If Wildhorse Energy was just a synthetic gas (syngas) company operating in central Europe, it would be less attractive for me. But with the share price more than twice underwritten by its Uranium assets, it becomes the most interesting investment I have encountered for a while.
Worth a visit I thought it was worth a look at the company in Hungary, where I went last week. The Uranium resource is verified at 77 million lbs (could be more) at a price of $2/lb in the ground, which seems pessimistic. Additionally, all of the gas potential is really exciting, and in for nothing.
Their current focus is developing a UCG (Underground Coal Gasification) Syngas project in a coal mining area some three hours drive south of Budapest down the Danube near a town called P?cs (pronounced ?page? apparently). The economics of UCG have been completely transformed by modern directional drilling techniques.
They have a team of eight in this incongruously beautiful old university town, 2010 European City of Culture, and well worth a visit, irrespective of gas activities in the surrounding areas.
The Australian-listed company?s current share price is $0. 45 (Australian dollars), and their significant uranium resource in the area was valued at $0. 89 in an analyst?s research note last week, and at $1.89 per share with the gas projects. A figure which, from information during my visit, I think shoots too low.
It is useful to report on a resource company which is entirely unaffected by the current efforts of the developing nations to moderate their inflation, thus badly effecting sentiment in most resource stocks, whilst the case further out remains intact.
A good buying opportunity? Hungary urgently needs the syngas to mitigate their dependency on the 78% of gas imported from Russia, piped across insecure territories. The UCG process is not new, a plant in Uzbekistan has been operating for 70 years, whilst there are three plants in Australia, one in South Africa and supposedly 30 in China. What is new is the ability to follow the coal seams with directional drilling.
The process involves drilling three wells into a deep coal seam. Oxygen is pumped down one well and ignited from a second well, thus burning the underground coal in a controlled manner from the oxygen supply. The third well then draws out the (synthetic) gas consisting of displaced methane, hydrogen, carbon dioxide and carbon monoxide and other traces. The gas is processed to remove the carbon dioxide and sulphur (sold to local farmers for fertiliser) and the ?clean? gas is piped to nearby power stations.
The current contract at the Pecs site is to supply gas to the local power station, owned by Dalkia, a joint venture between French companies Veolia and EDF, to feed two generators and a second phase combined cycle producing 120 megawatts. This should come onstream in 2013 and KPMG analysis of prices give Wildhorse an annual margin of ?25 million, for a payback in 4-5 years, with the coal resource to run for 30 years. Wildhorse have contracts for similar systems at two other locations in Hungary.
Whilst conventional underground mining is inefficient, extracting only 20% from the source, compared to 90% by the UCG process, it is also potentially dangerous and costly. UCG also has significant benefits from less noise, dust and visual impact with no slag heaps and a much smaller footprint.
'Vast potential' Wildhorse plans to operate similar systems at Dalkia power stations in adjoining countries, where Rumania and Ukraine use 100% Russian gas, and six other neighbouring countries all well over 50% dependent. The company is at an advanced stage of negotiation in some of these regions, hence my excitement at the vast potential.
Hungary uses 38% nuclear power now and Wildhorse has a soft sell for its proven 77 million lbs of Uranium, worth a pessimistic $2 in the ground. The uranium can be processed next door in Slovakia and brought back for home consumption.
The company is well managed with an excellent competent team of operatives, mostly South African, formerly of South African energy company Sasol.
There are issues of course. They will need more money this year and are likely to raise much of this by going for listing on London?s Alternative Investment Market, since the chairman and managing director are London based. The current management options are nearly 25% of capital, which although still a bit underwater, seems high to me and I would question whether they are in the right place. They are certainly technically competent and experienced in the UCG process, although I?m not sure they have got the local drilling right yet, but quite confident that they will.
I have bought the shares twice now and have a sensible holding, but I will certainly take more at the impending money raising. Also I suspect that Dalkia themselves will buy into the company at this time which raises other issues and attractions.
David Kempton is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies
SO4 Price at posting:
58.0¢ Sentiment: LT Buy Disclosure: Held
