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Wildhorse Energy - An exciting European gas story with a uranium twist

Last updated: 07:00 25 Feb 2011 GMT, First published: 08:00 25 Feb 2011 GMT

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ASX-listed Wildhorse Energy (ASX:WHE) is an interesting concoction – one part syngas with a dash of uranium. However, the combination works not least because it provides some potentially potent short, medium and long-term value kickers.

In assessing the prospects of a company such as Wildhorse it pays to look at the competence of the board and its management as well as the technical expertise of those paid to enact the strategy.

On all three counts Wildhorse scores highly - from the chairman Mark Hohnen to managing director Matt Swinney and all stops inbetween. 

This highly experienced team also includes technical director Johan Brand, an expert in underground coal gasification, chief operating officer David LeClair and senior UCG geologist Andries du Plooy. 

I’ll come back to the quality of the management, board and senior employees a little later. But first it is worth getting under the bonnet of Wildhorse.

The company’s main focus is underground coal gasification (UCG) in Hungary, although it has a very promising uranium project in the country with a JORC resource of 77 million pounds of the radioactive material.

UCG is an in-situ gasification process where underground coal seams are converted into synthesis gas, or syngas, by mixing coal, oxygen and steam through an injection well.

The process uses directional drilling techniques that are commonplace in the oil and gas sector to follow the coal seam. It then bores two separate holes – one to pump in the steam and oxygen and the other to extract the gas.

UCG is not new. The germ of the idea can be found in a lecture given by Sir William Siemens to the Royal Chemical Society in 1868, though the technique was pioneered by Russian chemist Dmitri Mendeleev.  

The oldest UCG operation is found in Uzbekistan, and it has been going for more than half a century, though the Australians and in particular Linc Energy (ASX:LNC) and Carbon Energy (ASX:CNX) are at the forefront of coal gasification nowadays.

Wildhorse has drawn its expertise from South Africa. Its technical team comes from the coal-to-liquid specialist Sasol and electricity generator Eskom, which helped pioneer the directional drill on which the company will rely.

Its first project is Mecsek Hills in Hungary, near the pretty university town of Pecs, though it also has two other prospects in the country – Izabela and Amelie.

There are a number of reasons why Wildhorse chose Hungary as its first target and Mecsek Hills in particular.

The first is a geopolitical consideration. Hungary relies on Russia for 78 per cent of its gas output. This is a scary prospect for any nation, but one that takes on an even more sinister dimension when former Soviet states begin falling out and supplies are threatened.

Prices are sky-high, so the Hungarians are amenable to projects such as Mecsek Hills that help wean the country off these expensive imports.

The other reasons are geographic and geological. The Mecsek Hills project sits right next to a power station run by Dalkia Energia, owned by French utility giants Veolia and EDF. 

So there is a ready buyer of the gas once it begins pumping in early 2013. The company has a memorandum of understanding with Dalkia, with the terms of a definitive agreement being worked on as we speak.

It is worth noting that many if not most power stations in Europe are now run on gas (mainly from Russia), so the Dalkia power opportunity is just the tip of the iceberg.

The Mecsek coal formation in southern Hungary is potentially huge and contains an estimated 1-1.25 billion tonnes of the fossil fuel.  Of course this is a JORC exploration target. Hungarian records suggest a much higher figure. 

However this is what’s called stranded coal – coal that can’t be mined because it is either too deep, or just too difficult and expensive to reach.

So in effect it is worthless – unless of course you have a technology that can unlock the energy contained in these rich, black bituminous seams.

There is stranded coal all over central Europe, and Wildhorse’s MD Matt Swinney makes no secret of the fact that the company is after other similar projects in Poland, the Czech Republic and Germany.

Once it is proven conclusively that UCG can reliably produce commercial volumes of syngas , these once worthless coal prospects take on a new veneer and valuation – so Swinney and his team are in a race to tie up the best prospects in super quick time.

In each case they are looking at former mines that are close to a power station – at least initially, although longer term the company may look for other customers for a synthetic natural gas.

“We are targeting early 2013 to get the Mecsek Hills project up and running – that’s our priority,” Swinney says.

“In parallel to this we will also be picking up other coal assets in Hungary, and we are also targeting Poland, the Czech Republic and Germany. We know the first time we produce gas at Mecsek Hills suddenly there’s a big value to that pipeline (of other stranded coal assets). 

“Currently there is a window of opportunity as the coal is stranded.  We have picked up two other assets in Hungary and each one we expect to contain substantial amounts of coal. 

“We know that once we show we can do this commercially, stranded coal in central Europe will be worth a great deal more than it is today.”

Swinney expects 2011 to be a very busy year with the first landmark coming in the next quarter as it produces its first of several JORC resource statements for the Mecsek Hills project. 

This ought to be followed very swiftly by a preliminary feasibility study on the project – it could even have compiled a bankable feasibility study by the year-end, though Swinney isn’t counting on it.

This then takes us to the funding for the proof–of-concept Hungarian operation. Here the Wildhorse MD is cautious of discussing costs too early, although analysts reckon a UCG project of this scale could cost the company around 100 million euros.

As things stand the company has around US$12-13 million in the bank. But with a 3D seismic survey and aggressive drilling campaign in train, the cash is only likely to see the company through to the third quarter of the year at the present burn rate.   

The company is currently assessing a range of financing options for its projects, which could include the European Bank of Reconstruction and Development amongst other sources designed to reduce the equity capital required.

Looking ahead, rumours of a London listing abound. AIM would appear to be the ideal home for an ambitious natural resources company with European focus, and of course would raise Wildhorse’s profile.

Swinney won’t confirm this, but he gives a very broad hint. “This is a European energy story,” he says. 

Meanwhile, the talks with Dalkia and similar players are ongoing and will be key to the future of the company’s aspirations in Hungary and further afield.

The two sides are in negotiations over pricing, though the MOU has three aspects: forward supply, a potential equity investment in Wildhorse and possible collaborations in other countries. 

So there is plenty of newsflow, which ought to be augmented by updates on the company’s plans to acquire stranded coal assets in other countries in central Europe.

“Even if we are not the first to produce UCG in Europe we aim to pick up big chunks of suitable black coal in these countries to give us first mover advantage,” Swinney says. “In time people will recognise the value of the resource.”

However there are two legs to this company. The other of course is Wildhorse’s uranium project, also in the Mecsek Hills, although the company’s main focus is to be the premier producer of coal gas in Central Europe.

The JORC resource was recently upgraded to 77 million pounds of uranium. Here again there are several tailwinds, most notably Hungary’s over-arching desire not to be so reliant on Russia for fuel.

The country has a well developed nuclear power programme – with two new plants on order – and a tradition of mining uranium in the Mecsek area that dates back more than 40 years. It is also worth noting that 38 per cent of Hungary’s energy needs are met by the nuclear sector.

In fact the Mecsek uranium project abuts an area of historic mine workings that is still owned by the government.  

Wildhorse has signed a co-operation agreement with the Hungarians that could see the two assets wrapped into a joint venture company with the explicit aim of restarting uranium production at Mecsek. 

Although it could take six to nine months before a definitive deal has been formalised, Swinney says.

The uranium asset does serve a very tangible purpose- it gives an immediate value to the company as it proves up and rolls out its UCG strategy.

In the past six months the Wildhorse share price has more than doubled as investors have begun to buy into the company’s potential.

However there is a very strong argument that says that the current price barely recognises the value of the uranium, particularly if one takes the average valuation of exploration companies in the sector which is around US$5.98 a pound in the ground.

Foster Stockbroking of Australia reckons the company is trading at a fraction of that valuation and reckons the uranium assets are worth US$1.22 a share using even after applying a hefty 40 per cent discount to the peer group average valuation.

Overnight the Wildhorse shares closed at 49 cents.

Recently the shareholder base of this traditionally retail stock has begun to change, and it now has significant institutional following with an estimated 25 per cent in the hands of professional money managers and high net worth investors.  

Swinney and his team have been actively  promoting the story to the big funds and scored a notable success recently when the Capital Group took a 5.4 per cent stake in the company.

“Their belief is that we probably have the best technical team in the world in UCG,” Swinney said. 

Not just the best technical team, but a top notch board too. Chairman Mark Hohnen of course is also the driving force behind Kalahari Minerals (LON:KAH), as well as the founding chairman of the Cloudy Bay wine company.

Meanwhile, in Ian Middlemas you have a hugely experienced non-exec, while Swinney brings to the table the expertise of developing large scale energy projects such as the Mecsek Hills gas venture.

So with two mouth-watering opportunities and the management and technical expertise to back this up, Wildhorse is definitely one for the watch-list.

“The benefit for Wildhorse shareholders today is you get exposure to two asset classes: two wonderfully attractive assets,” Swinney says. 

“One that has an immediate and easily recognisable value, which is the uranium, which is still very undervalued compared with its peers. And the other is the gas, which is where we believe the greatest value will be once we have achieved our milestones – especially when you consider the rollout potential across Central Europe which is currently very dependent upon gas imports.”

 

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