Australia | Dec 15 2006
By Greg Peel
Linc Energy (LNC) listed on the ASX six months ago with a small IPO intended to finance its demonstration plant, ahead of plans to go commercial thereafter. The company is an Australian pioneer in coal-to-oil conversion, and was profiled by FNArena back in August (Coal-To-Oil: Linc Energy Aspires To World Leadership, 05/08/06).
Linc held a reception in Sydney last night to provide a six-month update on developments, and specifically to announce a new association with Russia. Apart from all the Linc senior management, in attendance were the Russian Ambassador to Australia (caught the name, can’t spell it) and federal shadow treasurer Wayne Swan.
Linc’s managing director Peter Bond does not look like a managing director, which is heartening. Picture a younger, slightly taller Paul McNamee. Bond is a processing engineer by trade, with 20 years experience in the coal industry. He was the only man in the room without a tie, and probably had dirt under his fingernails if I’d have looked more closely. Not a public speaker, but clearly a man of great enthusiasm and someone shareholders would likely be comforted to know is leading the team.
Linc has assembled a world-class management ensemble, and boasts several global corporate associations. The company is at the forefront of coal-to-gas technology (see previous article).
The latest association, and the excuse for wine and sushi, has been established with The Slochinsky Institute – the 77-year old Russian research and development organisation which pioneered underground coal gasification (UCG). Mr Oleg Krzyzanowski has been appointed as Linc’s general manager of UCG operations.
Since its listing, Linc has been drilling on its Chinchilla, Queensland, site in order to prove up its coal reserves. Initial estimations are for 300Mt but Bond was happy to share his expectation that Linc’s total reserves will reach one billion tonnes. Under the coal-to-liquid process, one billion tonnes should amount to 1.5 billion barrels of oil. That’s more than Bass Strait.
Bond’s vision is that in a few years Linc will be providing 10% of Australia’s oil needs.
Drilling to date has rendered positive results indicating Linc is meeting initial targets. The commissioning of the pilot conversion plant – a demonstration model that will produce 5 barrels per day and provide an indication of the technology’s capability – is ahead of schedule. The prospectus indicated end of 2007 but it looks like being completed about mid-year. Thereafter, an environmental impact statement is targeted to be completed in 12 months.
Stockbroker BBY provides the only coverage of Linc to date. The analysts have calculated a discounted cash flow valuation of the company of $1.52. BBY suggests Linc will follow a path of de-risking and subsequent re-rating as milestones are achieved. If all goes to plan, Linc will undertake a major new capital raising in two or so years to provide financing for the real conversion plant (20,000bbpd). This raising will lean toward an 80/20 debt/equity mix.
BBY has set a 12-month target price of $0.60. This is down from the $0.71 target set on listing, but then the oil price was much higher six months ago. DCF valuation remains unchanged. Linc closed yesterday at $0.225.
Having listened to the grand plans of Peter Bond, we were next entertained by Wayne Swan. Swan was passionate if not predictable in his exhortation of commitment promised by the ALP to clean coal projects such as Linc’s in an environment of undeniable climate change. Questions from the floor were handled with expertise, and particular concessions to the clean energy industry were touted, as well as a commitment to emissions trading. There was, however, nobody present from the government.
The real entertainment of the night was left to the Russian Ambassador, who looked everything one might expect a Russian Ambassador to be. Not originally expected to speak, the Ambassador jumped to the microphone with gusto and related his country’s indebtedness to companies such as Linc in aiding Russia with the safety of its own coal conversion plants. Apparently they had previously suffered quite a deal of casualties.
Speaking through an interpreter, the Ambassador had us all in hysterics with his joke about a wind turbine and a parrot (had to be there) and laughs all round greeted his comment that having listened to Mr Swan, maybe it was time the Russians started taking more notice of the Opposition.
Linc Energy is a start-up company utilising innovative technology. Potential investors should be warned that while rewards for success may be substantial, many risks exist.