARE PRICE: 1.8p maximum value from its activities. of mine. This production relates to
Testament to this commitment, ‘Phase 1’ of the mine that targets the
in August 2015 Vast made the open pit, which has a 0.35 million
historic move into production. This tonnes in-situ resource of 1.10%
was achieved at its 50.1%-owned lead, 2.00% zinc, 1.25% copper, 0.70
Manaila Polymetallic Mine in g/t gold and 50.0 g/t silver.
northern Romania, which Vast Importantly, potential exists to
acquired in July 2015, and advanced expand this open pit resource further
into production four weeks later. and there is also additional upside
Manaila has a total 1.8 million available via ‘Phase 2’ and ‘Phase 3’
tonnes mineral resource estimated of the life of mine, which relates to
in accordance with the Russian underground mining and some open
VAST RESOURCES
2.00
Source: Thomson Reuters Datastream
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
2014 2015
16COMPANY PROFILE
Vast Resources
pit mining. Vast intends to explore
the expansion of this resource.
Prior to acquiring Manaila, Vast
had an established in-country
position thanks to its 80% interest
in the Baita Plai Polymetallic Mine,
which is located in the Apuseni
Mountains in Transylvania, an
area which hosts Romania’s largest
polymetallic and uranium mines.
This mine also boasts a 1.8 million
tonne resource at 2.19% copper, 128
g/t silver, 3.46% zinc, 3.07% lead length in the highly prospective 10,000 tonnes per month expected.
and 1.41 g/t gold, which includes a Carpathian Mountains in northern The mine, which is located 120
400,000 tonne copper, silver, zinc, Romania. kilometres southwest of Harare, has a
lead, gold, tungsten, molybdenum Due diligence has been completed current JORC Resource of 62 million
ore body which is ready to mine. on these mining assets, where tonnes grading 1.8 g/t gold, containing
The previously operational mine three main asset classes have been 3.56 million ounces of gold. Included
was put on care and maintenance identified, providing the basis for in this resource is an open-pittable ore
in 2013, prior to Vast acquiring a staged development programme reserve of 16.6 million tonnes grading
the project, due to lack of capital targeting five high priority projects. 1.9 g/t gold for 1.02 million ounces.
investment and modernisation. With wide underground ore bodies The current plant design is
Vast is confident that while the that can facilitate mass mining and expected to target the oxide gold cap
plant and equipment require some major exploration opportunities over at Pickstone-Peerless, which has an
rehabilitation, the mine can be a 100 kilometre prospective land estimated life of six years. During
brought back into production in package, this presents a particularly this period, expansion of the plant to
approximately three months, once attractive opportunity for Vast to treat the open cast sulphides, at a rate
the transfer of the mining licence establish itself as a leading mining at least double the current monthly
has been concluded. Potential company in the region. volume will be evaluated.
also exists to expand the current With its low sovereign risk, pro- With one producing and two
resource further. mining government and emerging near-term revenue generative mines
market opportunities, Romania and further down-stream growth
Proof of concept represents a strategic investment prospects, Vast has developed a
Vast’s current interests in Romania destination, which is well positioned diverse investment portfolio.
serve as proof of concept for future to access Europe, the Middle East Having identified the near-term
development opportunities within and Africa. development potential of the
the region. The company continues Manaila and Baita Plai Polymetallic
to develop its relationship with Zimbabwe progress mines in northern Romania, as well
Romanian state mining group, In conjunction with developing its as its Pickstone-Peerless gold mine
Remin SA, with whom it has Romanian interests, Vast remains in Zimbabwe, Vast is leveraging
entered into a Memorandum of focused on advancing its Pickstone- the extensive experience of its
Understanding (MoU). Peerless Gold Mine in Zimbabwe. management team to develop assets
Vast has a strategic opportunity With plant commissioning completed, through to production for the benefit
through this MoU to acquire 55 first gold sales are targeted for of all stakeholders. With this in
previously state-owned precious September 2015, with annualised mind, the remainder of 2015 and
metal and polymetallic mines over gold production of circa 10,000 beyond is set to be extremely active
more than 100 kilometres of strike ounces from an initial mining rate of for the company.
17ANALYSIS: Oil feature
The investor's
guide to oil
stocks in the
new era of
commodity
prices
Tom Sieber
A
re you interested in oil-related anticipated operating cash flow
investments but lack the expertise of $83 million and higher than
with separating the likely winners forecast capital expenditure of $386
from the losers? Fear not, as there million.
are three key areas to study which could help Early in 2015 Enquest negotiated a
you get the edge over other investors. These relaxation of covenants on its lending facility
are, in no particular order, funding, exploration and retail bond and management says it ‘will be
and M&A (mergers and acquisitions). able to operate within the requirements of its
At the moment funding is likely to be existing borrowing facilities for 12 months from
uppermost in the market’s mind given the the date of approval of the half-year report’.
pressure on balance sheets from collapsing Cantor Fitzgerald which has a 'sell'
commodity prices. Investors will punish recommendation on Tullow and a price target
companies with significant amounts of debt. of 168p comments: ‘Through our analysis we
For example, both Tullow Oil and Enquest believe one of Tullow's covenant ratios (net
have seen their share prices come under severe debt/EBITDA) will come under increased
pressure as the market frets about the state of scrutiny and could be in danger of breach
their respective balance sheets. if the company is unable to bring its TEN
Enquest reported higher-than-expected net complex onstream, on time and at the required
debt in its interim results on 19 August. The production rate. In addition, if the current sub
figure of $1.28 billion reflected lower than $50 per barrel oil price persists we estimate
18Oil feature: ANALYSIS
that Tullow’s debt headroom could be exceeded widespread cost deflation means we remain
before 2019.’ bearish on the oil services space.
Faring a bit better despite the negative
backdrop is Premier Oil. Although the company Exploration focus
reported a larger than expected loss of $214.7 The main reason people invest in exploration
million – based on impairments to its oil and and production companies is to achieve many
gas developments to reflect the lower oil price times their investment as the market responds
– operating cash flow for the first six months of to exploration success, however there are
2015 came in at $513 million, 12% above the comparatively few recent instances of this
consensus forecast figure of $457 million. actually happening. The last really compelling
Writing in July, Deutsche Bank sums up story was Cove Energy which, in partnership
the debt concerns in sector-wide terms. ‘This with US independent Anadarko, made a
is a leverage issue, as opposed to a liquidity number of natural gas discoveries offshore
problem: the sector’s borrowing capacity has Mozambique before being acquired by Thai
been expanded to a staggering $17 billion national oil company PTT for £1.2 billion in
over the course of 2015, suggesting around August 2012.
$8 billion of "theoretical" headroom exists. Without these kinds of examples to draw
So why are we cautious? We think material on there is little incentive for investors to get
deleveraging in 2016/17 is needed to reset involved in the sector. And given spending on
balance sheets and free up capital for the next exploration has declined almost 65% in 2015
growth phase.’ there seems little chance of the lacklustre
It says three things need to happen if the oil recent record in the sector improving.
sector is to deleverage ‘organically’, i.e. without Yet for those companies with sufficient
dilutive equity issues. funds to invest in exploration it could
he commodity to recover to $75 by
• ‘(1) T work out very nicely. A big reduction
2017; in costs makes drilling wells
• (2) Capex to decline a further 25% in significantly less expensive and
2016 and remain flat; a potential recovery in crude
• (3) Production growth of 25% to be down the line could make
delivered in 2016.’ discoveries particularly
A recovery to $75 a barrel is lucrative once they are
possible but the current trend is brought onstream.
not encouraging. Increasing In this context
production by a quarter the high impact
next year while reducing drilling being
capex by the same level pursued by Cairn
looks a big ask. What Energy offshore
may help is the Senegal is likely to
downward pressure attract considerable
on costs as big attention. Numis
companies scale comments: ‘We see a
back their relative low risk E&A
spending. campaign ahead with
The a very high chance of
prospect finding oil in all three
of planned Senegal wells.’
19ANALYSIS: OIL feAture
Cairn has a strong balance sheet and although
the tax dispute which prevents it from realising
the value of its stake in former subsidiary Cairn
India is a negative, this is largely priced in by
the market.
Faroe Petroleum is also in a relatively robust
financial position and is, for the time being at
least, able to continue its strategy of drilling
multiple material exploration and appraisal
wells with the aim of rapidly monetising any
finds through asset swaps and divestments.
With a focus on Norway, Faroe also benefits
from a fiscal set-up that sees 78% of
exploration-related expenditure reimbursed in
the following tax year.
The concern is that discoveries may not be
fully rewarded by the market and the focus
instead will be on the additional cost, time and
risk associated with appraisal and development
and the possibility that in the current climate
an explorer might not be able to monetise their
discoveries.
consoliDAtion
The third obvious driver for sector valuations
20OIL feAture: ANALYSIS
Companies
projects. The completion of Royal Dutch Shell’s
deal to buy BG – expected early in 2016 – will
not help with this situation as Shell is widely
with low expected to rationalise the portfolio of the
combined entity.
Lower tier companies may seek to combine
costs could in order to survive and predators may seek to
take advantage of bombed out share prices. On
be long-term
24 August Poland-focused San Leon Energy
confirmed it had received a bid approach from
an unnamed party.
winners
One company looking to secure a farm-
out deal in a difficult market is Savannah
Petroleum, which controls 50% of the Agadem
basin in the Niger desert (with Chinese state
operator CNPC controlling the remainder), but
we believe it can pull this off.
is M&A activity. Logically now is the point There are a couple of key reasons why
in the cycle that you’d expect widespread focusing on stocks with low operating
consolidation as those with plenty of cash costs makes a lot of sense in the current
at their disposal look to pick up barrels on environment. One, these companies will
the cheap. Though there are some signs of inevitably be more resilient if oil prices remain
private equity sniffing around, the market is depressed; and two, they will see the greatest
currently flooded with assets because the major upside from a recovery in crude assuming they
oil companies are in the process of divesting can retain tight control on costs.
21Databank
Commodity price
performance 2011-2015
2011 2012
Copper -21.3% 4.4%
Corn 9.5% 7.4%
Crude Oil 15.3% 1.9%
Gold 11.1% 5.6%
Natural Gas -29.4% 15.1%
Platinum -22.8% 12.8%
2013 2014
Copper 7.2% -15.0%
Corn -41.6% -8.6%
Crude Oil -0.2% -49.7%
Gold -27.3% -1.6%
Natural Gas 26.5% -31.1%
Platinum -11.1% -12.1%
Source: Shares, Thomson Reuters Datastream
22Databank
2015
15
(%)
11.0
10 NATURAL GAS
BRENT CRUDE
ALUMINIUM
WTI CRUDE
4.9
PLATINUM
PLATINUM
RHODIUM
5
COPPER
COFFEE
NICKEL
WHEAT
SUGAR
SILVER
CORN
GOLD
LEAD
ZINC
TIN
0
URANIUM
COCOA
-1.9
-5
-6.7
-8.5
-10
-9.7 -9.8
-12.5
-15
-15.7
-16.6
-17.5 -18.3
TOP BOTTOM
-20
-19.6 -19.6
-21.1
-25
-25.8
TEN TEN
-27.2 -27.4
-30
-35
-34.5
-36.0
-40
Covers period 01 Jan to 15 Sep 2015. Source: Shares, Thomson Reuters Datastream.
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