FIRST AUSTRALIAN RESOURCES LTDSPECULATIVE BUY 23 Jan 2009Share...

FIRST AUSTRALIAN RESOURCES LTD

SPECULATIVE BUY 23 Jan 2009
Share Price:$0.037
12mth Price Target:$0.13

Senegal Interest Increased to 90%, Operator First Australian Resources Ltd (“FAR”, “Company”) has confirmed the increase of its interest in three offshore blocks located in Senegal from 30% to 90%, plus being granted operatorship. The increase was subject to approval from Petrosen (the Senegal national oil company), after Hunt Oil (“Hunt”) chose to withdraw from the blocks in late 2008. In our opinion, this has significantly increased FAR’s chance of achieving a farmout, as it can now drive the negotiation process. We believe that Hunt withdrew from the permit for strategic reasons based on substantial capital commitments elsewhere related to an LNG development project and because of a reduction in the risk profile of its portfolio due to current economic conditions.

Three Written Offers for Senegal Farmout Received FAR has received an additional written offer from a major oil and gas company in relation to a farmout of the Senegal acreage. This is in addition to two offers previously accepted, which we understand are still in play. Ideally, we would like to see FAR achieve a farmout which reimburses some of the past costs of US$17m and a free carry on the drilling of at least one exploration well.

Timing of a farmout is uncertain; however, with three written offers we would not be surprised if a deal was done sometime this quarter. Under the terms of the lease, which was recently extended by one year, FAR has until 20th November 2009 to commit to drilling an exploration well on the permit. Drilling costs are estimated to be in the order of US$40-US$60m, depending on the depth of the prospect chosen.

Massive Potential Provides Speculative Opportunity The potential of FAR’s Senegal acreage is massive, with over 1 billion barrels of recoverable oil identified from several prospects. Based on the shelf edge prospect, which has a mean estimated in place resource of 1,128 million barrels of oil, we estimate that a discovery could be worth $9b in gross terms. 20% of this would represent a return on investment in FAR of 90X (i.e. an $11,000 investment could yield $1m)

Tullow Oil Plc has recently announced a 100% exploration success record for its acreage in Ghana and Uganda, located in the same West African oil margin as Senegal. 17 discoveries were reported and resources upgraded by 800 million barrels of oil equivalent. Recent trading in shares of Karoon Gas Limited (“Karoon”) and Methanol Australia Ltd (“MEO”), has seen potential gains of 30% for Karoon and 150% for MEO. This shows that speculative investment in companies with large exploration potential can yield good returns. On this basis, we recommend First Australian Resources Ltd as a Speculative Buy.