Investor Newsletter • June 2007 13 UPDATES MOLOPO SPECULATIVE BUY An emerging producer Molopo Australia has spent the past three years assembling one of the largest portfolios of coal seam gas exploration acreage yet seen in the Australian market. Until now, however, the company has seen few fruits for its labor because its gas production has grown much slower than its huge exploration portfolio. That is about to change with the company accelerating plans to develop several projects to the point of first cash flows. Molopo’s Mungi field in central Queensland has been in production for three years. But a lack of interest from the joint venture partner, Anglo Coal, has seen little progress in lifting production volumes or winning new contracts. With a new production and development team imported from BHP, Molopo is planning to significantly expand Mungi’s production over the next two years by investing in up to 10 new sole-risk development wells. While this will involve significant costs (up to $2 million per well) Molopo will also earn 100 percent of the revenue from each new well. With new power generators seeking to tap into Queensland’s rapidly rising demand for electricity, chances are good for Molopo winning a sizeable new gas contract. Near Mungi, MPO has two other development projects – Harcourt and Timmy – which also have the potential to become producers in the near future. As both are relatively close to existing pipeline infrastructure, chances of securing contracts are also good. In New South Wales, Molopo and its joint venture partner, A. J. Lucas, own the massive Gloucester Basin coal seam gas reserve in PEL 285. The partners aim to drill up to 13 new exploration core holes this year in order to prove the quality of gas seams. Early wells have shown very high daily flow rates (0.65 million cubic feet/day), and if these results are repeated in the new wells, the Gloucester deposit will be of undoubted commercial value. As the Gloucester Basin is just 90 kilometres from Newcastle, where industrial users pay around $4.50 a gigajoule of gas, this field could be developed relatively quickly with a modest capital outlay. Outside of Australia Molopo has developed exploration projects in China’s Ordos Basin in Shanxi Province, south-west of Beijing, in two provinces in South Africa and in West Virginia, it has developed a coal shale gas exploration project. Both the Chinese and South African projects are highly promising due to local shortages of gas and the proximity to large-scale industrial users. Development costs could, however, be higher in both markets as the technology for coal seam exploitation is immature in both markets. But with local gas consumers paying well above Australian prices for gas (50 to 80 percent higher in some cases), the risk is worth taking. In the short term the company appears to have the ability to execute its plans. Following the underwriting of the conversion of the company’s options (by Wilson HTM and E. L. & C. Baillieu), the company has approximately $16 million in cash. While the future looks bright for coal seam gas, Molopo will be subject to the risks that confront all young companies in a rapidly changing industry. Competition for contracts is fierce and there is no guarantee the company will win contracts to underwrite the development of its fields. Cost overruns and development delays are also a regular problem for emerging companies. Given the number of areas where problems can emerge, Molopo shares may be volatile over the next two to three years shares in the company are not recommended for investors seeking to preserve capital. Only those who are comfortable with the trade-off between high risk and high potential rewards should consider investing in such a speculative stock. Investors should speak to their Baillieu adviser before investing in a high-risk, speculative stock of this nature.
MPO Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held