Investment Memo:
Province Resources Ltd
(ASX:PRL)
-
LIVE
Opened: 10-Mar-2023
Shares Held at Open: 20,402,926
What does PRL do?
Province Resources (ASX: PRL) is aiming to develop Australia's first truly zero carbon, green hydrogen project.
What is the macro theme?
As the world looks to cut its greenhouse gas emissions, green hydrogen may prove to be a replacement for natural gas/fossil fuels and become a key pillar of a net zero energy mix.
Green hydrogen could potentially replace natural gas in Industrial applications, large transport (like buses and trucks), and heavy industry applications like steel mills.
Our Big Bet for PRL
To see PRL progress its green hydrogen project to the point of development or a takeover (whichever comes first) and re-rate to a $500m+ market cap
Why did we invest in PRL?
Australia is aiming for net zero emissions by 2050
In 2019 Australia launched its National Hydrogen Strategy with the ultimate view of ensuring Australia remains on a path to be a global hydrogen leader by 2030.
Just like Australia led to global dominance in lithium production, we think Australia could be a global hydrogen superpower in the future with the government committing $526M in funding to build 8 regional hydrogen hubs around the country.
Large scale clean energy project
According to its Scoping Study, PRL intends to produce 550,000 tonnes of green hydrogen annually, with 8GW of renewable energy with around half of the renewable energy generated sold back to the grid.
The scale of the project is such that if the project is successful, it could earn PRL (or a future acquirer) billions of dollars a year in green hydrogen and renewable energy generation.
PRL’s land tenure position and completed Scoping Study means the company’s project is a lot more advanced than industry peers’. This makes PRL’s green hydrogen project more attractive as a development opportunity when capital starts pouring into the hydrogen space.
100% ownership of project
As a small cap company currently with 100% ownership of the project, PRL can progress its projects a lot quicker than a larger company as it has fewer competing priorities. 100% ownership means PRL can commence discussions with potential partners this year, which will be needed for financing capital intensive developments.
What we want to see is for PRL to farm down parts of the project ownership to funding and development partners, and PRL ends up holding a free carried percentage of the total project.
Ideal location for a green hydrogen project
PRL's project is located in the Gascoyne region of WA, next to the town of Carnarvon. The Gascoyne region is a particularly sunny and windy part of the world (ideal for green energy generation) and it's on the coast (important to build a hydrogen plant to undertake hydrolysis). The Dampier to Bunbury gas pipeline runs past the town of Carnarvon.
Strong relationships with stakeholders has led to advanced land tenure position
We think PRL’s local stakeholder relationships give it a three year headstart on any other company looking to develop a giant green hydrogen project.
For the past three years PRL has been working closely with the WA government, native title holders, landowners and the regional government to build its position in the Carnarvon.
We understand all stakeholders are strongly motivated to see this project get into development.
These relationships have solidified PRL’s land tenure position with section 91 licences and native title agreements in place to support the green hydrogen project.
Current strong cash balance
PRL had $17.8M in cash at 31 Dec 2022 and is fully funded to the completion of a Pre Feasibility Study (PFS) on the upstream and downstream components of its project, and likely some runway beyond this. Given the current mood of investors for speculative stocks, we see this as a big advantage for a company of PRL’s size.
What do we expect PRL to deliver?
Objective #1: Complete Pre Feasibility Studies (PFS)
We want to see PRL complete a PFS on both the upstream (renewable energy) and downstream (electrolysers) components of its green hydrogen project. PRL expects these to be completed in Q3 2023.
Objective #2: Land tenure progress
We want to see PRL make progress on its land tenure position at all levels including native titles, land access agreements and with section 88 leases at the government level.
Objective #3: Secure a new project partner to advance the project
On its most recent investor call PRL said it had “been approached by various parties” but that due to its MOU with Total Eren “were unable to engage or entertain any discussions”. After its exclusivity arrangement with Total Eren expires on 17 April 2023, PRL will be open to explore these expressions of interest. We hope this leads to a new project partner coming on board.
Funding risk
PRL has not released any project economics to the market yet. However, we previously estimated that PRL’s project could cost around A$29BN for both the upstream renewable power generation and downstream hydrogen production.
These were our own estimates based on other projects of a similar size and nature around the world, and don’t take into account any technological advancements over the coming years.
PRL is a $46M capped company and to secure the billions of dollars of funding required it will need to find project partners prepared to invest this kind of capital into the project.
PRL can mitigate this risk by finding a larger project partner and progressing its feasibility studies to provide with more certainty the economics of the project.
What we want to see is for PRL to farm down parts of the project ownership to funding and development partners, and PRL ends up holding a free carried percentage of the total project.
The risk is that PRL won’t be able to find and sign on a suitable partner/s.
Land tenure risk
PRL’s project is dependent on multiple stakeholders agreeing to give the company access to a large land footprint.
There is always a risk that one of these parties (native title groups, landowners or government) decide to refuse permits, permits are delayed, or any other regulatory hiccup occurs. This could delay development of the project or, in a worst case scenario, put it at risk entirely.
Green Hydrogen commercialisation risk
While the global hydrogen industry is already operational, green hydrogen projects of the size PRL is planning are still in the feasibility/development stage.
There are question marks still around the economics of shipping green hydrogen for export and limited use cases of the technology for now.
For green hydrogen to be commercially viable for domestic use, there will also need to be big upgrades to pipelines and other infrastructure to get the hydrogen to market.
Market risk (macro)
A market wide sell-off would impact PRL significantly given the company is not producing any revenues and is still a while away from commercialising its project.
If global share markets fall further, investors will look to sell higher risk early stage investments first, like PRL, which could lead to the share price de-rating significantly from current levels.
What is our investment plan?
At the date of this memo we hold 20,402,926 shares in PRL, and it continues to be one of our largest holdings by value (it was our second largest until the recent share price weakness).
We have held a position in PRL for over 2.5 years, and have achieved Free Carry on each Investment and Taken some Profit since the Scoping Study was announced in March last year.
We will hold the current position while PRL works through the objectives set out in this memo, and re-asses in the second half of the year. If the share price materially re-rates on the back of a new JV partner or PFS we may look to sell a further 5% to 10% of the position.
Disclosure: Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 20,402,926 PRL shares, and the Company’s staff own 200,000 PRL shares at the time of publishing this memo. The Company has been engaged by PRL to share our commentary on the progress of our Investment in PRL over time.
Investment Memo:
Province Resources Ltd
(ASX:PRL)
-
CLOSED
Opened: 12-Jan-2022
Closed:
10-Mar-2023
Shares Held at Open:
24,000,000
Shares Held at Close:
20,402,926
Reason Memo Closed:
Major catalyst - Total Eren and PRL Joint Venture did not proceed.
What does PRL do?
Province Resources (ASX:PRL) is aiming to develop Australia's first truly Zero Carbon, Green Hydrogen project.
What is the macro theme?
Decarbonisation using the latest green hydrogen technology.
As the world looks to cut its greenhouse gas emissions, green hydrogen may prove to be a major building block of a net-zero economy.
Industrial applications and large transport (like buses and trucks), and heavy industry applications like steel mills are the most likely candidates to start using this technology in the near future.
[Memo Assessment - 10-Mar-2023]:
Sentiment = Strong
If 2021 was the year when green hydrogen was announced as a potential fuel of the future, 2022 was the year that governments put into place the mechanisms to make it happen.
In 2022, 680 large-scale hydrogen project proposals (equivalent to US$240BN in direct investment through 2030) have been put forward - with around 10% reaching final investment decisions in that year.
The Australian government has indicated that hydrogen will play a major role in Australia’s energy mix and a key part of achieving net zero emissions by 2050, while in the US, the government has provided attractive tax credits to encourage green hydrogen production.
Our Big Bet for PRL
To see PRL progress its green hydrogen project to the point of development or a takeover (whichever comes first) and re-rate to a $500m+ market cap
Why did we invest in PRL?
Ideal location for the project
PRL's project is located in the Gascoyne region of WA, next to the town of Carnarvon. Gascoyne is a particularly sunny and windy area (ideal for green energy support) and coastal (important to build a hydrogen plant to undertake hydrolysis). The town of Carnarvon also has a gas pipeline.
[Memo Assessment - 10-Mar-2023]:
Grade = A
PRL still intends to build the project in the Gascoyne region of WA and has built strong relationships with native title groups and pastoral land owners in the area.
The beneficial conditions for hydrogen production have not changed in the last 12 months.
Australia is aiming for net zero emissions by 2050
With particular targeted investments in hydrogen and we think PRL can be part of the solution.
[Memo Assessment - 10-Mar-2023]:
Grade = A
With Labour in power and the Greens holding the balance in the Senate there is a strong push from the Australian government towards renewable energy.
However, with cost of living pressures increasing from high energy prices there is an indication that fossil fuels may be around for longer as a bridging fuel.
This gives the Australian government a strong incentive to support the fast development of green hydrogen and renewable energy projects as an alternative fuel source to meet the sustainability goals.
Joint Venture Possibility
PRL has a pathway to financing through their potential joint venture partner Total Eren.
[Memo Assessment - 10-Mar-2023]:
Grade = F
PRL is now progressing the HyEnergy project without Total Eren.
This makes the pathway to financing less certain, as the company will need to find a new JV to support the upstream, renewable energy, part of its project.
However, the partnership with Total Eren did open some significant doors for the company, establishing its credibility as a serious player in the green hydrogen space in Australia.
This set the tone for the project as one of critical importance to the hydrogen industry in WA. PRL continues to maintain a strong relationship with the WA government even after Total Eren’s departure.
An Experienced Team
Project set up by the people behind Vulcan Energy Resources (one of our most successful investments)
[Memo Assessment - 10-Mar-2023]:
Sentiment = Unchanged
What do we expect PRL to deliver?
Objective #1: Scoping study
Deliver scoping study to better determine the commerciality of PRL’s project.
Milestones
Deliver scoping study
[Memo Assessment - 10-Mar-2023]:
Grade = A
PRL delivered a Scoping Study in March 2022 which proposes to generate 550,000 tonnes of renewable-based hydrogen per year.
We provided a deep dive look at the scoping study here: https://nextinvestors.com/articles/prl-announces-scoping-study-550t-annum-green-hydrogen/
Objective #2: Secure key stakeholder support
Secure land tenure and key stakeholder support for the project, including a Heritage Agreement, Environmental Impact Assessment and other necessary permits so that the project can proceed.
[Memo Assessment - 10-Mar-2023]:
Grade = A
PRL secured key tenure agreements including Section 91 and agreements with pastoral land owners over the project area.
While PRL waits for the WA government to provide more certainty on the “diversification leases” these are the best options that PRL has to secure tenure over the project.
These agreements are effectively PRL’s “moat” for the project and for the region and come from multiple years of community engagement.
Objective #3: Begin Pre-Feasibility Study (PFS)
With a Scoping Study, land tenure and stakeholder support, the start of the PFS would enable PRL to get to work on understanding the specific factors needed in development to deliver an economic green hydrogen project in WA.
[Memo Assessment - 10-Mar-2023]:
Grade = A
Once PRL secured the section 91 land access agreements it could access the project area and start collecting valuable data for the PFS.
With Total Eren now out of the picture, the company has hired global professional services firm GHD to complete a downstream PFS which is expected to be finished in Q3 2023.
We also expect the upstream PFS contract to be awarded soon with both studies due for completion in Q3-2023.
Objective #4: Solidify commitment from Total Eren
With PRL announcing the completion of the scoping study on 2nd March 2022, we next want to see PRL solidify its commitment from Total Eren to further develop the project.
[Memo Assessment - 10-Mar-2023]:
Grade = F
PRL is now progressing the HyEnergy project without Total Eren.
It's not all doom and gloom though, with a revert to 100% control, and no exclusivity arrangements, we may see more newsflow, quicker progress, and conversations with new partners in the future.
Project Development Risk
Total Eren decides that after the Scoping Study has been completed that the project is not economically viable, and as such, chooses to abandon the project.
[Memo Assessment - 10-Mar-2023]:
Risk = Increased
Although we got the reason wrong here (Total didn’t ”abandon the project because it wasn’t economically viable”) the general risk of the “JV not being entered into” did actually materialise.
After the Scoping Study, Total Eren was happy enough with the project to sign a binding joint venture agreement.
However, PRL decided to develop the project through to the feasibility stages alone.
Without a large organisation backing the project there is a greater risk that PRL will not find a partner to develop the project with, however, the company can now move more nimbly and make decisions quicker to progress the project forward.
Hydrogen Market Risk
Hydrogen is a very new technology, and there are currently limited uses. Hydrogen is not easily transportable, it is extremely flammable and has also not been adopted on a large scale. If the hydrogen market doesn't materialise, PRL may struggle to secure financing for its project - and sell its hydrogen at a commercial scale.
[Memo Assessment - 10-Mar-2023]:
Risk = Unchanged
There have been some significant advancements in hydrogen technology, in particular with regards to electrolysers.
However, the shipping and storage limitations of liquid hydrogen still remain a big question mark over the industry.
Regulatory Risk
If PRL can't secure the key permits for the project to go ahead (including heritage agreement, environmental impact assessment and the new development permit). This risk is increased for PRL because there are no regulations that exist for hydrogen projects, and governments will need to update laws to fit this emerging market.
[Memo Assessment - 10-Mar-2023]:
Risk = Decreased
PRL has spent a lot of time securing tenure over the project including section 91 licences and agreements with pastoral land owners.
The Australian government has a strong incentive to make hydrogen work in order to achieve the ambitious net zero emissions targets set, which means that governments are working together with projects to support the hydrogen industry.
What is our investment plan?
PRL is our second biggest holding behind Vulcan Energy Resources (ASX:VUL). PRL has delivered several impressive announcements since February and is up over 500% since we first invested over 12 months ago in August 2020.
After PRL delivered a number of material announcements and rose over 500%, we sold a portion of our holding to recoup our investment outlays.
We intend to hold our position now until the results of the Scoping Study are announced and re-evaluate our investment plan from there.
[Memo Assessment - 10-Mar-2023]:
Grade = A
After the Scoping Study was completed and the share price consolidated, we progressively sold down around ~21% of our Total Holdings at a volume weighted average price of ~9.5 cents, Taking some Profit as the company had further partially de-risked the project.
The majority of our PRL position was held in expectation of a re-rate on a joint venture being entered into with Total Eren, but unfortunately the project development risk subsequently materialised, and was reflected in the share price.
Read more about our trading policy here: https://nextinvestors.com/disclosure-policy/
Given the material change, we have now launched our PRL
Disclosure: The authors of this investment memo and owners of Next Investors, S3 Consortium Pty Ltd, and associated entities, own 24,000,000 PRL shares at the time of publication.
