Leigh Creek Energy Ltd (AX:LCK) offers investors an option over the in-situ gasification (ISG) of an underground coal resource in the state of South Australia (SA). Recent power blackouts in SA have highlighted the need for more baseload power generation capacity, while high electricity prices incentivise the monetisation of 2,964PJ of 2C ISG gas resource at the Leigh Creek Energy Project (LCEP).
The development of LCEP is not without risk and uncertainty at this stage; however, if LCK is able to attract development funding and mid-stream/power infrastructure partners, LCK could be worth materially more than its A$40m market cap. Our 2C risked valuation after farm-down is A$83m (A$0.31/share) based on a subjective 20% chance of success.
South Australia power market dynamics
SA is the highest priced domestic gas and power market and state-wide blackouts as recent as 28 September 2016 have highlighted a need for greater within-state baseload power generation. This would augment renewable sources (largely wind and solar) as well as underpin supply when the inter-state grid connection is offline. The government of SA has regulations in place to specifically permit ISG operations and is supportive of the monetisation of deep coal-resources.
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