Storm drowns Mongolian coal hopefuls
Mongolian coal trucks make a long journey from Ovoot to the Chinese border because there is no railway. A weak point in the coal price cycle is yet to pass, while the equities market has lost its appetite for funding large-scale bulk commodity projects such as Aspire Mining’s Ovoot coking coal development.
Photo: Bloomberg
Few companies better illustrate the dramatic rise and fall of investor sentiment towards Mongolian coal explorers over the past two years than Aspire Mining.Since early 2011, when the fervour surrounding Mongolia’s emergence as a new coal province was approaching a peak, Aspire’s shares have lost more than 85 per cent of their value and are now trading at around 15¢.As managing director David Paull pointed out at the company’s annual meeting in November, it’s been something of a perfect storm that has caused the sector to fall so heavily out of favour.A weak point in the coal price cycle is yet to pass, while the equities market has lost its appetite for funding large-scale bulk commodity projects such as Aspire
’s Ovoot coking coal development.
The other major issue for investors has been the rising spectre of sovereign risk in Mongolia, as evidenced by disputes between the government and Rio Tinto
-controlled companies Turquoise Hill Resources and SouthGobi Resources.But Paull is confident that the country, a young democracy that is grappling with how best to exploit its substantial mineral resources, will sort itself out.He says a number of senior government officials and ministers have already hinted at amendments to foreign investment laws introduced in May last year. These laws were interpreted by many as a deterrent for investors.Aspire last week gained a boost in its efforts to develop Ovoot, which is a fair way from the nearest market, when it extended its strategic alliance with Asia’s largest commodity trader and logistics provider, Noble Group.
The new arrangement provides Aspire with access to Noble’s recently acquired far east Russian port, a crucial element in its plans to establish the option of developing a seaborne export business.Paull believes the port access was a key factor behind Aspire’s recent share price rise. Over three trading sessions ending on Monday, the stock ran from 5.6¢ to 17¢.The company still needs to secure a rail concession and build a railway to the port, which won’t be cheap. Noble has committed to helping to develop a financing plan and identify potential strategic partners.After taking up a placement of 35 million shares, the commodity trader’s stake in Aspire will increase to 14.9 per cent. SouthGobi is also a major shareholder with 19.9 per cent.
While the potential of China’s nascent shale gas sector gets plenty of coverage, coal seam gas has been slipping under the radar. But the drivers to increase local production are the same, and Sino Gas & Energy is well placed to benefit.Sino Gas’s two ventures in the Ordos Basin are well located in the core of China’s coal seam gas world in Shanxi province, and its neighbours include international giants such as Shell and Total.While the current drilling program had a slow start due to heavy rains mid-2012, Sino Gas has since caught up well and the 17-well campaign is coming to a close. So far flow rates have averaged 640,000 cubic feet a day, leaving a comfortable margin over the threshold commercial rate of 125,000 cubic feet a day even allowing for decline rates.Thanks to last year’s farm-out deal with Hong Kong-based MIE and a $10.1 million placement at 12.25¢ a share to two institutional investors early this month, Sino Gas should now be funded through the year. The exercise of 9 per cent of some 12.5¢ options that matured in December has added another $3.4 million and taken cash in the bank to about $20 million.
A reserves update as early as next month will be a key step towards certification that would support a reserves-based lending facility to fund project development, chairman Gavin Harper
has suggested.Between the Linxing East/Linxing West and Sanjiaobei ventures, contingent resources for Sino Gas are over 500 billion cubic feet, with almost as much again in the prospective category. If Sino Gas is successful in upgrading most of the contingent resources to 2P (proven and probable) in the third quarter of 2013, a market value up to four or five times its current $200 million would be in order, reckons Argonaut, which managed the placement.Initial pilot production is expected later this year, before commercial flows from the first venture in 2014, when gas prices in China are forecast to reach $US10.50 per thousand cubic feet, about triple current US prices.
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