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In the news: Veridyne Power, Peninsula Energy & Global Petroleum

Published: 11:04 11 Mar 2016 GMT

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FROM THE BROKING DESK

Will the Hinkley Point C nuclear power station ever get built? After all the hullaballoo during Xi Jinping’s state visit to the UK at the end of last year, when funding for the project seemed assured, it now looks pretty wobbly. Press commentary suggests that the project could fall over, and the resignation of EDF’s CFO after he expressed misgivings about it implies that the French are getting alarmed about the costs. Alternatively, it could be that EDF is so sure about how brilliant it is that there was no room for naysayers on the Board (although the French state auditor has also raised concerns about the £18bn project). Pub quizzers may want to note that this cost would make Hinkley Point C the most expensive nuclear power plant in the world.
It’s not just the cost, though. There are also worries about the design of the reactor (known as a European Pressurised Reactor (EPR)). The construction of EPRs in Flamanville in Normandy and at Olkiluoto in Finland has been beset by extremely worrying design floors and other problems, with the consequence that they are both behind schedule and way over budget. Talk is that two more EPRs being built in China are also having problems, so should the whole EPR design be scrapped? If they’re inherently unsafe or just too expensive to construct, then clearly the answer is ‘yes’.
There’s also grumbling about the £90/mWh the government is willing to pay for the power. While this figure is three times (!) the wholesale energy cost, this doesn’t give us the full picture. Renewables are subject to whopping subsidies to make them competitive with gas-fired power stations; once these subsidies come off, as they should now that they represent roughly 25% of the UK’s energy mix, then the nuclear plant’s economics don’t look quite so bad.
Without Hinkley, the UK has no back-up plan in regards to base load. Renewables have grown quickly and will provide around 30% of our energy within due course. Energy companies are now losing eye-watering amounts of money as they can’t make any cash through power generation with renewables, so they have to do this through retail and distribution. The government expects them to invest in new gas-fired power stations to be part of the energy mix, but the idea is that this will mainly be used to make up for shortfalls in power at peak times. Why would anyone spend hundreds of millions of pounds on building new capacity if it’s not allowed to run it 24/7? Also, we will not be allowed to burn coal after 2025, so all existing capacity using this will be forced to close. It really is going to get to squeaky bum time soon. Maybe we will all be forced to put solar panels on our roofs. I’m just nipping out to buy a log burner and some candles.

Back to the future
There may be an unexpected solution. We’ve met with a private Canadian company called Veridyne Power. It is developing a Solid Oxide Fuel Cell that is going to be tested at the Uskmouth power station in South Wales, which is owned by SIMEC. In essence, this cell ‘gasifies’ coal. By gasifying the coal, this can more than double the power efficiency of the plant and halve the amount of coal being used to produce the same electrical output. You virtually eliminate NOx and SOx with a 50-75% CO2 reduction, thus exceeding the US clean air regulation. Over 500 coal-fired power plants are due to be closed in the US and Europe over the next few years. Is this just an engineering solution to what is effectively a political issue? Well, yes, but I have checked with industry players and they believe that while you won’t be able to burn coal directly for power in the UK after 2025, you will be able to gasify it and as long as you can cut emissions to the same level that a gas-fired power station has, then this solution will be allowed. If you want more detail on Veridyne then let me know.

COMPANIES

Peninsula Energy††
ASX:PEN | A$0.83 | US$110m | Buy | TP : A$1.60
Enters Long-term Contract for 4Mlb of U3O8 with Major European Utility
Peninsula Energy has announced that it has entered into a long-term uranium sale and purchase agreement with a major European utility. The agreement covers 4.0Mlb of U3O8 to be supplied from the Lance Project over ten years from the end of 2020. The agreement comprises scope for the delivered amount to increase to 50% of annual Lance mine production from 2026.
COMMENT: Having mentioned that a term sheet for this long-term contract was in place in the company’s quarterly (at the end of January 2016), we view the finalisation of this contract as a vote of confidence in the Lance Project, particularly given that it comes after several years of negotiations and extensive due diligence. The contract also adds geographical and off-taker diversity to the sales portfolio.
As is typical of many term uranium contracts, the name of the utility, the price and annual volumes are subject to commercial confidentiality, making the economic impact of the contract on the project value difficult to quantify. However, in addition to the positive aspects already mentioned, we consider that the certainty of off-take and a defined revenue stream offered by the contract will help to underpin the Phase 2 expansion planned for Lance.
We retain our Buy recommendation, with a target price of A$1.60.

Lance ramping up to 2.3Mlb pa U3O8 in three stages — The Lance Project is currently ramping up production from the Stage 1, Ross Permit Area, which is planned to build to a rate of 0.6-0.8Mlb pa U3O8 through 2016. The US$35m Stage 2 expansion is planned to increase the production capacity to 1.2Mlb pa during 2018, and the US$78m Stage 3 development to increase capacity further to 2.3Mlb pa in 2020.
New contract should account for just under 20% of Stage 3 production on an annualised basis — This assumes the off-taker does not take up the option to expand the contract volumes to 50% of mine production from 2026, whereby we estimate the total quantity of U3O8 covered by the contract would reach around 7.5Mlb. At a rate around 20% of annual Lance output, we consider that the sales agreement provides a measure of revenue security, whilst allowing for access to price recovery upside from production available for future contracting.
Declining LoM all-in-costs to US$29/lb by 2020 — Company guidance is that sustaining cash costs for Phases 1, 2 & 3 will be US$41/lb, US$30/lb and US$29/lb, compared to the current long-term uranium benchmark price of US$44/lb U3O8.
New contract increases total long-term volumes to 7.85Mlb — The company has been successful in securing term contracts for 1Mlb at a WAP of US$73-75/lb U3O8 for 2016-2020 delivery, and a further 2.85Mlb contracted at fixed term prices for 2016-2024 delivery. The company has indicated that the WAP for delivery under term contracts between 2016 and 2020 is US$59/lb U3O8, 70% above the spot price of US$35/lb.
 

Global Petroleum*†
LON:GBP | 1.5p | US$4.3m | Speculative Buy
Interim Report to December 2015
Global Petroleum has released its interim report for the six months ending 31 December 2015, during which cash outflows for the period totalled US$1.3m, leaving a robust cash position of US$11.4m and a debt-free balance sheet. With a market cap of just US$4.3m, the company has an EV of US$(7.1)m. The recorded post-tax loss for the six months stood at US$1.3m, down from US$2.3m a year earlier, reflecting the successful implementation of corporate cost-cutting measures.
On its existing acreage, the company’s activities comprised: the negotiation of a two-year licence extension on its Namibian offshore acreage to December 2017 for a reduced Minimum Work Commitment, for which associated seismic reprocessing has already commenced; and ongoing progression of the award process for its four exploration permit applications in offshore Italy. The company has also continued to assess prospective transformative M&A opportunities, with a de-emphasis on frontier exploration plays in light of their comparatively high funding requirements and limited scope to generate near-term shareholder value in the current weak oil price environment.
COMMENT: We consider that Global has thus far been rewarded by its recent focus on balance sheet conservation, with quarterly cash outflows having averaged US$0.7m through CY15. This continues to provide comfort in alleviating any near-term need to look to the equity markets, where we think the appetite for junior hydrocarbon explorers remains restrained. Nevertheless, in light of the effects of prolonged oil price weakness on valuations realisable by small-cap producers, we suggest this should present an attractive point in the cycle for Global to deploy its cash should it isolate a suitable opportunity, and believe newsflow on transaction activity would be well received by the market. We understand the company remains focused on asset quality, fundability, and near-term value accretion in selecting a suitable counterparty. We reiterate our Speculative Buy recommendation on the stock.

Namibian licence extension to December 2017 for a minimum work commitment — As announced in November 2015, the exploration licence covering blocks 1901B and 2010A in the Walvis Basin, offshore Namibia, was extended for a period of 24 months as of 3 December 2015. The original terms had entailed a commitment for the company to drill one well during this two-year extension period, but it has negotiated a revised Minimum Work Programme to enable cash conservation in the current market conditions. This will entail seismic reprocessing and the acquisition of 800km of long offset 2D over the retained acreage (after a mandatory 50% relinquishment of the area on transition to the extension period).
Seismic and gravity work on Namibian acreage to date indicates syn-rift oil play potential — As a condition of the initial one-year licence extension (to December 2015), Global was required to undertake further modelling of existing seismic and gravity data, which increased confidence in the presence of both reservoir and source rocks within the company’s acreage. Since the licence was issued in November 2010, the company has acquired 2,000km of high definition 2D seismic data, confirming the presence of two large structures and other potential leads, as well as reinterpreting 2,800km of existing seismic data. The company operates the Namibian acreage with an 85% WI; finding a partner to accelerate exploration activity has proved challenging due to both unsuccessful drilling results in the region (21 dry wells drilled up to 2014 off the SW African coast) and oil price headwinds.
Permitting process for Adriatic exploration licences continues to progress — The company first published its permit applications in September 2013, and submitted EIA documentation at the end of May 2014. The company remains uncertain as to when these permits may be awarded in light of the 20-month delay thus far from EIA documentation submission, but highlights a recent uptick in exploration interest in the Adriatic as a potential catalyst for the process to move forward.
Strong cash position of US$11.4m with a debt-free balance sheet gives it an advantage relative to peers — Following cost-cutting initiatives to reduce corporate G&A, cash outflows for the quarter totalled US$0.6m, leaving the company with US$11.4m at the end of the quarter. Hence, with a market cap of US$4m, the company has a negative EV of US$(7.1m). The company therefore remains well funded to progress the work programme at its Namibian licence, in addition to considering M&A activity. The company advises that, whilst it has been holding detailed negotiations with a number of potential counterparties, many are constrained by cash and access to capital. The company guides that, in view of ongoing market weakness, counterparties are prepared to accept more realistic transaction terms, but reiterates that it remains highly selective regarding the quality of assets in which it would be prepared to make an investment to ensure value delivery for shareholders.

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