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Wildhorse to turn up the burner on gas development plans

Wildhorse's plan is to turn unwanted and uneconomic coal fields into highly valuable gas assets. It also has a huge uranium deposit that could be worth more than its current value.
Wildhorse to turn up the burner on gas development plans

As oil prices hit record highs, governments everywhere are on the look-out for cheap, reliable sources of power.

Hungary is no exception, but in Wildhorse Energy (LON:WHE, ASX:WHE) the country may have found a solution.

The Australian and AIM-listed company describes its business as turning unwanted and uneconomic coal fields into highly valuable gas assets.

Hungary has a lot of disused coal fields, which offer plenty of potential to the company.

It is currently focused on an area in the south of the country at Mecsek Hills.

Its speciality is a relatively new process, called underground coal gasification, or UCG.  

It utilises recognised gasification technology below the surface, which could help Hungary slash the amount of gas it has to import.

The UCG process produces syngas, which is ideal as a feedstock to gas-fired power stations.

Matt Swinney, Wildhorse’s managing director, says syngas is also very easy to put into power stations and turbines.

The strategy is to supply these utilities and power stations with syngas, a plan that Swinney describes as “wonderfully boring”.

“We only want to produce gas,” he says.

“The gas price in Hungary is stable and high so we can make attractive margins without having to go too far downstream,” Swinney adds.

Hungary has previously had to import gas from Russia through the Ukraine. It is expensive and often unreliable, especially in February when demand peaks. 

Other European countries face similar problems and Swinney predicts the UCG process may eventually be rolled out across Europe.

All countries want to reduce their reliance on gas imports, he says, so there is a lot of pent-up demand for domestic gas.

China has up to 30 UCG projects working already, but Swinney believes Wildhorse is the leader in Europe and will be the first company to produce syngas here on a commercial scale.

The method uses stranded coal deposits that are no longer economic to mine. Wildhorse injects oxygen and steam to create syngas. 

Swinney says Poland, Ukraine and the Czech Republic all have extensive but effectively virtually worthless stranded coal deposits that can be turned into valuable UCG sites.

“It is very modular, very scalable, provided there is the right type of coal you can roll this out very easily across a lot of sites.”

First gas from Mecsek Hills is expected in 2014 with phase one to be a commercial demonstration project to produce electricity to show that the process works and is economic. 

This phase is designed to have a production rate of approximately 134MWt of syngas which will be used to supply a 61MWe (Gross) Combined Cycle Gas Turbine (CCGT) power plant, with both the UCG and CCGT facilities expected to be in operation by  the last three months of 2014.

After an initial 6-12 months demonstration period the plan is to sell the turbine to a utility.  

From that point on Wildhorse will be a gas producer creating significant revenue in line with Wildhorse’s current strategy. 

Phase II will have a production rate of 282 MWt of syngas, with the UCG facility to supply syngas to a potential 130 MWe (Gross) power plant. 

The development of this phase will commence after the commissioning of Phase I.

Broker Liberum suggests that Wildhorse has potentially more than 1bn tonnes of coal resources in Hungary suitable for underground coal gasification.

That is before any further licences it may acquire elsewhere in Central Europe, and on top of its current Hungarian portfolio which includes two further sites.

A better idea of the potential should come with a resource update at Mecsek due this month. 

On completion, the assay results will be reviewed to identify the coal seam targets most suitable for UCG.  

This new JORC compliant resource for Mecsek Hills will be a core part of a pre-feasibility study, also due shortly, with a full bankable feasibility study scheduled for completion by early 2013.

Liberum suggests that UCG could transform the European gas industry in a way similar to shale gas’ impact on the US gas market.  Costs are half of the oil-indexed equivalent, it estimates.

The broker suggests an upfront investment of €150 million in UCG could be worth over €400 million on commissioning.

In a note in September, it valued the Phase I and Phase II of the development of the company’s UCG assets at nearly €200 million or 75p per share. 

However, there is more than just gas potential at Wildhorse, there is also a massive uranium deposit.

In February, it signed a co-operation agreement with the state–run Hungarian companies, Mecsek-Öko and Mecsekérc, which own the licence adjacent to its Pecs licence at Mecsek Hills, to work towards forming a formal joint venture to re-start uranium mining there. 

“That would be a big value crystallising event for the uranium asset,” said Swinney.

A uranium mine previously operated on the site of the two licences for forty years, which means the deposit is very well known and very well understood, he said.

Hungary gets 40 per cent of its power from nuclear already and is building two new reactors.

The Hungarians want to supply these reactors with their own uranium product so it makes sense for them to re-start mining economically and politically, he adds.

The total project JORC Inferred Resource is 48.3Mt at 0.072% uranium (‘U3O8’) for 77Mlbs and an exploration target of an additional 55-90Mlbs of U3O8 with a grade range of 0.075-0.10% U3O8, making it one of the largest uranium deposits in Europe.

According to broker Liberum, at a price of $0.7 per pound for uranium this is worth more than double the company’s entire current market value.

The uranium market slumped last year in the wake of the Fukushima nuclear disaster in Japan, but interest has revived recently with the spot price ticking up and the takeovers of Kalahari Minerals by the Chinese and Hathor by Rio Tinto

The chairman of Wildhorse is Mark Hohnen who was also chairman and CEO of Kalahari Minerals.

Crystallising some of the value in the uranium asset would also help with the funding of the UCG development, which is entering its heaviest period with the trial turbine project, which could cost €100 million suggests Liberum. 

The company will be assessing all funding options.

The UCG business is looking very good, Swinney says, but if oil prices continue to rise the prospects will look even brighter.

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