Company Overview: Leigh Creek Energy Limited is a gas company. The Company focuses on the development of its Leigh Creek Energy Project (LCEP). The LCEP is located within PEL 650 at Leigh Creek in central South Australia, approximately 550 kilometers north of Adelaide. The Company focuses on producing electricity, methane and fertilizer from remnant coal resources at Leigh Creek utilizing in situ gasification (ISG) technologies. The LCEP intends to extract the energy in coal through ISG methods to produce methane for sale into the eastern Australian gas pipeline network. The LCEP will also utilize waste gasses through an adjacent fertilizer plant to provide supply to farmers across South Australia reliant on imports. The Company also holds a range of exploration license applications (mining and petroleum), however all of these tenements are at an early-stage of evaluation.


LCK Details

A Quick Review of Half-Year Ended December 2018 Results: Leigh Creek Energy Limited (ASX: LCK), formerly known as Marathon Resources Limited, is an emerging energy company that focuses on developing Leigh Creek Energy Project (or LCEP), located in South Australia. As on April 5, 2019, the market capitalisation of Leigh Creek Energy stood at $146.58 million. The company had received final regulatory approval to start operations on its Leigh Creek Energy Project on September 3, 2018 and there were expectations that operation of Pre-Commercial Demonstration would start within weeks of the approval. However, on September 7, 2018, the company made an announcement that it had been served legal documents on behalf of the Adnyamathanha Traditional Lands Association in which there were objections to various approvals which were given to LCK and the legal documents were seeking an injunction on the commencement of Pre-Commercial Demonstration. On September 19, 2018, Leigh Creek Energy Limited made an announcement that South Australian Supreme Court dismissed application for an injunction and all the objections were withdrawn. Later on, on October 10, 2018, LCK initiated gasifier at LCEP and following this commencement continued to work to develop the gasifier to the full production. Talking about financial results, the company incurred operating loss of $4,364,733 in the half year ended December 2018 while, in the same period of the previous year, it was $2,820,669. The expenditure incurred on LCEP capitalised, as exploration and evaluation expenditure amounted to $6,852,616 in the half-year ended December 2018 as compared to $5,368,923 in the same period of previous year. We presume that higher exploration and evaluation cost is a demand of growing emerging energy company to set the long-term growth catalysts in place.
 

Income Statement for Half-Year Results Ended December 2018 (Source: Company Reports)

Decent Liquidity Levels and Lower Debt/Equity Ratio: Leigh Creek Energy Limited is possessing decent liquidity levels and is evident from its current ratio of 1.43x (in the half-year ended December 2018) which is, more or less, in line with the industry median 1.24x. This reflects that the company can meet its short-term obligations which might arise moving forward. Also, decent liquidity footing signifies that the company can make investments towards its business activities which might help it in achieving long-term growth.

The company’s Debt/Equity ratio stood at 0.14x which is lower than the industry median of 0.40x reflecting that the company has been managing its debt in an efficient way and, we expect, that this might also support its balance sheet moving forward.

Raisings Done by Leigh Creek Energy: After Leigh Creek Energy made an announcement of the placement in June 2018, the company wrapped up a share purchase plan in the month of July 2018, thereby, raising the total of $1.52 million. Further, on December 17, 2018, Leigh Creek Energy made an announcement of the placement of 10.68 million share for the consideration of 12 cents per share in order to raise around $1.28 million, to be followed by non-renounceable rights issue, giving the shareholders an opportunity to buy one new share for every fifteen shares held, to raise up to $3.86 million. We assume that the raised capital will strengthen the company’s liquidity position and might support to achieve its business objectives over the long-term and also streamline the execution of business activities.

LCK Received a PRMS Certification: Leigh Creek Energy Limited had made an announcement that it received a PRMS certification of 1,153 PJ 2P at Leigh Creek Energy Project from MHA Petroleum Consultants.


Result of Pre-Commercial Demonstration Plant (Source: Company Reports)

Based on the above chart, the classification is a direct result of success of the Pre-Commercial Demonstration Plant at LCEP, where the PCD produced all the targeted commercial gases with commercial flow rates from a single gasifier. The 2P reserve certification provides a confirmation that gas at LCEP happens to be of considerable value and has been independently certified as suitable for a commercial project. The company’s management had stated that the independent confirmation as well as certification of such a large 2P energy reserve signifies that the company can advance the negotiations with potential joint-venture partners with respect to investment structures and the full-funding solutions for commercial facility at Leigh Creek Energy Project. They added that full-scale operations at LCEP demonstrate economic opportunity for LCK and significant value for the shareholders.


Australian East Coast Gas 2P Reserves (Source: Company Report, Australian Energy Regulator 2018)

Significant Research and Development Refunds Witnessed In December 2018 Quarter: Leigh Creek Energy had stated that China Communications Construction Company Ltd (or CCCC) provided it with the draft Heads of Agreement, resulting in joint opportunities for the investing as well as developing infrastructure projects in South Australia. At the end of December 31, 2018, Leigh Creek Energy Limited was having a total cash balance of $4.3 million with the total debt drawn of $3.6 million under CBA R&D working capital debt facility.

As of 31 December 2018, Leigh Creek Energy had 100% interest in the licences, all in South Australia, through its wholly owned subsidiary named Leigh Creek Operations Pty Ltd. These licences were Petroleum Exploration Licence 650 and Gas Storage Exploration Licence 662. In the quarter ended December 2018, LCK’s net cash from operating activities amounted to $0.803 million. During the same period, the company witnessed research and development refunds amounting to $5.01 million.  


Net Cash From Operating Activities For Quarter Ended December 2018 (Source: Company Reports)

A Look at Recent Updates: Recently, Leigh Creek Energy had stated that its current 2C Resource of 2,963.9 PJ is contained entirely within PEL 650. The Pre-Commercial Demonstration has revealed commercial gas production from 1 of 3 coal seams located within Telford basin and there happens to be an additional opportunity for resource upgrades in the future. There are expectations that the company would realise a significant reserve large enough to support the commercial project of over 20 years. Thereafter, the company expects that additional resources would be upgraded as the project progresses. The company also stated that it is in the process of working with MHA to upgrade the current 2,963.9 PJ 2C resource, representing 7.8% of Australian East Coast Gas resources, to a 2P Reserve. 

The company had earlier made an announcement that Ms. Jordan Mehrtens would be on maternity leave with effect from 4 March 2019. Mr. Damien Connor had been appointed for the designation of joint company secretary from February 25, 2019 for the period of Jordan’s leave.

What To Expect From Leigh Creek Energy Moving Forward: In June 2018, Leigh Creek Energy had extended the facility limit for Research and Development Working Capital Facility with Commonwealth Bank of Australia to December 2019 and facility limit got increased to $10.5 million. On January 8, 2019, LCK had made an announcement that PCD had developed further to final gasification phase, producing commercial quality syngas, at low flow rates. Later, on January 20, 2019, the company confirmed a twenty-fold increase to the flow rates since January 8, 2019 and continued syngas quality. These developments might support the company in the long-run and might attract the attention of the market participants moving forward.  

Leigh Creek Energy had commenced rights issue in January, closing on February 28, 2019, with all shares issued on March 7, 2019. As a result of the rights issue, the company raised $3.86 million. It also announced further capital raising amounting to $3 million through convertible note issue to Crown Ascent Development Limited. This might support to execute its business objectives moving forward.

Stock Recommendation: Over the past few months, the stock of Leigh Creek Energy delivered strong returns which might attract the attention of market players. In the span of the previous 6 months, the stock posted 21.28% return while, in the time horizon of three months, the company’s stock witnessed 137.50% appreciation.

From 1HFY 2015-1HFY19, the company had witnessed a significant improvement in its RoE (or Return on Equity) which signifies the importance of delivering better returns to the shareholders in the future. Also, the company’s Debt/Equity ratio stands lower as compared to the industry median which further reflects that the company has been managing its leverage position quite efficiently. However, the company’s financial instruments are exposed to numerous financial risks like Market risk (Interest rate and Price risk), credit risk and liquidity risk. Nonetheless, decent working capital together with the sustainable cash reserves might support the company’s short-term business obligations enabling it to meet capital expenditures. Based on the foregoing and looking at decent returns in the past few months, we give a “Speculative Buy” recommendation on the stock at the current market price of A$0.295 per share (up 3.5% as at April 05, 2019). 

 
LCK Daily Chart (Source: Thomson Reuters)

 
Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.