sp predictions

The bullish price predictions from PB1 and PB2 has been largely missing this time around. However, I have noticed quite a shift over the last few weeks in that people are now being more open in their SP predictions. So what the hell - I may as well join in.

I spent some time recently trying to work out a valuation for GDN based on some level of success from PB3. Here's what I came up with:

I am using 5mmcfd as my starting point. If that flow rate is achieved then I see a boost to the SP of around 7cps based on a spot price of USD3.90

If those flow rates are followed soon thereafter with news about reworking PB1 then I think the SP will reflect an expected near-term flow rate of about 10mmcfd (PB1+PB3, and maybe PB2). I calculate that would amount to SP increase of around 14cps.

In other words, good flows rates plus news of reworking = ~20cps.

As I worked on the numbers it dawned on me what the effect of positive flow rates would really mean. It is not so much about the cash flow from PB3 or PB1 (although it will certainly help). Rather it is the fact that they have proven that gas can be commercially extracted, so the Golden Eagle prospect (current valued near $0), suddenly becomes a massive commercial asset. So I set about trying to value that.

We have independent estimates from RPS Enengy with a best case (P50) of 85.6bcf. Trying to work out the number of holes, drill costs, well life etc was too hard, so I tried to put a value on the resource as if it were to be sold to a third party 'as is'. Assuming that only 15% of that resource is recoverable, and valuing the resource in the ground at USD0.1 we get an amount of $USD1284m unrisked. Assuming 10% a risk value that becomes $USD128.4m, or around 30cps.

So adding everything up:
PB3 @ 5mmcfd (with 10mmcfd expected) = ~20cps
Plus Reserves Value = ~30cps.
Total = ~50cps

Play around with the recovery rates and the risk values and you can easily get some seriously big dollar values for the resource. Then of course we have the prospect of revised estimates following PB3, and eventually a return to Leadville - none of which is included in the current estimates.

I have chosen to be as conservative as possible with the estimates so as not to be blinded by the stars.

I am no expert in such valuations and I have done this for my own purposes. As such, there is every chance my methodology contains errors. Comments and corrections are most welcome, but please be gentle.

To reinterate: this is based on an assumption that PB3 flows at commercial rates. All of us here know where the SP is headed if non-commercial...

Cheers,

-Disco


***Thanks to 'blokes' for looking over the numbers for me.