mpo speculative buy baillieu

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.