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Aminex share buying underlines management's confidence in prospects

The recent share purchases were a very public display of confidence in the group, its prospects and its prized asset – the Ruvuma property in Tanzania.
Aminex share buying underlines management's confidence in prospects

The recent share purchases by senior staff of Aminex (LON:AEX), the gas junior, take the stake held by management and directors to 12.5%.

It’s a very public display of confidence in the group, its prospects and its prized asset – the Ruvuma property in Tanzania.

What it hasn’t done is staunched the decline in the share price, which leaves the group worth just US$25mln (£15mln).

For those who bought stock at levels well in excess of today’s share price this lowly valuation is a problem. 

However, it also represents an opportunity for those willing to assess Aminex’s potential in a rational way.

There are reasons for guarded optimism, not least the promise of near-term production that would generate reasonably significant cash flow.

And, of course, there is the promise of a value accretive farm-out of Ruvuma, while the recent US$14.5mln (£8.6mln) fund-raise provides the wherewithal to carry out a 2D seismic survey of the property.

But before we assess the potential impact of some significant landmarks, it is probably worth considering what has taken the share price to where it is today. 

The first and obvious reason was previous management’s penchant for over-promising and under-delivering.

It is worth pointing out that the new team, led by chairman Brian Hall chief executive Jay Bhattacherjee, and chief operating officer Philip Thompson has quietly gone about its business, bulking up Aminex’s technical expertise and offloading the US assets as pledged when they took the helm.

The debt issue also overhangs sentiment towards the stock. At US$8mln it is significant and the coupon of 15% is expensive.

However, the market is treating the shares as if the rug is to be pulled out from under Aminex any day. 

This isn’t the case. It has until July 2015 to make repayments, at which point the group ought to be producing significant cash from the company’s Kiliwani North gas discovery, and will hopefully have found a farm-in partner for Ruvuma.

The holders of the debt, meanwhile, are also shareholders in the company over a variety of funds – so pulling the plug on the company would affect this investment.

Now, turning to the positives: the company’s Kiliwani development, which sits next to the producing Songo-Songo field, is set to be plugged into the 540km pipeline being built by the Chinese that will link Tanzania’s capital Dar es Salaam with the gas producing regions to the south. 

The market is fretting over the signing of a gas sales agreement with the Tanzanian Petroleum Development Corporation (TPDC), but Aminex is understood to be confident this will happen; the moot point is just how long the process will take.

Tanzania needs gas to fill the pipe to meet demand in Dar es Salaam, and the London-listed group is one of only a small handful of companies with the potential to do this. So there is pressure on the authorities too.

Once the agreement is signed, it should provide a catalyst to the share price. But the focus then turns to payment.

And most followers of Aminex will be acutely aware it has been a rather bumpy ride for Orca Exploration, which is producing and selling gas to the TPDC.

Recently the World Bank has become involved and may act as useful backstop for the other companies involved in supplying the TPDC.

As always, these are the tricky details of working in an emerging nation. But this isn’t Zimababwe or one of the backwater states of the former Soviet Union where there is a chance the project might be purloined.

Connecting Kiliwani to the pipeline then allows the company to book reserves that give an objective valuation of the well, which analysts suggest is worth a minimum US$35mln, or one and a half times Aminex’s market capitalisation.

Of course the big bang event is the planned farm-out of Ruvuma, the onshore/offshore extension of some of the giant gas structures discovered off the coast of Tanzania and Mozambique.

It has 75% of the licence area, with the remaining 25% owned by AIM-listed Solo Oil.

Aminex drilled the Likonde-1 well in early 2010 and discovered two sandstone intervals of over 250 metres’ combined thickness with high gas readings and physical evidence of residual oil.

It followed this in 2012 with Ntorya-1, which found a comparatively modest 3.5 metres of net gas pay and 16.5 metres of further possible pay.

However, this time the well flowed - at 20.1 million cubic feet a day of gas with an additional 139 barrels of 53 API condensate.

An independent resources report by Isis Petroleum Consultants estimated 178 billion cubic feet (BCF) of discovered gas initially-in-place, with a further 990 BCF undiscovered. It believes all Aminex’s prospects and leads could contain up to 5.57 trillion cubic feet of gas.

The process of finding a partner was suspended to enable the group to shoot 2D seismic to examine more closely some of the other targets.

This will be bankrolled from the recent fund-raise and should be completed and interpreted in the third quarter.

The seismic programme will allow the group to identify a number of drill-ready targets, which strengthens Aminex’s hands in negotiations and makes the deal an easier sell to some of the big companies initially interested in taking a piece of Ruvuma.

Shortly after the 2D is shot and interpreted, it is understood the group will re-open the data room and re-engage with potential farminees. It is thought interest has emanated from super-majors down; however, Aminex has always been tight-lipped about this.

Now, the drill commitment calls for an incomer to sink four wells by the end of 2016. That may sound like a tight turnaround, but it is eminently achievable for the larger companies interested in this basin.

And it seems management, buying shares in the market and taking full part in January’s cash call, have every confidence in Ruvuma.

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