Billions Of Dollars Of Revenue
June 20, 2008
At Today’s Oil Price, Altona Has Billions Of Dollars Of Revenue To Look Forward To From Its Ackaringa Coal-To-Liquids Project
By Our Man in the City
The stock market may be being put off by the US$3.2 billion development bill hanging over Altona Resources’ coal-to-liquids Arckaringa project in Australia, but a crude calculation based on today’s oil price of US$140 per barrel suggests it will take less than two years’ worth of production to get a return on its investment, according to chairman Chris Lambert. “Diesel commands a US$15 premium to today’s oil price. Add an extra US$20 on top again for jet fuel and you’re talking about the quality of product we will produce.” By his estimates, Altona will make US$1.7 billion from oil sales and an extra US$150 million from providing power each year. Of course, that is dependent on oil prices staying where they are today. When Royal Bank of Scotland spent four months putting its financial model together in early 2007, it worked off a forward oil price of US$40 per barrel. No-one really knows what the oil price will be when Altona starts production, potentially in 2013. Yet if oil did maintain its price strength, then the company will be laughing all the way to the bank.
To give a headline summary of Altona’s situation, it has 7.8 billion tonnes of coal underneath 150 metres of overburden. This equates to around 7.5 billion barrels of clean liquid fuel which will be converted at the rate of 10 million barrels a year. Around 700 million tonnes of coal should be upgraded to Jorc level soon, the company having drilled up historical workings. “The numbers shouldn’t change. Our drilling confirms the original estimates,” says Mr Lambert. With the technical part of the pre-feasibility study done, Altona will soon begin the bankable feasibility study (BFS). However, for a couple of good reasons, the company is keeping the full details to itself: “We won’t publish the full pre-feasibility information as it spans nine different reports and contains a lot of sensitive information that our competitors could use to their advantage,” says Mr Lambert.
An “Owners Team” has been assembled to oversee the BFS including engineering consultant Jacobs Australia and project management group Enthalpy. An overall project manager will soon be announced in the form of a reputable mining engineer, says Mr Lambert. A key aim of the team will be to bring down the capital expenditure requirements. This is where Chinese energy group Tongjiang should be able to help. Having paid the first two components of a three-part £11.6 million investment in Altona, Tongjiang currently owns 20.9 per cent of the business. “We’re hoping they will introduce us to Chinese manufacturing companies who can provide reliable equipment for the project,” says Mr Lambert. He also expects to see an offtake agreement into China, potentially alongside opportunities to supply fuel and power domestically in Southern Australia and to BHP Billiton, which needs water and power for its Olympic Dam project 300 kilometres from Altona’s base. These conversations are considerations for the future but are already on the company’s agenda. “We’ve not even talked to BHP yet, but it’s an obvious customer on our doorstep,” adds Mr Lambert.
The BFS should be completed by the middle of 2010. Altona raised enough money through the Tongjiang investment to pay for around 60 to 70 per cent of the study. “They offered to put up all the money, but we wanted the ability to raise more at a higher level later on,” explains Mr Lambert. “It will be at least another year before we will need to come back to the market for this extra money.”
The company is certainly at a turning point in its career. The recruitment of mining experts and the securing of most of the BFS funding means Altona can now focus on refining the design of the project and working out with whom it should sign sales contracts. There are still a few areas that require clarity, however. The appearance in February of coal group Homeland Energy on the shareholder register with a 15.6 per cent stake, shouldn’t be ignored. Homeland caused a fuss before the recent EGM convened to approve Tongjiang’s involvement, but eventually declared its support. If it’s trying to muscle in on Altona, it may want to consider that Tongjiang will soon own 45.9 per cent of the business, once the third tranche of its investment is made, and will be a dominant force. A memorandum of understanding with BP has seen Altona swap information on potential development opportunities at Arckaringa. Mr Lambert says he is none the wiser as to whether BP will take a stake in Altona. The agreement expires at the end of this month.
Shareholders may be disappointed with the lacklustre share price performance of late, but those familiar with the story know that this is a slow but steady development that could eventually yield significant returns. “We haven’t hyped the project. The information we’ve supplied has been conservative and we’ve stuck to the timetable,” comments Mr Lambert. “Yet in three years, having turned around a large coal deposit in the desert into possibly one of the largest energy banks in the world, is pretty impressive