Nick Lyth has a clear strategy for Altona Energy PLC (LON:ANR) and its coal project in the Arckaringa Basin of South Australia.
“Drill some holes, prove up the resource, sell the company and return a wad of cash to shareholders.”
A refreshingly straightforward approach on the face of it, except that shareholders will tell you that Altona’s history has been anything but straightforward.
Lyth, who was appointed as chief executive in November, says the problem in the past was the sheer size of the resource at Arckaringa.
Huge resource, most of it worthless
Across three tenements in South Australia, there are nearly 8bn tonnes of coal.
As context, in energy equivalent that is 20% of what is left and or has already been extracted from the North Sea.
The snag, says Lyth, is that 95% of that resource is economically worthless.
Too much water is the main issue, but pollution worries and indigenous land rights add to the complex extraction mix.
WATCH: Exploration the key focus for Altona Energy as it works to de-risk and sell off coal asset
Previous managements have tried to find a solution to the problems, but Lyth has no such ambitions.
“If we can find a bit of coal shallow enough, thick enough and dry enough to make the necessary return to justify the cost of building a coal plant,” that will be enough, he believes.
“We are a £6mln company – 100mln tonnes of coal would make us big.”
Not much required to move share price dial
Geological assessments have indicated enough coal of the right type exists for a thermal coal mine with a 25-year life.
Fellow Australian coal miners have rallied on the back of a surge in the price of thermal coal from around A$50 per tonne to more than A$120 a tonne.
One, Whitehaven, producing around 21mln tonnes per year, is currently valued at £2.5bn.
Lyth reckons Altona has potential to produce 5-6mln tonnes per year but its value is £6mln.
Even allowing that its tenements are some way further from the nearest port and transporting coal is expensive, it is a severe discount.
Exploration the next stage
Lyth aims to close the value gap with an exploration programme to establish a JORC resource.
Further development will depend on turning a current memorandum of understanding with Altona’s two substantial Chinese shareholders – Wintask Group (16.6%) and Sino-Aus (6.6%) – into a full agreement for A$33mln of funding.
This amount would be sufficient to complete both a full drilling programme and a bankable feasibility study.
Lyth says the two Chinese investors are happy and on board with the plans, while indications from its geologists are that Altona’s tenements contain up to 150mln tonnes of mineable coal.
“Initial investigations by consulting engineers indicate that there is a coal seam in the south-west of the Westfield tenement that may be sufficiently shallow, dry and disconnected from the Great Artesian Basin to be economically extractable,“ said an RNS this month.
While hundreds of holes have been drilled throughout the Arckaringa Basin, most are in the east, and virtually none in the west, where Altona’s tenements are located.
A recent study confirmed the existence of two coal seams in the one of these, Westfield.
The thicker of the two, the upper seam, Willoughby, is 3-6m deep and starts at a depth of 80m.
Altona wants to explore the middle of Westfield licence for an extension of the seam and to see possibly if it even runs into the tenement immediately to the south.
Lyth is in the process of adding this block to its portfolio “just in case exploration shows a thick seam of coal,” though he insists he has no intention of becoming a coal miner even if that is the case.
“We are explorers, not miners”.
If there is a 5mln a year resource at Westfield, a A$1bn plant can be repaid in four years at current prices, he says.
So we will sell it to “someone with deep pockets who will get on with it.”
Drilling will be next. Scheduling will depend on land access and usage permissions from the local aboriginal population, but the aim is for exploration to be done and dusted this year and completion of a bankable study in 2019.
Explorers not miners
And a resource will be the key to Altona’s future, he believes.
The drill results will frame the structure of the drawdown of the A$33mln or even if all of it is actually needed.
At present, 100% ownership resides with the AIM-listed group but this will also change depending on how much is handed over.
If a chunk of mineable coal is proved, however, Lyth suggests all of these and the other pieces will drop into place.
“Once we are through to the bankable feasibility study, there is almost nothing left to do.”