Our Outlook for 2019 – Part 2

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Which firms could be big in the small-cap arena?

After 12 months of geopolitical turmoil, difficult commodity conditions, and suppressed market volatility, where could investors make money in 2019? Here, we highlight another group of businesses that have seen their share prices decline in recent months and look at why this could change this over the next year.

Jangada Mines (JAN)

What have shares done?

Jangada’s shares have fallen from 4.8p in June to their current 1.73p.

What’s its current market cap?

£4.07m.

What was cash at last count?

Jangada had $198,000 as at 30 June 2018. However, it bolstered this with a £2.1m fundraise package at the end of September. This included a £1.05m placing at 3p a share.

What’s next?

The company fell nearly 13pc in a day two weeks ago when it added a JORC-compliant nickel and copper sulphide resource to its flagship Pedra Branca project. This added 8MMts at 0.22pc nickel, 0.04pc copper, and 135g/t cobalt to the advanced platinum group metals project in north-east Brazil.

The upside bolstered Pedra Branca’s already attractive economics. In June, work confirmed the project’s potential to house an open pit operation with an NPV of $192m, an IRR of 67pc, and a 1.6-year payback period. Then, several months after this, the business announced further reductions in development capex requirements.

Pedra Branca operates in the exciting battery metals market and its NPV far outstrips Jangada’s market value. Could the company’s recent weakness provide an attractive buying opportunity ahead of further developments in the New Year?

Block Energy (BLOE)

What have shares done?

You can currently buy Block at 2.7p a share. It was trading at 3.9p when it listed in June.

What’s its current market cap?

£6.99m.

What was cash at last count?

As of 30 June 2018, the business had cash and cash equivalents of £4m. It said this would fund work for a year. It is also generating production revenues.

What’s next?

Since listing, Block has been working to develop its portfolio of assets in Georgia’s Kura Basin. The business’s production currently sits below 100bopd. However, its portfolio contains estimated net proven oil reserves of 1.5MMbbls plus 61MMbbls oil and c.473Bcf gas of unrisked contingent oil resources.

Block is currently completing the first phase of a work programme that will see it target 900bopd of production within 18-24 months of listing. The company will then begin the second phase of development that will see it target production of more than 2,000bopd production. Finally, it will look to bring its West Rustavi gas discovery into production and expand across the wider region.

Recent operational updates have suggested that all is on track so far. Should this continue, then it will be interesting to see where Block goes next year. The firm’s operating region in Georgia is already attracting significant amounts of interest from resource majors like Schlumberger. Is it worth getting exposure now as a punt on the firm being able to deliver on its ambitious plans?

Bigdish (DISH)

What have shares done?

Shares peaked at 5.24p shortly after the business’s London listing. They can now be picked up at 1.5p each.

What’s its current market cap?

£4.29m.

What was cash at last count?

BigDish is yet to declare a cash position. This will be featured in its first set of published results. It has not had to do this yet as it only listed in August.

What’s next?

BigDish offers a platform that allows restaurants to offer discounts at their off-peak times to smooth their footfall. This also allows customer to enjoy money off by booking at different times and days.

The company listed in London this year and has since launched its app in the UK to a limited number of users in Bath. It will look to build on this foundation in 2019.

BigDish is also looking at ways to penetrate the Asian market. This included the acquisition of Philippines-based web and app-based restaurant and travel discovery business Looloo in August.

The firm’s share suffered in the months following listing, culminating in an RNS that put volatility down to an overhang in the market that has now been removed. If you believe the company’s unique business model has legs, then the leftover weakness could provide a buying opportunity. Click here for an in-depth interview with chief executive Joost Boer.

Andalas Energy (ADL)

What have shares done?

Following a share consolidation, Andalas rocketed from 0.02p to 1.3p between August and September. Shares now trade at 0.62p each.

What’s its current market cap?

£2.29m.

What was cash at last count?

The firm had a cash balance of $38,000 as at 30 April, the end of its financial year. This was bolstered by an $827,000 placing that completed after the end of the closing period. This figure is now more than six months old. Keep an eye out for Andalas’s cash balance when it publishes its interim results for the current financial year.

What’s next?

In the UK, Andalas’s major hub of activity over the near future will be the Colter prospect, where it owns an 8pc interest.

An offshore well drilled at Colter in 1986 recovered oil on test within the Triassic Sherwood Sandstone. This is the main reservoir at Wytch Farm, which lies immediately north of Colter and is Europe’s largest onshore oil field producing over 450MMbbls to date.

For some time now, Corallian – which operates the licence – and its partners have planned to drill an appraisal well on the historic discovery. This will evaluate whether it is on the flank of a commercially viable accumulation. This much-anticipated well is due to be drilled in Q1 2019.

The gross unrisked mid-case oil contingent resource in the section proven up by the original offshore well at Colter is estimated to sit at around 4MMbbls. Predictions have put total unrisked mean-case prospective resources at 15MMbbls for the rest of the structure.

If all goes to plan, then Colter could be a strong value driver for Andalas.

Emmerson (EML)

What have shares done?

After rocketing to highs of 4.9p after listing, Emmerson has fallen to 2.4p.

What’s its current market cap?

£14.4m.

What was cash at last count?

As at 31 October, Emmerson had a healthy cash position of £3.8m.

What’s next?

At the end of November, Emmerson released the results of a scoping study for its Khemisset potash project in northern Morocco.

The work gave it a post-tax NPV of $795m and an IRR of 29.8pc over a 20-year mine life assuming flat potash prices of $360/t. Using forecast prices from an independent market consultant, this NPV rises to $1.14bn. Using flat potash prices, the project will deliver post-tax cashflow of $184m per year. This translated into a capital payback period of less than 3.25 years.

The scoping study places Khemisset in the top quarter of all potash projects in the world in terms of projected cash margins. Likewise, Emmerson has said the site’s capital intensity per tonne of product produced is less than half the global average.

If the firm can deliver on these impressive boasts as it continues to advance its project then next year will be very interesting. After all, Khemisset boasts unique access to Africa in a market dominated by a small handful of players.

Management Resource Solutions (MRS)

What have shares done?

The business has declined over recent months to 4.65p.

What’s its current market cap?

£8.37m.

What was cash at last count?

As of 30 June 2018, MRS had a cash balance of $50,000. However, chief executive Paul Brenton explained in a recent interview with TMS that this figure fluctuates wildly on a week-to-week basis. This is due to the contractual nature of its business model. Brenton added that he is comfortable with the company’s financial situation.

What’s next?

This year has seen Brenton focus on bringing together MRS’s services and plant hire businesses in Australia to cut costs and improve efficiencies.

Based on the first results for the year ended 30 June, released in December, he appears to have enjoyed some success in this area so far. The figures revealed that the firm had reversed losses in the previous year to deliver EBITDA of $12.3m and net profit after tax of $5.4m.

MRS’s services arm has enjoyed a boost from ongoing demand for high-quality coal in 2018. Meanwhile, its plant hire division has enjoyed ongoing opportunities from a large, local economic development project in Ipswich, Brisbane.

Earlier this month, Brenton told us he feels that the market has not acknowledged the significance of MRS’s turnaround efforts and strong performance. Moving forward, he said the firm expects to deliver more deals and contracts in 2019. If the business can follow through on these claims and pick up the market’s interest in the process, then its current valuation could soon look cheap.

As a side-note, it will be worth keeping an eye on the progress of MRS’s nomad situation. The company has revealed little to the market since announcing that Northland had ‘voluntarily agreed to relinquish’ its nomad status in November.

Nostra Terra Oil & Gas (NTOG)

What have shares done?

Shares are now trading at 2.5p after hitting highs of 5.5p at the beginning of the year.

What’s its current market cap?

£3.75m.

What was cash at last count?

Nostra’s cash balance sat at £143,000 as of 30 June 2018. Thankfully, considerable production growth has seen the business become cashflow positive this year. This is being used alongside a favourable lending facility with Washington Federal Bank to fund growth.

What’s next?

Its been a very strong year for Nostra both financially and operationally.

The business kicked off the period by securing a senior lending facility with Washington Federal Bank on highly favourable terms. It then went on to deliver solid production growth across its US portfolio, which consists of assets in Pine Mills and the Permian Basin. This helped it to deliver record first-half revenues and become cashflow positive on a continuous basis.

Looking forward, all eyes will now be on Nostra’s ability to expand in the Permian Basin. It acquired an asset called Mesquite in October, where it believes it can construct eight horizontal wells delivering initial production rates of between 200-300bopd. It is currently waiting to deliver the results of a field development plan for the 100pc-owned assets early next year.

Should the business be able to deliver on its forecasts then its scale will increase considerably – Permian production sat at 53bopd at last count. With this in mind, Nostra’s commodity-market fuelled weakness could provide an interesting buying opportunity. We will be keeping an eye on newsflow and market reaction throughout 2019.

Solo Oil (SOLO)

What have shares done?

A strong beginning to the year saw Solo’s shares rise to 4.6p. They have since been in gradual decline. They now trade at 1.65p.

What’s its current market cap?

£10.42m.

What was cash at last count?

The company’s cash balance sat at £147,000 as at 30 June. This was bolstered by c.£2.41m in August through a placing at 2.25p a share.

What’s next?

Solo has changed its strategic focus considerably in 2018 with a major shake-up of its management team.

Notably, it also sold its 15pc position in Horse Hill Developments, the operator of the Gatwick Gusher discovery, to UK Oil & Gas. It immediately used the £4.5m raised from the disposal to buy a 4.2oc position in UKOG. This provides it with ongoing exposure to the project without the burden of funding requirements.

Solo’s chief focus now is on Tanzania. Here, it owns a 25pc stake in the Ruvuma Basin production sharing agreement. This is estimated to contain gross gas resources of 764Bcf and Pmean total gas initially in place of 1.87Tcf. It also owns a 8.4pc position in the production Kiliwani North-1 asset, also located in Tanzania. This has produced 6.4Bcf since April 2016 and houses a prospect called Kiliwani South, expected to contain mean un-risked GIIP of 57Bcf.

Finally, Solo owns a 13.8pc position in Helium One, which is fully funded and moving towards drilling the Rukwa Basin natural helium play in Tanzania.

Ruvuma’s operator Aminex is currently completing the farm-out of a large portion of its stake in the asset to the Zubair Corporation. It will be interesting to see how the introduction of such a key player into one of Solo’s core assets will affect development next year.

Echo Energy (ECHO)

What have shares done?

Echo shares were performing strongly until July, when they sat at 19.1p. The business is now trading down at 6.2p.

What’s its current market cap?

£29.63m.

What was cash at last count?

Cash sat at £26.1m as of 30 June 2018.

What’s next?

The loss of chief executive Fiona MacAulay in December did little to soothe the nerves of Echo investors in the middle of a commodity downturn. However, the fact remains that the firm is cashed up and carrying out an ambitious workover and drilling campaign across its acreage in Argentina.

Next year, it will be particularly interesting to keep an eye on progress at the firm’s Tapi Aike exploration acreage. Alongside MacAulay’s resignation, the business said it had mobilised equipment to acquire 1,200km2 of 3D seismic at the site in the foothills of the Andes mountains.

A Competent Person’s Report has identified 41 leads over three independent plays at Tapi Aike. These are thought to contain gross prospective resources of up to 4.2 trillion cubic feet of gas at the best estimate. The most significant two leads potentially contain 3.8 trillion cubic feet and 2.6 trillion cubic feet of gross gas in place, with total high case potential of over 20 trillion cubic feet of gross gas in place.

A seismic programme at the site is expected to begin once all the equipment has arrived and parameter testing is completed in early 2019. It will last around four months. Echo intends to define an initial four well exploration drilling programme, with each well estimated to cost between $2m and $5m net to Echo.

This is certainly a game-changing opportunity, but will Echo be successful in its delivery?

Active Energy Group (AEG)

What have shares done?

A difficult second half of the year has seen Active Energy fall from 3.7p to 0.9p.

What’s its current market cap?

£10.8m.

What was cash at last count?

Cash sat at $261,421 as of 30 June. This was bolstered by a £1.5m placing at 1p a share in November.

What’s next?

Active Energy’s flagship offering is CoalSwitch. This is a biomass fuel technology that creates pellets used to replace coal in power stations. Unlike coal, the pellets are produced from forestry waste and other industrial waste products, meaning they release far fewer harmful emissions when burned.

This year has seen Active work on building up interest in the product – and its sister product PeatSwitch – around the world. The business plans to use its recent placing proceeds to continue this. More specifically, it plans to begin producing CoalSwitch commercially from a five tonne per hour plant in early 2019. It will also begin planning for the commercial development of a CoalSwitch plant in NewFoundLand.

As environmental concerns continue to grow around the world, Active Energy and its products could provide an interesting investment opportunity. It may be worth keeping an eye on developments over the next 12 months.

You can hear one of the latest interviews with Paul Haywood of Block Energy here:

The author does not hold shares but was remunerated to write the article 


Categories: Bulletin