Watershed quarter for Leigh Creek Energy

Leigh Creek Energy Ltd (ASX:LCK) recently provided an update on developments that occurred in the three months to March 31, 2019, a quarter which is sure to be remembered as a watershed period for the group.

In late March, the company informed the market that it had received a PRMS (Petroleum Resource Management System) of 1,153 petajoules 2P certification at the Leigh Creek Energy Project (LCEP) from Denver-based MHA Petroleum Consultants.

This classification is a result of the success of the Pre-Commercial Demonstration Plant (PCD) at the LCEP, where the PCD produced all targeted commercial gases with commercial flow rates from a single gasifier.

This 2P reserve certification confirms that the gas at the LCEP is of considerable value and has been independently certified as suitable for a commercial project, and now based on the Australian Energy Regulator report (2018) unequivocally represents one of eastern Australia’s largest undeveloped and uncontracted gas reserves.

The comparisons below demonstrates where Leigh Creek sits in terms of its peers.

Interestingly, many of the smaller companies above that don’t measure up to LCK in terms of resource size trade on superior valuations, suggesting that the slight retracement from a recent strong rally (see below) in the March quarter could be the precursor to another share price surge.

Those that do have superior reserves are mainly multibillion-dollar multinational groups.

A recent commercial transaction between Origin Energy and Australia Pacific LNG (APLNG) implied a purchase price of $1.79 per gigajoule, setting a benchmark price for gas transactions that are currently uncontracted and still in development.

Interestingly, this suggests Leigh Creek could be sitting on a resource valued in excess of $2 billion - not bad for a company with a market capitalisation of $150 million, suggesting there is significant scope for a rerating based on the value of the company’s assets.

PCD delivers world-class gas heating value

The PCD was a success with the research and commercial objectives having been met.

In particular, it confirmed that the syngas produced is of sufficient quality and quantity to support a commercial project.

The peak flow achieved was an impressive 7.5 million cubic feet per day.

Management also confirmed that the PCD achieved a gas heating value (energy), representing one of the highest for air-blown syngas achieved anywhere in the world.

Subsequent to the end of the March quarter, the company commenced the decommissioning of the PCD.

Once completed over the next month, this will significantly reduce the level of cash burn.

The environmental monitoring will remain ongoing until successful decommissioning has been demonstrated.

Cost recovery through PCD lease, sale, service

Leigh Creek signed a Heads of Agreement (HoA) with South African based African Carbon Energy Pty Ltd (Africary) for the negotiation of one or several of the Lease Agreement, Sale and Purchase Agreement and the Service Agreement.

This will enable the PCD to be in the first instance leased by Africary and the granting of an option for Africary to purchase the PCD for use at its Theunissen underground coal gasification project in South Africa, and for Leigh Creek to provide advisory services to Africary.

If the agreements are signed, this will mean that LCK will be able to recover the majority of its engineering and plant costs of the PCD and to also have an early path to revenue.

Consequently, the company is in good financial shape as it looks to advance negotiations with potential joint venture partners on investment structures and the full funding solutions for a commercial facility at Leigh Creek.

As at March 31, 2019 the company had cash of $6.6 million, as well as some head room with its research and development working capital debt facility.