Alba Min Res PLC (AIM:ALBA) Horse Hill 1 – Broker Notes

Approval secured for Extended Well Tests at Horse Hill.  

This afternoon Alba Mineral Resources (ALBA.L) announced that the UK Oil & Gas Authority had granted consent for extended well tests (EWT) at the Horse Hill oil discovery site. With all EWT permissions in place and operations “fully funded” the tests are expected to commence shortly. Alba is the second largest stakeholder in the Horse Hill licence, with a net 11.77% holding.

The full testing programme is expected to take around 150-days and consist of at least three separate test sequences in the Portland and Kimmeridge limestones. The test data gained should significantly add to what was learnt from the 2016 flow tests that achieved a total stable rate of 1,688 barrels of oil per day over three reservoir horizons, but over a much shorter test period of 30 to 90 hours.

The objective of the programme will be to confirm commerciality of the Portland and Kimmeridge Limestone oil discoveries. This could be declared soon after the testing of each sequence, once a minimum commercial volume of oil is reached for each horizon. The first permanent oil production could then follow, which could be as soon as next year. Technical data gathered from the EWT over the Summer from both the Kimmeridge and Portland, could be used to improve the independent estimates for current reserve and resource figures over Alba’s wider 143 sq km licence area (PEDL137 & PEDL246).

Comment & Recommendation

Today’s RNS from Horse Hill is a significant event for Alba and could reverse the recent share price decline experienced in the last few weeks, that appears to be in response to fears about the outcome of the final well test approval.

The testing work programme seems very comprehensive in its scope and could subsequently trigger several high impact news-flow announcements over the coming months, as potential ‘declaration of commerciality’ events are revealed. The announcement suggested that the first declaration of commerciality could come from the Portland, with “late Summer 2018’ identified as a “realistic possibility”. With Portland production costs estimated at $20 to $25 p/b by the consortium management, and oil currently trading at around $75 p/b, the profits margins look extremely healthy. Investors may start to take a keener interest in Alba, given the prospect of oil production in 2019 and a re-assessment of the Horse-Hill licences following the tests.

To remind readers, Alba also has several potential company maker projects outside the oil and gas world, including its Greenland interests, most notably the ilmenite project at Thule Black Sands, which lies adjacent to a potential look-a-like deposit being advanced by Bluejay Mining. Another project worth highlighting is Clogau, where a development strategy to re-open the mine is being formulated that could lead to the production and sale of premium priced branded ‘Welsh’ gold.

We continue to rate Alba Mineral Resources as a ‘ Buy’, with a ‘Base Case’ price target of 5.0p. This is adjusted from our previous 6.0p price target, due to the share dilution impact from the March and May placings, that raised £1.55m in total. At the same time our risked valuation for Thule Black Sands has improved from $54.7m to $58.6m due to project de-risking, following the significant resource upgrade from Bluejay Mining’s project in April. Around 67% ($127m) of our total ($189m) risked valuation for Alba remains attributed to the Horse Hill licences. Indeed, our price target could be revised upwards upon successful well test results and subsequent resource/reserve estimate upgrades. Given today’s approval news at Horse Hill, with a funded project budget and strengthened balance sheet following recent placings, Alba is in a much stronger position than our last recommendation on 9 February, when the shares traded at 0.385p.