Ladies and Gentleworms,
To give some more context on why a conversion to 2P is so valuable please read below:
A 2P reserve is a 'BANKABLE ASSET'. What that means is that currently the 2C resource is not reflected on the balance sheet of the company and therefore the Net Assets of LCK. Once there is acknowledgement of the 2P Reserve via an accredited valuation, it means that the ‘Fair Value’ of the 2P resource can be added to the balance sheet,therefore increasing the Net Assets of LCK and therefore deriving a larger market capitalisation. It is BANKABLE.
As a big 4 auditor in Perth back in the early 2010's, I would see this happen quite often. A very exciting time for acompany...
So how do you calculate the 'Fair Value' ofa 2P Reserve? Well based on this IASB Discussion Paper 'DP/2010/1 Extractive Activities'
https://www.aasb.gov.au/admin/file/content105/c9/ITC23_04-10.pdf
It is a complex calculation. In Extractive Activities, usually the
Income Approach is used to calculate Fair Value (refer to para 4.14 - 4.22).
Boiled down it looks like this:
So what do we know currently?
The current price for 1 GJ according to the Australian Energy Market Operator is sitting at $8-$9. See link here:
https://www.aemo.com.au/Gas/Gas-Supply-Hubs/Data-dashboard When you take into consideration the potential costs, time value of money and other risks to commercialise the 2P Reserve, I have given a very conservative
Discounted Commodity Price of
$2 per GJ. This represents a 25% margin.
The Size of the Commodity or High Quality 2P Reserve is unknown until we get the next announcement.
So here is the fun part. We know LCK is sitting on roughly 2900PJ 2C (PJ is 1million GJs). If the report comes back forthe first chamber with say.. 100PJ of 2P, the first BANKABLE ASSET will be approx.$200m ($2 per GJ X 100m GJs).
That is $200m that will be put on LCK's balance sheet that will increase LCK’s Net Assets and therefore LCK’s market capitalisation.
Currently LCK’s market capitalisation is$100m. So with an announcement of 100PJ 2P, the company has
DOUBLED it’s value over night. LCK would then have a tenement that it can comfortably sell to a potential buyer for $200m. If it doesn’t choose to sell it, LCK can also forge a partnership/JV and begin producing and selling gas. Once again, if the first chamber has 100PJ 2P, LCK’s value is doubled.Here is a table with some calculations so you can see what the BANKABLE ASSET will be depending on the amount of 2P PJs that are announced:
So there you go! I’m waiting for the announcement for the
FIRST chamber’s results and then holding until after the results of further chambers. (20 chambers to go
) Ie. Many BANKABLE ASSETS coming our way.
GLTAH IMO DYOR
(This is not financial advice, just the thoughts of my dirty mind)
