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TLOU Energy has the potential to succeed

By Gary Newman | Wednesday 15 March 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

TLOU Energy (TLOU) was once one of those AIM companies that was hugely popular with PIs and was attracting a lot of attention and hype. Now that has now subsided, I can see real potential with this company going forward given the track record of those who are running it.

Like many of the natural resource outfits on AIM, I would tend to question the current market cap being as high (£17 million or so) as it is, but when compared to other similar companies that certainly isn’t an outrageous amount given the potential gas reserves that the company is sat on.

At the moment all of its attention is focussed on the Lesedi CBM project in Botswana, and that isn’t a bad thing as at least it means that it can focus its limited cash and resources in one place. The fact that it operates in Africa may be a concern for some, but the reality is that Botswana is one of the most stable countries on the continent, having been an independent democracy for more than 50 years.

It is also one of the most affluent African countries in terms of GDP per capita, and diamonds make up a decent sized chunk of its exports, alongside other mining, but one thing that it has definitely been lacking is electrical power, with outages being common, and power is having to be imported or obtained via generators.

TLOU, which is dual listed on the ASX and AIM, actually looks to be well placed to benefit from these power supply problems through its coal bed methane gas reserves at Lesedi, which can be used to fire a power plant, as an alternative to the far more expensive diesel which is currently being used.

For such a small company it has already made good progress and has the support of the Botswana Government. It was recently invited to tender for a power plant of up to 100MW, and subsequently signed a binding Heads of Agreement with Independent Power Corporation, and will now work on a proposal that will be put before the Ministry of Mineral Resources, Green Technology and Energy Security, for approval. The deal with IPC means that it will carry out a feasibility study (at its own cost) into an initial 10MW pilot project, as well as contributing 50% of any external costs involved in the tender. Under the terms of the agreement, TLOU can opt to be up to a 50% equity partner in any power plant.

Back to the Lesedi project itself, which totals five CBM blocks, and that has already seen numerous exploration wells drilled on it as far back as 2009 – TLOU has held 100% since 2010 – and several appraisal drills have been carried out as well.

This has led to booked gas reserves, and although currently not huge on a 2P basis, those have recently been further upgraded following a report by SRK Consulting. The proven and probable reserves (2P) were increased by 44% to 3.9bcf of gas, but have plenty of further potential upside with the 3P figure getting a 390% boost to 261bcf.

There is also still massive potential for further reserves and resources to be added across the whole project area, with more than 3tcf of 3C contingent resources across all the coal seams in the Karoo Basin.

The beauty of this project is that the gas would be used to fire the power plant, and in turn offtake deals would be done for that power, so the demand would always be there for the gas. In terms of infrastructure, it is proposed that a gas pipeline would be put in place to supply the power plants – the existing 90MW Orapa plant, plus a new, larger one.

It may seem like a big ask for an AIM company to actually achieve all of this, but from what I can see TLOU already looks to be well on the way, and the BOD certainly have a track record in this area, as it includes former CEOs of Sunshine Gas and Mitchell Energy – companies which successfully pioneered CBM in eastern Australia – and the company does look to be ahead of the competition at the moment.

In terms of the finances, it is burning through cash at a similar rate to other AIM resource companies, around £120,000 per month as at the last interims up until the end of December 2016, and at that time had around £1.5 million left in the bank.

It does seem inevitable that ultimately it will need to raise further cash via equity, but as long as it can continue to demonstrate that it is progressing the project forwards and everything is still on track, I wouldn't expect that to come at a huge discount. The IPO was done at 6.5p back in November 2016, and a further over-subscribed placing was carried out in August at 5.5p, raising A$3 million.

This one could well drift a bit lower on any lack of further news, but I can see value in buying at anywhere around the 7p area – that should give upside both longer term as the project progresses towards production, as well as the potential for upward spikes in the shorter term on the back of any good news.

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