erg acquisition, page-21

Thanks Imbiber – its good to see I’m not alone in that interpretation of the transaction.

Lory – The issue you are trying to get some discussion going on is important. Linc is currently primarily valued on a JORC basis taking into account tons of coal. The question is whether LNC would be more highly valued under SPE guidelines (Society of Petroleum Engineers) whereby the coal is converted into syngas according to their technology and then the valuation is performed on PJ of gas rather than tons of coal.

Are you aware that CNX obtained a SPE certification in 2009? Here is the link:
http://www.carbonenergy.com.au/images/20091208%20mha%20reserves%20certification.pdf

I have limited knowledge of these certification processes, so I’ll just let you know how I think it works. An independent SPE conversion is required for the market and brokers to take notice, with consequent implications for the share price. In-house conversions provided in presentations/broker reports have limited impact because there is too much uncertainty regarding whether the coal resource can be commercially converted to syngas taking into account economic, marketing, legal, environmental, and regulatory factors etc. A 1P, 2P etc certification removes this uncertainty.

Obviously, greatest value is attached to 1P reserves because they provide most certainty. In that respect, I would suggest that LNC is missing a few key ingredients and perhaps that is why certification has not been sought. In terms of GTL, the first would be a feasibility study confirming the economics of their proposed modular approach to plant construction and operation. The second would be certification of the diesel output and/or that the synthetic avgas has been certified by the US Air Force as an aviation fuel. Third would be an approved plant location. We all know that these are exactly the things that LNC are progressing as quickly as they can.

Certification for a power plant would be much easier. Technologically it’s a much simpler route to market and it has already been verified that turbines can operate on UCG syngas. Electricity production is very likely to be the first commercial use of LNC syngas and hence SPE certification will likely follow shortly after a proposed project/partner has been determined.

In 2009, Bell Potter and Pattersons produced broker reports that looked at recent takeover prices for CSG assets. They reduced the prices to account for the takeover premium and then calculated $/GJ energy for 2P and 3P reserves for each takeover. They compared that to CNX, LNC and CXY by dividing their enterprise value by their respective 3P GJ’s (using a conversion of 10PJ/Mt of coal). The end result was around 7c/GJ for LNC compared to about 50c/GJ for CSG companies. It was pretty flawed analysis imo because no adjustment was made for the $billions of assets that LNC held which had no UCG potential and which were on the market for sale. Deduct these assets from the valuation and the LNC figure dropped below 2c/GJ.

The main insight from the analysis is that if UCG becomes accepted as commercially viable (in the way CSG has), then substantial share price catchup is required for LNC to be valued on par with CSG companies (even if you assume CSG valuations may have dropped since 2009).

Hope this helps
Cheers
Bleasby