Company Review – Linc Energy – Could it prove to be the bargain of the year! Part I

Disclaimer:

I have chosen Linc Energy for a company review after the shift in its stock exchange listing from the ASX to the SGX (Singapore) December 19, 2013. CEO Peter Bond has described the decision as perhaps his hardest yet, but one he felt compelled to make in the best interest of Linc’s further development.

This is a post for my benefit.  I have been unsure whether to sell or keep my present small shareholding in Linc after it decided to delist from the ASX in favour of the Singapore Exchange. I have not welcomed the need to open an international trading account within a deadline. I’m fearful of the exposure to FOREX risk. It will require extra work to stay abreast of company announcements, and to compensate for less analyst coverage, although the company is still based in Brisbane.

I have no personal knowledge of the company’s technology, or of the coal industry and would welcome expert comment.

It is too soon after listing for technical analysis to be helpful, and with limited understanding of company financials, I am unable to speak authoritatively about fundamental considerations. .

For these reasons it is particularly important for readers to not rely on this post in making investment decisions; rather they should seek independent professional advice.

Why has Linc Energy shifted to the Singapore Stock Exchange?

http://www.brisbanebusinessnews.com.au/article4766/PETER%20BOND:%20WHY%20LINC%20LEFT%20THE%20ASX.html

This question was the topic of Peter Bond’s address to the Brisbane Business News breakfast 12 Feb 2014.

It was not a lack of offshore investment which was already 66% of the shareholding.

Nor did he blame the failure of the Queensland Government to approve Linc Energy’s promising technology (Underground Coal Gasification or UCG) for converting coal deposits to a more energy productive synthetic gas (syngas) suitable for power generation, and from it conversion to synthetic petroleum products such as diesel and aviation fuel. Instead government preference would seem to be for the evolving, coal-seam gas industry, which carries a real risk of methane contamination of underground aquifers, and has not yet won the support of the agricultural industry.

The carbon-tax and anti-fossil fuel sentiment were also not blamed despite devastating Linc’s coal mine asset values. Although acquired for treatment with UCG, most were found to be more suitable for conventional mining operations and likely to be divested.

Surprisingly to most investors he criticised the Australian Stock Market itself, which for ten years has supported Linc Energy’s capital requirements.  Linc Energy had become “a traded stock” he claimed, instead of the share-price reflecting the company’s asset value.

Of course markets trade. Without dividends, investors must seek a return through  trading. Reading between the lines, I think Peter Bond  when he announced with a bit more hype than was necessary, the finding of 230 billion barrels of shale oil in South Australia’s Archaringa Basin around Coober Pedy, thought that the share-price would lift to $6-$7 a share. Instead the shares were re-rated upwards about 50% to a high of just $2.99 before sinking back to not much over $1.

http://www.afr.com/p/business/companies/bond_peter_bond_deal_maker_and_energy_8HJcyKwy2Y0vt1WO9JqTEO

An IPO when Linc Energy listed  on the SGX code T16, offered 47.85 million shares at $1.20. The public component was for 500,000 shares, and applications were received for 41.841 million shares, approximately 83.69 times over-subscribed, and in toto, the offer was 2.68 times over-subscribed.

Linc also retains a listing presence in the United States through the OTCQX exchange in New York for the benefit of US Investors. http://www.otcqx.com/qx/int/overview

The story of Linc Energy’s UCG technology?

Linc has devoted the bulk of its time and resources on developing this promising addition to the science of coal mining technology.

The technology did not originate with Linc Energy. Indeed it was developed in the USSR about 70 years ago after the end of the 2nd World War. In 1961 the Soviets built the world’s first, and still the only commercially viable UCG facility, Yerostigaz, at Angren in Uzbekistan. It produces an astonishing one million cubic metres of syngas per day to generate electricity at the Angren Power Station. In 2007 Linc Energy secured a 92% controlling ownership of this plant.

From its earliest days Linc Energy focussed on UCG.  It started by building in 1999 a demonstration facility at Chinchilla near Toowoomba in Queensland’s Darling Downs. Initially Canadian gasification technology was used, but in 2006 it was replaced with Russian technology. The next step was to be able to convert syngas into synthetic crude. A company, Syntroleum, built a pilot gas-to-liquid plant at Chinchilla which was commissioned in 2008. Peter Bond bought  a $1 million controlling stake in the struggling coal, gas and oil explorer in 2004.

As I understand it, the coal deposit remains in situ; miners are not needed (minimizing the risk of personal injury) and the operation is a fraction of the cost of conventional mining. In essence it requires the drilling of just two wells, interconnected below the coal deposit. Air is injected via one, and after the coal is ignited, gas is withdrawn via the other (syngas), as the coal burns. Surprisingly perhaps, but the resultant gas is superior in energy production to the coal deposit (estimated at twenty fold) and is a cleaner fuel in producing less emissions. The gas is also more versatile and can be converted to liquid fuels such as diesel and aviation fuel if needed, or used in the production of plastics.

In 14 years of experimental operation a total of five Gasifiers were built at Chinchilla:

  • The first, a straight forward unit commenced operation in 2000
  • The second, to research modifications for commercial production, in 2007
  • A third in 2009 to demonstrate linked vertical wells to facilitate stable gas production, and to enable decommissioning of the unit.
  • A fourth introducing other modifications such as directional drilling, more modern well construction, new ignition process, and water injection for hydrostatic pressure control was constructed in 2010.
  • The fifth and final Gasifier established in 2011, enabled Syngas to be produced within an hour of ignition.

Queensland government decision leads to Decommission of UCG plant at Chinchilla. Does this end Linc Energy’s aspirations for using UCG technology?

The Queensland Government Environment Minister has stated that they have given Linc Energy “plenty of opportunities to demonstrate that its technology is safe, and he makes no apologies for having high environmental standards that must be met by everyone”. There have been two incidents involving UCG projects in 2011, one with environmental effects, and the other producing contaminated water, but neither involved Linc Energy. Then too, have coal-seam operations been proved safe to the environment? These references below suggest that coal seam gas has won government approval for production as early as 2015 despite concerns from the agriculture industry about its environmental safety.

http://www.abc.net.au/news/2013-11-06/linc-energy-leaves-queensland/5072472

http://www.lincenergy.com/underground_coal_gasification.php

http://tvnz.co.nz/world-news/australia-s-coal-seam-gas-industry-faces-scrutiny-5392704

http://www.thepunch.com.au/articles/Dear-Coal-Seam-Gas-this-thing-just-isnt-working-out

http://www.proactiveinvestors.com.au/companies/news/49503/origin-energy-santos-to-connect-queensland-coal-seam-gas-infrastructure-infrastructure-49503.html

Origin Energy, Santos to connect Queensland coal seam gas infrastructure

Friday, October 25, 2013 by Proactive Investors

Origin Energy's APLNG project in Gladstone, QueenslandOrigin Energy’s APLNG project in Gladstone, Queensland

Origin Energy (ASX: ORG) and Santos’ (ASX: STO) respective coal seam gas to liquefied natural gas projects have signed gas swap and infrastructure connection agreements to realise capital and operational efficiencies.
Calls have been made previously for Queensland’s four major CSG to LNG projects to share infrastructure given that they all locate their respective liquefaction trains at Gladstone.
This includes co-locating their pipelines in purpose created corridors.
The agreements between the Santos-led Gladstone LNG and the Origin-led Australia Pacific LNG projects will make gas transportation more efficient between their respective Surat Basin gas fields and reduce the need for additional pipeline infrastructure.
Under the terms of the agreement, two pipeline connection points will be built between GLNG and APLNG infrastructure and a number of gas swap agreements undertaken to minimise gas movements and operational costs.
Without this agreement both projects would need a total of 140km of additional pipelines and multiple connection points at compressor stations to each deliver its gas to Curtis Island.
The US$18.5 billion GLNG project will have two trains capable of producing a total of 7.8 million tonnes of LNG per annum with first production in 2015.
APLNG will have an initial two trains producing 9 MMtpa of LNG with first production also expected in 2015

The failure to gain acceptance of UCG in Queensland should not mean that Linc’s experimental work is in vain. The technology has been refined, and the company has demonstrated it has the expertise to implement operations when needed.

One might argue that Linc should have been able to establish commercial operations in addition to Angren in Uzbekistan by now, if it was a practical methodology. It would seem to me UCG is a most valuable tool that can be rolled out when most needed. Whatever the technology, there should be no rush to consume precious reserves of fossil fuels at risk to the environment.

Linc may not see opportunities to use UCG at present in Australia. With the closure of Chinchilla it will be able to promote commercial opportunities in coal rich, but gas limited countries in Europe, Africa and Asia.

Linc Energy has a number of agreements to explore opportunities for commercialization in other countries:

  • A joint venture company has been established in Vietnam to develop the Red River Delta coal basin.
  • It has coal exploration licences in Alaska suitable for UCG treatment.
  • It has a memorandum of understanding with UK Coal to treat “stranded” coal reserves.
  • It has a coal exploration lease in the Upper Silesia Basin of Poland
  • It has a memorandum of understanding with South Africa’s Coal producer Exxaro Resources to evaluate coal tenements in South Africa and Botswana for use of UCG.
  • They have an agreement with Exxaro Resources to develop commercial UCG projects in sub-Saharan Africa.
  • They have been evaluating commercial UCG to GTL with LLC YakutMinerals in north-eastern Russia.

Another post will look at some reasons why the Linc Energy share-price could outperform in the near future.



Categories: Business, Investment, Trading opinion

Tags: ,

1 reply

  1. Hi there! I’m at work browsing your blog from my new apple iphone!

    Just wanted to say I love reading through your blog and look forward to all your posts!

    Keep up the fantastic work!

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