Sunday, 26 January 2014

2014 Stock Picks: Group 3: Small Cap Resources

Right, time to cover the list of 13 mid tier stocks that twitter followers picked out for success in 2014. If you missed the origins of this list, I asked followers for tips for 2014. They gave me 41. You can read the full list here I then split them into groups to make them more manageable. This is group 3 out of 5 groups in total and this group is focussed entirely on resources. Their market caps are between £12 and £30m.

As usual, the following is a basic overview only. So for the sake of clarity, I do this as a hobby, not to pretend I know about the next big success. I’m sharing my and others’ thoughts on shares as I hope that gives you ideas for further research. But please do your own due diligence. Thank-you. Right, here they are........

Small Cap (£12m - 30m) Resource stocks

Chosen By
Starting Market Cap
Starting Share Price
Magnolia Pet
Tri-Star Resources
W Resources
Baron Oil
Beacon Hill Resources
Tertiary Minerals
Edge resources

Tomco Energy Pls (TOM)
TomCo is focused on oil shale in Utah, USA. It owns 100% of 2 leases covering 5 blocks with an independent JORC compliant resource declared in the measured category of 126million barrels for the main tract of the Holliday block. There is an estimated 21 gallons of 31-34 deg API oil per tonne of shale, with a mine life of 21 years.

Literally next door to TomCo is a company called Red Leaf, who operate their Seep Ridge site 15 miles south west of TomCo’s Holliday block. They are planning a 9,800 bopd commercial operation using their “EcoShale™ In-Capsule Process” - a more environmentally friendly way to extract oil from the ground. The oil major Total has invested in Red Leaf’s technology which gives some confidence in their project.

TomCo's strategy is, therefore, to develop the Holliday Block as a similar follow-on to Seep Ridge using the same EcoShale™ In-Capsule Process, with the same targeted production rate of 9,800 bopd. Red Leaf’s first oil is due in 2014. TomCo’s would be sometime following this but I have to say I couldn’t see any indication of when exactly they are planning to commercialise the project, as Final Investment Decisions on the Total / Red Leaf venture has not been taken, and then their project needs to be up and running before TomCo’s could proceed with theirs.

However, you could see this as a positive, as it should mean that their approach is less risky, as they are using technology which will have been refined and proven next door at someone else’s cost. But you should remember that they could still be many months away from production.

Compared to their peer group TomCo seem to be relatively attractive. According to Beaufort Securities TomCo’s North American unconventional oil peer group is valued at $1.57/barrel of oil equivalent. Next door, Red Leaf is valued at an implied $5.38/boe. And TomCo are valued at just $0.25/boe. So there is plenty of potential if they get the project through to production. Cash flow break even is apparently c.$50/bbl and over the next 2 years they expect to derisk the project as Red Leaf makes progress on its own project. TomCo also have some assets which they could monetise for around $5m.

The project looks less risky than other pure exploration plays, and the resources are there, but you would need to be happy to lock your investment away for a while. The valuation is low, but I guess that’s a reflection on the timescales involved. An interesting prospect if you are in for the long term.

Empyrean Energy Plc (EME)
Empyrean is a profitable O&G company focussed primarily onshore in Texas and California. They have a mix of assets at various stages. Its flagship project is the Sugarloaf AMI in the prolific Eagle Ford Shale, Texas. It has a 3% working interest (operator is Marathon Oil) in 116 producing wells (across 24,000 acres) and at full development this is expected to reach over 280 wells, and there could be further upside from additional formations and closer well spacing. They plan to drill 110-120 wells in 2014 compared to 48 in 2013. The Company has a term debt facility in place of up to US$50 million with Macquarie Bank to develop their acreage. They also own:
  • A 57.2% interest in the Eagle Oil Pool Development Project in California, a proven O&G province 
  • A 7.5% interest in the Sugarloaf Block A operated by ConocoPhillips
  • A 10% interest in the Riverbend Project in Texas currently producing from the Wilcox formation.
The 6 months to the end of September saw some good numbers:
  • Net Profit +3512% to £2.38m (prior year 2012: £66,000)
  • Net Profit for 6 months already +18% on net profit for the full year ended 31 March 2013
  • Revenue +136% to £3.83m (prior year 2012: £1,62m)
  • Gross Profit +354% to £3.15m (prior year 2012: £694,000)
Marathon has forecast a reduction in drilling costs and time for 2014. Additional processing facilities and pipeline capacity is planned for 2014. In addition to the Eagle ford Shale, there could be further potential from the Austin Chalk, which covers much of the Sugarloaf AMI area. Austin Chalk drilling is planned for 2014.

Empyrean CEO Tom Kelly said, "Empyrean is delighted with the increase in Net Profit for the half year which already demonstrate significant uplift in comparison to the full year results for the period ended 31 March 2013...” “....the coming six months look very exciting for the company and we look forward to announcing specific 2014 plans for our Eagle Ford Shale acreage, once received from Marathon. Based on results from pilots and activity to date, we are confident that these will substantially enhance production, reserves and revenues and we look forward to reporting on these developments, alongside the various initiatives on-going across other parts of our US onshore portfolio, on a regular basis."

I quite like the look of Empyrean and will look some more.

Magnolia Petroleum Plc (MAGP)
Magnolia is focussed in the US, in particular North Dakota and Oklahoma. It has interests in 140 producing and non-producing assets. Over time Magnolia has been increasing its interest in wells which have traditionally been low percent working interests but are now becoming more material. Several new wells are due to come into production in Q1 with higher interests than previously. At the same time they are actively acquiring new leases and managing activity to grow and diversify their portfolio.

Current 2P reserves stand at 1.43m barrels of oil and condensate, with 5.1mcf of gas. The overall value of this has been determined as US$47m. However this was as of last August and only 9 out of 45 of the wells drilled between January and August were included in that figure. Reserves estimates also include only 5,500 out of the total 13,500 acres in proven formations. Since August additional drilling activity has taken place and an updated CPR is due to be commissioned in Q1 which is expected to increase reserves across 1P, 2P and 3P categories.

Full year revenues for 2013 should be well ahead of 2012 following a strong H1 and good performance and higher interest of some new wells in H2. The six month results to the end of June 2013 carried the following numbers:
  • Revenues +223% to US$910k (H1 2012: US$282k). Already +27% on the full year (FY 2012: US$709k)
  • EBITDA US$237,552 (H1 2012: loss of US$485,464)
  • Daily production +75% to 214 boepd as at 1 August 2013
  • 2P reserves increased to 1.437m barrels oil and condensate and 5,124 MMcf natural gas (68,700 barrels and 249.8 MMcf on admission to AIM November 2011)
  • 2P reserves valued at US$47million (21 fold increase since Admission to AIM)

Obtala Resources Ltd (OBT)
Obtala is not an operation with which I am familiar! It invests in and develops natural resources in Africa. It says it “is working towards developing a vertically integrated trading platform with the emphasis on agriculture, food production and processing with projects currently in Tanzania, Mozambique and Lesotho.” Obtala also has substantial natural forest timber concessions in Mozambique. Their interests are split across 3 main areas:
  1. Agriculture: (Tanzania, Mozambique) - Horticulture, Sundried Tomatoes, Dried Fruits, Developing Agri-Hub.
  2. Timber (Mozambique)- Natural Forests, 10 traded species, multiple products
  3. Processing (Lesotho) - Fruit and Veg cannery, Home Farms, Local market, Branded goods. 
They say they are determined to grow and develop the business – for example, they recently signed a heads of agreement to assume control over the cannery in Lesotho at no cost with no debt incurred allowing them to enter the branded goods market. They are targeting a self sustainable, profitable agribusiness and timber trading company and are also looking for further growth opportunities elsewhere in Africa. Their recent ops update highlighted the following:
  • Tomato harvest yielded 90 tonnes of fresh produce per hectare from Phase 1 (anticipated to generate revenue in excess of $0.5m per month)
  • Predicted monthly production of dried product is c.150 tonnes across Phase 1 of Morogoro Tomato Farm (50% higher than originally anticipated)
  • First export shipment of 20 tonnes of dried product before end of 2013
  • Fully funded and cash generative to complete Phase 2 by Q2 2014 and Phase 3 by Q3 2014 (taking gross revenue to in excess of $1m per month)
Very different from the usual oil and gas stock!

Tangiers Petroleum Ltd. (TPET)
Tangiers is a junior O&G exploration company with their key project offshore Morocco. Tangiers successfully farmed out 50% of their interest in this Tarfaya block to Galp Energia (operator) who is paying $40.5m plus $7.5m back costs. Tangiers retain a 25% interest and are now carried for the first well planned to be drilled in the first half of 2014.

More recently Tangiers announced an off-market takeover for all of the shares in Jacka Resources Ltd (ASX: JKA). Jacka have prospects across Africa, including Tunisia, Nigeria, Tanzania and Somaliland. This follows Tangiers announcement that their strategy was to exit their Australian interests and instead focus on building an African focussed O&G exploration, development and production Company.

The combined entity of Jacka and Tangiers will provide some highly prospective assets in Africa, including two high impact wells planned for 2014: the first fully carried AO-1 exploration well in the Tarfaya block, Morocco and the second being the drilling and testing of the Hammamet West-3 sidetrack 2 in Tunisia. They also have exposure to a promising near-term offshore Nigerian development project in Aje (OML 113) where the joint venture plans to complete the field development plan by early 2014. Aje is adjacent to the recent Ogo discovery, where the operator, Afren, recently announced upgraded recoverable resources of 774 million barrels of oil equivalent and identified a new deeper hydrocarbon-bearing zone. The acreage in Somaliland and Tanzania is still at an early stage but both areas have attracted strong interest from industry participants.

Twelve months ago Tangiers shares were around 25p. With their Australian interests now cleared out, and the proposed takeover of Jacka on the table, the way is clear for Tangiers to focus exclusively on Africa and roll the dice on their first 2 drills this coming half year.

Tri-Star Resources (TSTR)
Tri-Star’s objective is “to become the leading integrated antimony metal and products manufacturer to western economy consumers utilising an environmentally advanced 20,000 tonnes per annum name plate capacity antimony metal and tri-oxide production facility in the Gulf”. Try saying that with your mouth full. So what’s antimony I hear you say? It is an important minor metal with a wide range of uses most notably as an additive in flame retardant compounds eg for printed circuit boards, computers and other electronics. China has supplied 90% of the world’s supplies for the last decade.

The plan is to design and build an “antimony roaster” and a value added downstream antimony trioxide manufacturing facility in the UAE. This would produce finished material. The raw material would be supplied from Tri-Star’s own exploration and development projects in Turkey and Canada, as well as from third party producers. They are aiming to be the Western world’s leading integrated miner, producer and marketer of antimony metal and antimony tri-oxide products.

The company was formed in 2008 by Mr Emin Eyi, a metal proprietary trader with over 40 years experience in Antimony metals and products. The UAE roaster project has seen a MOU signed establishing the joint venture parties with detailed planning underway and development of the Turkey and Canada projects is ongoing.

W Resources (WRES)
W Resources struck me as an interesting and promising project which looks like it has come a long way. It is a tungsten and gold exploration and development company with assets in Spain and Portugal. Its flagship project is its La Parrilla Tailings Project in Spain. The project comprises a tungsten mine and a tungsten tailings project situated in the southwest of Spain, close to roads and with power and water already in place. The 2008 estimated resource is 36million tonnes at 0.09% WO3, making it one of the largest tungsten deposits in the western world.

W Resources has recently successfully test commissioned its pre-concentration plant which is now complete. First tungsten production is anticipated in Q1 2014; in fact according to last week’s RNS it is “next month”. Annual production is anticipated to be 28,000 MTU Tungsten (W) and 26 tonnes Tin (Sn), which will deliver over €7m revenue per annum at current prices. The price of tungsten has more than doubled in the last 3 years and La Parrilla offers a low cost, high margin resource development opportunity.

Recent news saw final concentrate grades exceed expectations by a significant amount and discussions have begun with potential customers for sales of product. In the short term it is expected that the product will be sold to 1 or 2 customers to provide a strong base from which to build. The Chairman Michael Masterman said “As we near production at La Parrilla Tailings next month we are delighted that the final analysis has delivered tungsten grades of over 60% and tin at over 7%, significantly exceeding our expectations. This is further endorsed by the positive response from potential customers, which we look forward to securing off take agreements with in the coming months."

The long journey mining companies from prospecting, exploration, discoveries, financing, planning, approvals, investment, development and then finally production can take many years. W Resources looks like it has been on that journey and I’m wondering if it might be the time to join the journey for the best bit? DYOR.

Mariana Resources Ltd (MARL)
Mariana is a gold, silver and copper exploration and development company with projects in South America. Their prospects are located in Peru and Argentina.
  • Peru - option to earn 51% interest in highly prospective copper-gold and copper silver porphyry targets in the Cordillera del Condor. This is a highly prospective licence and has significant upside potential. Initial positive drilling results were released in December. Mariana also has an option to earn a 70% interest in the Soledad copper-gold and silver project in Central Peru. This is close to Barrick Gold’s Pierina gold/silver mine. Drilling here is planned for H1 2014. 
  • Southern Argentina - core gold-silver projects at Las Calandrias (100%), Sierra Blanca (100%), Los Cisnes (100%), Bozal (100%) and Los Amigos JV (30%). These projects span over 200k hectares in the Deseado Massif epithermal gold-silver district in mining-friendly Santa Cruz Province. The Argentian Las Calandrias flagship asset has an initial gold resource estimate in excess of 500,000 equivalent ounces. Low cost exploration continues to advance these assets as part of a longer term strategy for Mariana. 
Mariana is clearly moving its projects forwards. I’m not that keen on early stage mining operations as the journey can be a long one and I would prefer to join at a later stage (see W Resources above) but it looks like Mariana has attractive prospects and is making good progress if this is your area of interest – one to look at if that’s the case.

Baron Oil Plc (BOIL)
Baron Oil is another O&G E&P company, this one focused in Columbia and Peru. Baron has been through a complete reorganisation and was previously known as Gold Oil Plc. Trading was suspended in 2012 and finally lifted in January 2013 following an almost complete change to the board, a placing, and a change in strategy. Baron Oil is reportedly now in a steady state after a period of significant turmoil. That said, the board say they need to look for opportunities to enhance shareholder value in the short to medium term. Their web site didn’t inspire me massively as it talked about the challenges and risks of operating in Latin America and how Columbia is now hard to get good deals sorted. They do report though that several potential opportunities are being analyzed and will be announced if successful conclusions are forthcoming, but the company has released no news at all since 17th September last year.

Baron’s interim results for the six months to end of June 2013 showed a small profit of £303k versus a loss of £1.5m the year before. They have successfully farmed out portions of their blocks, and also formed a partnership with S&J Full Services for their Colombian producing field where discussions are ongoing with Ecopetrol regarding a licence extension, and until this is granted the company state they will not invest more funds here. In Peru there are plans to drill a well(s) in 2014 in Block Z-38 which adjoins block Z-34. Positive results would underwrite the potential of Block Z-34.

Baron didn't fill me with confidence, due to the past history of the company, the licence negotiations, and the risk of operating in Latin America, but if it overcomes these challenges maybe it could be a phoenix out of the ashes of Gold Oil?

Caza Oil and Gas (CAZA)
Caza is involved in the USA in Texas, Southeast New Mexico, and the Louisiana Gulf Coast. In Texas and New Mexico Caza have operations in the Permian basin which are relatively low risk prospects from the Wolfberry, Bone Spring and Delaware Mountain plays. This is a mature basin with well established infrastructure. Modern technology is being used to unlock the substantial resources that remain in place in this region. The Gulf Coast operations cover a large area and the majority of production comes from natural gas reservoirs in conventional sandstones, many of which are stacked and provide multiple pay zones. Where condensates exist, this can add significant economic upside.

Caza’s 3rd quarter results to end of September included the following highlights:
  • Aggregate production for Q3 + 66% to 36,491boe versus same period 2012.
  • Q3 revenue +186% to $2.6m ($902,622 2012). The increase was primarily due to additional Bone Spring wells brought online.
  • The ratio of oil and non gas liquid (NGL) increased to 63% of the company's combined oil and natural gas production, mitigating the low US gas price.
  • Cash balance of $13.4m compared to $19.1m end of June. The decrease due primarily to drilling activities in the Bone Spring play in New Mexico.
The ratio of oil and NGL is increasing and this is expected to continue. Production and revenue is ahead of last year and Q2 figures. There is plenty more drilling planned in 2014 and more wells to come online. To accelerate development and production Caza has drawn $35m from a $50m facility which it is using to drill several wells currently underway. If these are successful production should be possible immediately as facilities are already in place.

Beacon Hill Resources (BHR)
I like Beacon Hill. That’s odd really as they have been a complete nightmare recently but I still like them. They have a certain determination that suggests that they are going to get there....eventually. It’s just that the journey recently has been over the edge of the cliff and they haven’t come back up yet. But Beacon Hill remains one of my top speculative stocks for 2014 and I am invested with an expectation of a share price at least four times higher than currently. But that depends on full commercial production as a Tier 1 status producer and it’s not certain so please don’t take my word for it – I just like the possibility and am prepared to take the risk.
Beacon Hill is focussed on building and developing a portfolio of near term production projects in commodities relating to the steel industry. They have three main projects:
  • Their flagship Minas Moatize Coal project in Mozambique
  • Their Changara Coal project also in Mozambique
  • Their Arthur River Magnesite Project in Australia. 
What I like about Beacon Hill is that they are making progress, seemingly with gritted teeth in the face of strong headwinds. They have secured an allocation for 0.5m tonnes p.a. on the Sena Railway line, itself no mean feat. They have installed and commissioned the wash plant. They have updated their JORC reserves statement which shows a commercially viable operation for 15 years even at current depressed coal prices. They have 5 diesel locomotives and 90 rail wagons on the way from South Africa, and have also entered into an agreement to acquire up to 70% interest in an exploration licence to provide pig iron mineralisation and magnetite, part of their plan to integrate across the steel industry.

The recent share price has been killed by “Darwin funded” convertible loan notes. These have taken the gloss off the progress towards production. Together with the global price of coking coal, there are many reasons why investors might choose to steer away from BHR. But they are making progress, and are planning on leasing out the locomotives whilst upgrading their production facilities until they achieve Tier 1 status. This should provide better financing as well as allow the global prices of commodities to recover. Combined this all pushes back production to late 2014, even into 2015, but at £15m BHR is priced cheaply. For info, in 2011 there was reportedly an interested party offering £120m for BHR which was turned down. Those days seem a distant memory now, but I believe that BHR could just make it to 2015 and be priced around the same level if all goes to plan. That would be 8 times the current SP.

Tertiary Minerals (TYM)
Tertiary Minerals is a mineral exploration and development company building a strategic position in the fluorspar sector. Their strategy is to develop large fluorspar deposits in stable, democratic, mining friendly areas. Tertiary controls two significant projects in Sweden and Norway, as well as a large deposit of strategic significance in Nevada USA.

Fluorspar is an essential material in the chemical, steel and aluminium industries. The EU named fluorspar as one of 14 critical raw materials for which a predicted supply shortage would represent a substantial economic threat. Meanwhile, China is changing from a large net exporter to a potential net importer.

Tertiary’s Swedish project shows solid economics with a resource of 3Mt of fluorspar. An exploitation permit is expected to be submitted in 2014. Their Norwegian project adds another 1Mt resource. Nevada drilling resulted in an estimate of at least 8Mt with recent positive drill results showing upside potential.

On the positive side Beaufort Securities agree with the supply & demand issues for fluorspar. Medium term pricing should be trending upwards. Tertiary has 3 attractive prospects in stable areas of the world, and could farm out some of their licences to add cash to their coffers. Broker targets suggest 16p-21p could be achieved.

Less positive is the potential for other fluorspar discoveries in the western world (as it is an abundant resource), or the risk that some form of synthetic alternative could be developed. Production remains several years away meaning funding could be a challenge. But overall Beaufort say Tertiary remain undervalued on both a theoretical and resource based assessment.

Edge Resources (EDG)
Edge Resources is an oil and gas company focused on Canada with a number of 100% owned interests. In the past they have struggled with debt and in September they had to refinance. Shares were 22p not long ago but are currently just under 7p which gives a market cap of only £11m. They have just successfully drilled and cased 4 wells in their Eye Hill license with all 4 wells expected to produce at commercial rates. Preliminary results show a production rate of 175 bopd from 3 of the 4 wells (slightly lower than PI expectations) but this is expected to increase as the wells clean up. The wells should also lead to an increase in reserves and a new reserves report is due in the spring.

Half year results showed improvements across most areas. Production was up to 283bopd. Revenue was up over 20%, general and admin costs were down. Operating costs were down substantially (due partly to the increase in oil prices). Net Cash generated was $850,000 compared to a loss of $447,000 same period 2012.

I quite liked the look of Edge Resources. They are a very small outfit, but already making a small profit, and with what looks like a new found focus on their future following a challenging 2013. They reminded me of the turnaround that Nighthawk has managed to pull off. 2014 could see them make continued progress and at under £12m market cap there should be plenty of headroom if they manage to keep the progress going. DYOR though please.

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