In Africa things always tend to take far longer than people expect, and even more so when it comes to anything in the natural resources sector. Interest in, and the share price of, Tlou Energy (TLOU) seems to have waned and I think that has largely been as a result of some having far too optimistic timescales with regards to the company’s coal bed methane project at Lesedi, in Botswana. The share price has drifted back to 6.5p on the ask currently, and has been even lower than that recently, but for me nothing has really changed in terms of the investment case here and I would still view it as a speculative buy with the potential to be worth a lot more in the future than the current £25 million market cap if things go to plan for the company.
It already has reserves and contingent resources in place and the management behind the company have history in the field of CBMs, plus there is plenty of potential for further upgrades from gas still in the prospective resources category. In terms of the gas that it has already proven up, it has 2P reserves of 40.8bcf, and whilst that might not sound particularly exciting when taken on its own, it also has 3P reserves of 426bcf across its licences, plus plenty of potential from 2C contingent resources of 214bcf, and 3C of more than 3tcf. On top of the that the prospective resources from its other three licences could be more than 8.5tcf, although it is very early days and those licences are still at the exploration stage. Those of you who have experience of the natural resources sector will know that it is all about getting it out of the ground and monitising the asset, and in the case of Tlou that doesn’t look far away, although development will be phased and it is likely to take some time to see real returns in terms of profit.
The Botswana government has been very supportive of the project and a production licence is in place, but the success of Tlou will largely be driven by the success of it winning contracts for gas-to-power projects. So far it has already been short-listed as just one of two companies to tender for a 100MW plant, although that process has been dragging on longer than expected, and it is expected that development would be staged, starting with a 10MW plant. A pilot well drilling programme is now underway, and this could lead to an initial 2MW of power, which would be expanded up to 10MW as further wells were drilled. The company seems to have been able to raise capital when it has needed to as well, including from institutional investors and the directors – with £2.4 million recently coming from African Alliance Botswana, plus a further £4.4 million odd from placings and an equity entitlement offer.
I would still view this share as being highly speculative given the stage that it is at and there are still risks, and potential for things to go wrong – failure to win this initial tender would have a significant negative impact on the share price I would imagine. But it is also worth remembering that Botswana is possibly the most stable country in the region in which to do business, plus the whole area is in desperate need of power generation, and given that Tlou not only has the resources, but also the necessary permits/licences to make use of that gas, I can see plenty of potential. I would consider this as a longer term buy from the 6.5p area, and if the company enjoys even a modicum of success, then I think you will be pleased with the eventual outcome.
Filed under: Tlou Energy, TLOU, Bluejay, IndigoVision, Woodford, Mayan Energy, gold
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