Kinetiko Energy Ltd (ASX:KKO) has received a base valuation of $0.24 per share in MST Access’ initiation report, as the company advances its vision to deliver the largest gas field in gas-hungry South Africa.
The company’s flagship Mpumalanga Gas Project hosts a 2C contingent gas resource of 4.9 trillion cubic feet (Tcf) and 7,000 square kilometres in granted rights and application area, indicating a potential long-life gas development.
Kinetiko’s shares are currently trading at $0.090 with a market cap of $58.66 million.
Following are the excerpts from MST Access initiation report:
Prime Location, Long Life, Exploration Upside
The Mpumalanga Project, 100%-owned by gas explorer/developer Kinetiko (KKO), is located ~200km southeast of Johannesburg, the largest city in South Africa (SA).
The project sits within existing infrastructure including power generation, gas pipelines, high-voltage transmission lines, roads and rail.
The project hosts a 2C contingent gas resource of 4.9 trillion cubic feet (Tcf), found in shallow sandstone and coal formations, indicating a potential long-life gas development.
Gas has been identified in every exploration hole drilled to date.
KKO has engaged the independent gas certification group, Sproule, to independently evaluate the gas reserves.
The project covers ~7,000 km2 with 4,604 km2 of granted exploration rights and over 2,300 km2 under the application.
Only a fraction of the project area has been explored, presenting KKO with the potential to expand resources significantly through further exploration.
Near-Term Production: Gas to Power
KKO has a joint venture with highly experienced gas-to-power (GTP) partner Vutomi Energy. Existing wells at Mpumalanga will be utilised to produce gas powering an in-field generator linked to the existing grid.
Further phases are planned to increase output. Long-Term Production: SA Energy Crisis Creates Multiple Options for Gas Sales for KKOSA’s ageing and underinvested power generation (predominantly coal) infrastructure, declining domestic offshore and imported onshore gas supply and the existence of only one approved onshore gas producer reflects a nation facing a significant energy crisis.
Solutions have to be found, such as gas to power; compressed natural gas (CNG) for transport; liquefied natural gas (LNG) for transport, power and industry; or just simple pipeline gas.
KKO is in the enviable position of being part of both a short and long-term, lower-carbon solution to SA’s energy needs.
Successful demonstration of production should lead to staged project expansion.
The project’s location and supportive government policy present further options for gas sales to state-owned power stations, industrial users and transportation.
Quality Partners Reflects a Quality Project
In addition to Vutomi Energy, KKO has entered into a joint development agreement (45% IDC/55% KKO JV) with SA’s Industrial Development Corporation (IDC) to develop a 15 to 20-well pilot production field.
The IDC is a wholly-owned government subsidiary that supports growth and development in SA.
Additionally, the IDC has the first right to participate, up to 45% of the next 80 wells developed by KKO.
The IDC JV has been funded predominantly by a subscription of ZAR60m from SA energy investment group Phefo Power, which boosts KKO’s Black Economic Empowerment (BEE) certification.
Risked NPV Valuation A$0.24 – Resource Provides Large Potential Upside
Our base case valuation of A$0.24 is derived by estimating the risked value of developing the Mpumalanga project.
Our unrisked discounted cash flow (DCF) valuation is A$0.43 per share.
As a cross-check we look at the EV/Resource method, deriving a valuation using average market multiples.
The valuation of A$1.05 is derived from market average EV/ Resource multiples, showing the potential upside to KKO as the project is developed, reserves are certified, and production increased.
The key risks relate to development risks, reserves conversion and funding.