fresh pb commments, page-2

Full Eureka report:

PORTFOLIO POINT: A $1.5 billion deal with Xinwen Mining Group is taking longer than expected, casting a shadow over the gas sector.
It was the best-performing small cap stock of 2008, rising 162% and pushing its chief executive on to the BRW Rich 200. But this year might be not so sweet for Linc Energy.

After a bumper 2008, investors including chief executive and major shareholder Peter Bond have been selling stock in coal-to-liquids group Linc Energy.

Starting the year at $2.03, Linc shares trading are now trading at $1.61 as doubt emerges over the company’s deal to sell some of its Queensland coal assets to Xinwen Mining Group of China for $1.5 billion.

Having announced the deal in September, Linc disappointed investors late last month by saying that although it was “confident” it would complete the Xinwen sale, it appeared “unlikely” it would receive a $150 million deposit by the end of December.

In a media release two days before Christmas, Linc said negotiations on the Xinwen deal had “progressed particularly well”, and it expected the sale would be completed in six to eight weeks. The same release announced Linc had raised $36 million in an institutional share placement.

So is Xinwen trying to wriggle out of a deal whereby it would pay much more for the Emerald (Teresa) coal tenements than Linc's entire market cap? On Tuesday’s share price of $1.61, Linc was valued at $640 million.

The oil analyst at Southern Cross Equities, Johan Hedstrom, says given the delays, it's fair enough for people to be sceptical. “In this market you’ve got to ask: why would the Chinese pay so much? So I think they are delaying it because they are having second thoughts about paying that much money.” (International gas prices have fallen roughly in line with oil.)



Peter Bond told Eureka Report yesterday (January 20) that Linc was “still confident” an asset sale for about the same price would take place in late January or early February. How long will investors have to wait? Bond says: “It’s still going ahead and we’re getting traction on those negotiations.”

Although Xinwen is “still in the mix”, Bond says the company is talking to several parties. “The deal with Xinwen allowed us to shop around to other parties, so we’ve always had that right and we’ve always walked along that path.”

The other parties are not all Chinese, Bond says. “There are a number of Chinese, a number of large local mining groups, a few other overseas mining groups. I couldn’t tell you the number; it may be seven or so.”

Is the figure still $1.5 billion? “We’re still managing around 1.5. We haven’t done the final negotiation with a number of parties, so we don’t know what their bids will be, but that’s still about the number we’re talking.”

Bond says he would like to see the bulk of deal completed by the end of this month, but "you don’t want to tie yourself too much to deadlines in this market”.

Jeremy Tobias, the renewable energy and clean tech analyst with BBY, said in a recent note that Linc's “key short-term milestone” was finalising the $1.5 billion deal.

Peter Bond remains Linc’s majority shareholder, through his Newtron Pty Ltd. While institutional stakeholders HSBC, Perpetual, Merrill Lynch and ANZ also pop up on the top 20 list, an unexpected name is Presentation Congregation Queensland. The Presentation Sisters declined to be interviewed on their holding of million shares.



Bond took control of Linc in 2004. He has since offloaded more than 600,000 Linc shares valued at more than $1.8 million in November (see Coal seams’ promises and puzzles). He says he doesn’t have plans in the short term to sell more. “We’ll see what the opportunity brings, but it’s not high on the agenda.”

Linc takes stranded coal resources, considered unsuitable for conventional mining, and uses underground coal gasification (UCG) technology and a gas to liquids (GTL) plant to turn the resources into liquid fuels.

Bond says: "You take the coal, turn it into gas, take the gas, turn it into clean diesel." Coal is converted to gas while underground and then processed in a GTL plant. The combustible product gas, or syngas, is then used as a feedstock in the production of diesel, fertiliser or chemicals, or to generate power.

Linc reported in October that it had produced the first liquids from its Chinchilla GTL demonstration facility, describing the news as a "significant milestone not just for Linc Energy but also for the global community".

Producing liquid fuels from UCG gas "provides the potential for billions of tonnes of stranded coal resources to be converted into transport fuels in an environmentally acceptable way", Bond says.

Across the Pacific, Linc signed a letter of intent to buy GasTech Inc, a Casper, Wyoming-based energy company, for $US50 million late last year in a bid to step into the US clean fuels market. It will pay for the acquisition by issuing shares at $4.03, a hefty premium to its current price.



Stephen Morzenti, president of the privately held GasTech, says his company flies “pretty much under the radar screen”. He says he met Peter Bond several years ago. He says GasTech wants to monetise a portion of its UCG holdings “without getting wiped out entirely”.

“We’ve been in business a long time and we’re financially reasonably capable,” Morzenti says. “We felt as if the next step in this process is to do a demonstration in the Powder River Basin [in Wyoming], similar to what Linc has done in Chinchilla [Queensland]. And that’s something with a price tag say of between $US10 million and $US50 million, depending on how many bells and whistles you put on it.

“Like most technologies it takes a while for it to get some traction, but having done so I think it could be a very significant component of our energy future.”

But Southern Cross Equities oil analyst Hedstrom says if oil prices stay around current levels [$US30–40 a barrel] it would be difficult to make money out of the coal to liquids. “When the oil price went over $US100 it looked pretty interesting. It’s a long way from $US100 now and that is obviously raising a few question marks,” Hedstrom says.

He adds that although it’s OK to plan for a recovery in oil prices (he predicts a tight oil market in a couple of years) the issue for companies in the UCG sector is one of funding. This issue is particularly pertinent for Linc as talks continue.

Another issue is how the fledgling sector would cope if Linc fails to finalise the crucial Xinwen deal.

The coal-to-liquids sector is small. It includes Carbon Energy (CNX), capitalised at $170 million with CSIRO and Incitect Pivot as major shareholders; Cougar Energy (CXY); and UK-listed Altona Energy. Carbon Energy, formerly Metex Resources, told the market yesterday (January 20) it had produced commercially viable syngas at its UCG plant in the Surat Basin, north-west of Brisbane. There's also joint venture between Anglo American and Shell Oil in the La Trobe Valley in Victoria.



Elio D’Amato of Lincoln Indicators says if the Linc deal falls through, it would not necessarily bring the sector to a halt. “Would it be the end of UCG? I doubt it. But obviously it’s a significant amount of money so if that falls through, then obviously it’s going to put a dent on Linc Energy’s ability to fund its developments,” D’Amato says.

“In terms of the sector, I think it will recover from any short-term shocks and there appears to be a viable future for over in the long term. As to who’s the one who finally makes money out of it, Linc appears to be in the front running (laughs), but it could be other companies in time.

“It definitely had a massive rise, but then the pressures of financing and funding emerged, although the $36 million capital raising should do well for Linc in the short term. Longer term, I'm sure the company would like this deal to go through, but if it doesn’t obviously that won’t be good for the company. But I don’t think it will be the death knell for the sector."