Carbon Energy Ltd (ASX:CNX) has received a Speculative Buy recommendation and a A$0.09 target price from APP Securities.
CNX shares last traded at A$0.01. The following is an extract from the report.
QLD Govt plays hardball on UCG ....
QLD Govt Announcement
Carbon Energy Ltd (ASX:CNX) is a small QLD based energy technology company focussed on the development and commercialisation of underground coal gasification (UCG) projects.
On 18/04/2016, the QLD Labor Govt announced the prohibition of UCG/USG development in QLD after Linc Energy Ltd (SGX:BRE) was forced into voluntary administration under section 436 (a) of the Commonwealth Corporations Act.
This announcement was apparently unexpected and occurred without the release of any triggering evidence.
The Independent Scientific Panel (ISP) Report on UCG Pilot Trials (June 2013), commissioned by the then Liberal QLD Govt, stated that commercial UCG operations in QLD could be viable “subject to successful demonstration of project decommissioning”.
In the last Quarter of 2014 CNX completed a site Decommissioning Report and a Rehabilitation plan for its Bloodwood Creek pilot demonstration site in QLD.
According to CNX, the Government advisors had advised CNX that the decommissioning recommendations as required by the ISP had successfully been completed.
CNX reported that key findings included that:
- Operations were safe and effective;
- The process was highly controlled; and
- No material impact on regional ground water quality was evident.
Original valuation and price target ($0.23cps, $0.14cps respectively) pre-dilution from the recent 3 for 11 renounceable rights issue, included items for:
- An approximate $4M “adjustment” to CNX’s market capitalisation based on a comparison of EV/Pj of gas reserves (v another ASX listed company); and
- Booked deferred exploration, development and evaluation costs of A$90M (as per 2015 annual report) associated with pre-development of the Bloodwood Creek/Blue Gum UCG project, QLD.
As per the 2015 annual report, CNX state that recoverability of the carrying amount of this asset is “dependant on successful development and commercial exploitation of the resource”.
Whilst we had always assumed a low probability of development of the QLD gas assets, taking out the MV uplift and capitalised development costs (assuming zero probability of QLD development) reduces our valuation and price targets to $0.15cps, $0.09 cps respectively (includes dilution from recent rights issue).
There is still some uncertainty as to whether this announcement will pass through legislation.
Given our revised valuation and price target still significantly exceeds current share price our Speculative Buy recommendation remains.
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