LONDON () -- One of the basic tenets of successful marketing is that your product must be driven by what consumers need, not by what you want to produce.
And Altona Resources [LSE:ANR] will certainly be fulfilling consumer needs big time if all goes to plan with its immense Arckaringa energy project. The project is located in South Australia, a booming state which will be hungry for Altona's power, fuel and water, particularly as a swarm of new mineral developments come on stream, including BHP Billiton's [NYSE:BHP; TSX:BHP; LSE:BLT] Olympic Dam expansion which is on course to become the biggest mining project in the world.
Altona's objective is to mine its vast 7.5-billion tonne coal resource and build an integrated coal to liquid (CTL) and power plant in order to become a leading integrated energy supplier in South Australia. Specifically, if it gets all the necessary approvals it aims to:
- Supply fuel and power to new resources and industrial projects.
- Supply power to the state grid and the National Electricity Market.
- Provide commercial grade sulphur and chemical feedstocks, such as naptha and nitrogen, to industry.
- Supply water to the region from mine dewatering and plant processes.
The Altona story has a number of building blocks; having started on a marketing theme perhaps the best way to continue is to look at the company loosely in terms of the 5 "P's" of marketing; the project, the place, the people, the price and the promotion.
The Project: An Integrated Mine, Coal to Liquid and Power Plant
Altona holds a 100% interest in three coal exploration tenements with a combined area of just less than 2,600 square kilometres in the Arckaringa Basin Coalfield in South Australia, some 800 kilometres northwest from Adelaide. The tenements are adjacent to the main north-south road and rail routes from Adelaide to Darwin.
The deposits, which were extensively explored in the 1980s and 1990s, were estimated at the time to hold 7,850 million tonnes of sub-bituminous coal based on the JORC-equivalent standards of the day (the SADME standard). A drilling programme is currently underway to convert at least 700 million tonnes of the Wintinna estimate to JORC standards.
The coal is sub-bituminous and wet. It has been proved to be technically suitable for conversion into clean petroleum products, low-cost power and high-value industrial feedstock. One tonne of coal from the Wintinna deposit will yield a barrel of liquids plus power and industrial products. It can be mined using a conventional open cut operation, and in the base case it will be mined at a rate of 10 million tonnes per annum.
The base case also includes the construction of a modular multi-billion dollar CTL and power plant which in phase 1 will produce 10 million barrels per annum of liquid products (mainly zero sulphur diesel fuel) and 560 megawatts of power. Phase 3 will increase capacity by 50%.
CTL is a well established technology which was first developed in coal-rich Germany in the 1920s and was used to supply Germany and Japan with fuel during the Second World War when they had no access to oil. It has been operating on a commercial scale in South Africa for more than 50 years and now supplies 30% of the country's gasoline and diesel fuel needs.
The CTL plant will involve two major stages; a gasification stage to produce a synthetic gas, "Syngas", and a liquefaction stage, where the Syngas is reacted over a catalyst in the "Fischer-Tropsch" process to produce high quality, ultra-clean synthetic fuels and chemical feedstocks. Along the way the process also produces a slag which can be used in construction, sulphur for industrial sales, water, carbon dioxide ready for either sequestration or sale (the company sometimes jokes about adding sparkling water to their already extensive product range!), and, crucially, steam which can be combined with the waste gases from the Fischer-Tropsch process to generate power. CTL fuels offer a number of advantages in that they are ultra-clean with no sulphur, and because they are green, they increase engine efficiency and thus reduce maintenance costs.
The Place: South Australia
Altona's location in South Australia is an integral part of the attraction of the project for a number of reasons.
Firstly South Australia will provide a ready and hungry market for Altona's products. South Australia, which 15 years ago had fallen on tough economic times, is now undergoing a spectacular boom driven in large part by the resources sector. The dark green area in the map below shows the exploration and development projects currently underway. The area is perhaps five times as big as it was five years ago.
South Australia already imports all its petroleum fuel requirements, making it vulnerable to disruptions in supply. It is also facing a power supply deficit of more than 500 megawatts by 2016 according to official forecasts, and this makes no allowance either for the 500 megawatts of additional power that will be required by the expansion to BHP's Olympic Dam mine, which is located just down the road from Altona and is set to become the biggest mine in the world from 2013. Nor does it allow for any of the other new mineral developments planned for the next decade. As the chart points out none of these developments would be possible without power and fuel. Altona's project would be enough to make both South Australia and the Northern Territory self-sufficient in fuel products and there would be sufficient to surplus to provide a strategic fuel stockpile for the region.
A second attraction of the location is the excellent transport connections. The deposits lie on or adjacent to both the Stuart Highway, which runs for 2,800 kilometres from Adelaide in the south to Darwin in the north and the Central Australian railway which links the same cities and was completed just four years ago. The railway will allow for a modular construction of the plant and for the export of finished products either north or south.
Thirdly, of course, the state offers political and economic stability which is critical to the success of long life, high-capital cost projects. Moreover the government has been highly supportive of Altona as it sees the Arckaringa project as a key to the continuing development of the economy. The company holds regular meetings with the government.
The People
As the chart below shows, Altona has employed a high calibre set of advisors and consultants to examine the many aspects of the project. Moreover, according to Chris Lambert, the Chairman of Altona, these companies have been assigning top class people to the job as it is such a significant project.
The directors also have significant relevant experience as can be seen from the website. CEO Chris Schrape, for example, was formerly the CEO of Griffin Coal in Western Australia.
The Price
Integrated mine, CTL and power plants do not come cheap. The Royal Bank of Scotland, which has developed an economic model for the project, estimates that the total capex costs will be in the order of $3.2 billion for phases 1 and 2 combined, rising to $4.7 billion for Phase 3.
However, under conservative price assumptions of a crude oil price of $45 per barrel, this will generate annual revenue of at least $750 million just from diesel and power, representing a cost per barrel after power sale revenue credits of $20 opex and $35 in total, putting the Arckaringa project at the lower end of the cost curve. At the prices of September 2007 (when oil was $75 a barrel), projected revenues rise to $1.1 billion per annum equivalent to an opex cost of $16 per barrel and a total cost of $30 per barrel.
The Promotion
Marketing Altona's products should not prove difficult. It will be able to provide high-value, clean fuel products to a market in its own backyard, so there will be no ocean freight or duty costs and distribution costs should be low, giving it a significant competitive edge over any imported fuels.
Next Steps
Altona is currently undertaking a number of studies to pave the way for the final feasibility studies in 2008; a drilling programme is in progress, as are studies to finalise the assessment of the coal feedstock quality, mine cost optimisation, groundwater management plans and carbon dioxide sequestration. Altona then plans to gain all the necessary approvals during 2009 and to begin construction in 2010 for completion in 2013 at the same time as BHP's Olympic Dam expansion.
It is unlikely that Altona will develop the plant alone. Its stated strategy is to overcome the technical hurdles and take the project to the end of the feasibility studies and then bring in one or more major partners to fund and manage the development and construction.
Valuation and Summary
Altona's risks are now mostly in execution risk. This is a large and costly project involving more than 1,000 major pieces of equipment. Geological risk is low as the resource has already been defined, although to a historic standard. Political risk is negligible and the technical risk is controlled as the project is based on proven technology.
Altona's market capitalisation at today's share price of 3.6 pence is just lb10 million ($20 million). This values its in-situ resources of 700 million barrels of oil equivalent at 3 cents a barrel. Its share price has been falling over the last year, perhaps partly because there is an element of disbelief that such a large project could be undertaken by so small a company, and also as the company has been keeping its head down while it has been addressing the key issues. But this may be about to change with the publication of final feasibility studies during 2008.
Brokers Matrix Corporate Capital published a report in October which estimates an NPV of 44 pence per share rising to 100 pence by 2013 when all capital has been raised and invested, an uplift of more than 20 times from current values. The report suggests that Altona will have overcome 15% of the project risk in the near future and on that basis the price could be 7 pence. It notes however that the most likely endgame for Altona is that it will be acquired by a major.
Or could it be the case that mighty oaks from little acorns grow?
