Dowgate Capital Stockbrokers Analyst Jason Robertson caught up with DirectorsTalk to discuss Alba Mineral Resources Plc (LON:ALBA)
Q1: Now I wanted to talk to you today about Alba Mineral Resource. The research note that I have in front of me is from 5th May this year, is this the most up to date research that you’ve issued on Alba?
A1: It is yes, that’s right. I mean that note’s looking a bit old now, that was back in May as you said, and we are preparing a new revised updated note at the moment which we’re hope will be issued quite soon. Since that note was issued there has been more technical information published on Horse Hill and also the Brockham licence, which is next door to Horse Hill, which Alba also have an interest in. There’s also been more activity on their graphite gold and gold prospective project in Greenland so quite a lot has happened since that note back in May so quite a few things to talk about and to update people with.
Q2: So the 5th May note has a target price of 16.5p which is far above the current share price of Alba Mineral Resource at the moment of 0.3, why is there such a big difference?
A2: There is quite a big difference, the valuation is based upon a number of risk factors but essentially the basis of the note is based upon the technical reports that have been published by the industry experts such as Schlumberger, Nutech etc. so it’s based upon those figures and also most of the valuation, probably about over 99% of it, is based upon Alba’s stake in the Horse Hill licence. So it does seem like quite a difference you’re right, I think there’s also a lot of scepticism out there in the wider investment world about whether there’s actually a large oil discovery in southern England, in the Weald basin, I think a lot of people of sort of a bit sceptical about that and sort of wonder whether it can be developed. It probably will take a few years to actually get developed and also probably because it’s quite near to Gatwick airport I think people are worried that that might cause problems or not but I don’t think it would do. So yes I think there’s a bit of a difference between the target price and also the current share price, that will probably close at some point and also it is a conventional oil in play and some people are thinking it’s a frack in play which it isn’t so I think some people still think that might be a problem as well but I don’t think it is really.
Q3: Can you explain the different risk factors that you’ve used to value Alba’s Horse Hill interest?
A3: Yes sure. There was a number of different risk factors we’ve used in it so we’ve analysed the valuation based upon different pay zones or geological levels so you’ve got the Upper Portland which is near to the surface, you’ve got the Kimmeridge zone which is where we think most of the oil is and then you have the layers below that such as the Oxford, the Corallian and the Oolite.
So there’s a number of different zones there and they’ve each got different risk factors applied to them, I think one of the biggest risk factors is the recovery rates so we’re assuming that in the Upper Portland zone there’s a potential 20% recovery rate and so we’ve estimated in Kimmeridge an 8% recovery rate and also further down the layers below that perhaps recovery rates of about 4% so there’s different sort of recovery rates there.
We’re probably being very cautious actually on those recovery rates and in addition to that we’ve also got the development risk so there’s a development risk applied for each of those different zones, the Upper Portland has a very low development risk of around 15% right down to the lower zones below the Kimmeridge which has got quite high development risk of 50% thus the second risk factor.
We also valued the oil based upon discovery values so some of the higher levels nearer to the surface have got a higher discovery value per barrel, as high as $10, it sounds quite high but then you’ve got these other risk factors behind it as well so it’s not really as high as that. The layers that are below the Kimmeridge have got just about 50 cents per barrel exploration value and just going back up to the Kimmeridge got a discovery value of about $8 per barrel on that so it sounds quite high but you’ve got all those other risk factors that sort of bring that down.
Of course the biggest risk factor in all these different valuations of course is the recovery rates, the recovery rate could be a lot higher than what we’ve estimated, which itself is based on some of these capital reports that have come out from Schlumberger and Nutech etc. so there are a number of factors that we do use to sort of risk it, as such, so yes quite a complex task.
Q4: Now I notice that the Brockham licence, in which Alba Mineral Resources has a 5% interest and is next to Horse Hill, is being drilled before the end of this year. What value did you put your 5th May note to the Brockham interest?
A4: At the time there wasn’t really much information available on Brockham so in that note we valued the Brockham field along with Alba’s Greenland graphite project at just a low figure of about $1 million which is relatively small compared to the value that we put on Horse Hill which we put a value of about $328 million so that’s Alba’s interest in Horse Hill. So it is quite small, there was a technical report issued by Nutech last month so we’ve got that report now on the Brockham field which we can use to reassess the Brockham project interest. The Brockham licence itself is a much smaller licence than Horse Hill so we have to sort of factor that in as well so yes there is scope to improve that valuation for Brockham by quite a bit I would have thought.
Q5: Regarding the risk factors that you used to value Horse Hill, will the same ones be used to calculate a value for Brockham?
A5: Yes, good question really. I think the geology, given that it’s next door to Horse Hill, is believed to be very similar so I would think we’re going to use similar risk factors. Brockham itself is a production licence so you would think the development risks should be much less for Brockham than it is for Horse Hill because it should be easier, once you’ve actually discovered any further oil sources, to just add that to the existing production which they’ve been getting from that field so should be quite easy to do. Yes, I would have thought the development risk factor should be much less and also the oil value, maybe the recovery value might be a bit higher as well.
It’s quite interesting if you look on a Google map for where that Brockham project is, it looks like it’s just under about 200 metres away from a railway line so that gives them, if they do find oil when they drill, a development option. So instead of trucking oil off in trucks there’s maybe, if they find the real big discoveries, a potential maybe for having some sort of facility to link up to the railway line possibly, of course there’s also the option of having a pipeline but they would probably use that if they had a much bigger discovery, depends on what they find when they do the drilling there.
So yes on balance I think the risk factors will probably be much less than they are for Horse Hill Because it’s a production licence as opposed to an exploration licence although as I said it is a much smaller oil licence there.
Q6: Will you be calculating a new value for the graphite project in Greenland?
A6: as I said we did apply a nominal value to that project so there is an active expression going on at the moment so we need to see the results of those exploration work that they’re doing at the moment so I need to find out a bit more information about that. In addition, the graphite project in Greenland is also prospective with gold so there’s a potential there to be surprised perhaps when the further results come out and given that the project is also right on the southern tip of Greenland there is the opportunity there to explore it all year round. So I think there could be some surprises there perhaps, as I’ve said we would need to see more results from the exploration that’s ongoing at the moment I think before we come to any sort of valuation for that project.