<![CDATA[Hydra Capital Partners Inc. - HYDRA BLOG]]>Wed, 13 Dec 2017 18:29:21 -0800Weebly<![CDATA[Valeura Energy's Thrace Basin Discovery: Putting All the Pieces Together]]>Thu, 14 Dec 2017 01:48:31 GMThttp://hydracapital.ca/hydra-blog/valeura-energys-thrace-basin-discovery-putting-all-the-pieces-togetherBy: Malcolm Shaw

(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long VLE.TO)

As Valeura Energy (VLE.TO, last at $3.05) continues to trade near multi-year highs on record volume, a lot of market participants and observers are scratching their heads wondering just what all the excitement is about. That’s understandable. It’s a big market out there and no one can follow everything, especially at a time when the words “small cap energy” have been synonymous with “bubonic plague” for a few years now. There are a few specialists that have kept candles burning for domestic energy juniors, but there are even fewer that even remember the concept of what being an international energy junior is all about. Having been an international energy equity analyst in a former life, I happen to be one of the few people that remembers why you follow these obscure international junior energy companies. It’s because once in a blue moon, and I really mean once in a blue moon, one of them finds something mythical. It might be a giant offshore oilfield, an untapped oil structure in Utah, an oil strike in the jungles or deserts of Africa, or, in Valeura’s case a giant tight gas play on the doorstep of Western Europe.
Many companies try to make world-class discoveries and most fail miserably, but that’s just the nature of the exploration game. It’s knowing who these companies are and what they are up to that makes all the difference to a good speculator. Risk, as is usually the case, is commensurate with reward and I’ve said before that if you truly understand what you own, you are far more likely to be a successful speculator. It’s of little use if you spend years stalking a story (I’ve followed Valeura since 2010) to make a quick 30-50% gain and be gone. In Valeura’s case, I highlighted earlier this year that things had become quite skewed in the long’s favour and boy have things ever come together. Valeura is up over 500% since its October lows and is certainly one of the best performers on the TSX this quarter. The crazy part is that, if you’ll forgive the pun, there’s probably more gas in the tank… while more people have clearly discovered the story, it’s still far from mainstream given its low market cap and relative obscurity.
Valuation on international energy discoveries is always a challenge. Fiscal regimes, capital costs, infrastructure access, operating conditions, and pricing are all highly variable, and that can make it hard to make apples to apples comparisons with similar assets in other jurisdictions. There’s also the fact that international energy stories often require a fair degree of technical knowledge to evaluate or even understand, meaning that the line between “value” and “potential value” becomes blurry since it is interpretation dependent (and there’s almost always far less data than a domestic play). Of course, when it comes to exploration discoveries, more data is always better, but the market makes you pay for that data in the form of a higher, or lower, share price. So if you can come to the same conclusion of value with less data than “the market” needs to come to its own conclusion, you’re probably going to make money. That means you will need to be able to do more with less, which takes hard work… but the rewards can make it worthwhile. 
International energy stories live in a world where probability, geology, economics, geography, and finance meet. Once you’re comfortable enough with the geology that you feel you’re in the ballpark in terms of scale, you can crunch some high level numbers to get a sense of the quality of the commercial opportunity to see if it even makes sense. It’s back-of-the-envelope math/art at the beginning, but the numbers are usually big enough that even being generally right is a good place to start. Ultimately, an industry player will tell you if you’re right in the form of a buyout by a major – the dream of most junior international energy explorers.
When it comes to the Thrace BCGA that Valeura and Statoil have discovered, the first key is in understanding what a BCGA is… it is a Basin Centred Gas Accumulation. Google will tell you anything you want to know about a BCGA, but the most important part is that they are just what they sound like they are, basin centres that are full of gas. If you think of a basin as a giant bowl that is filled by many, many layers of sand and shale over time, you’ll have a reasonable visualization in your head. In that basin, below a certain level all of that sand and shale is full of gas that can’t escape and leak out into the layers above. Every pore space available down there is full of gas. It takes the usual exploration risk (i.e., Will I hit gas?) right off the table. Think about that for a minute. Wherever you drill within the BCGA cell, the rocks will be gas bearing… the only thing you might look for is a place to drill where you think you can get more gas than elsewhere… or maybe a better liquids yield. The gas is deep in the basin and typically in tighter (i.e., less porous and permeable) reservoirs than one might expect in a conventional field, but the pressures are high because the gas can’t escape through the overlying regional pressure seal. When you drill into these reservoirs you can either fracture stimulate them to unlock the gas, find naturally fractured reservoirs, or do both. It’s just about productivity and maximizing return. BCGAs are commonly exploited in North America, but abroad they have been elusive, at least partially because they are difficult to identify/recognize with limited drill data. The excitement about the Thrace BCGA is being driven by the understanding of just how large these BCGAs can be and how profitable they can be to develop.
Once you convince yourself that the Thrace BCGA is for real, you can start to think about how it might be initially developed. The BCGA cell covers some 1,600 square kilometres, maybe less if you pare it down to the thicker parts of the basin, but in any case it’s a huge area. So where do you start? Well, obviously you want the best rock you can find with the best flow potential, but where the heck is that? In terms of the best rock, you probably want to balance proximity to the sediment source in the interval(s) of interest (i.e., sand content) with distance from the centre of the basin where the overall sedimentary package is its thickest. But that still leaves a huge area – how do you place an “X” on the map for your first development pad?
This is where things get a little more technical. The geodynamic/tectonic history of the Thrace comes into play here. I won’t go into the gory details, but importantly, there are multiple NW-SE trending fault zones crossing the Banarli licenses. Valeura has these large faults indicated as thick grey lines on some of its presentation materials (see below). Those fault zones have accommodated the tectonic stresses that have acted on the Thrace basin over time and are likely to have created a network of natural fractures and micro fractures throughout much of the basin’s BCGA cell. Logically, one would expect fracture density to increase adjacent to these fault (or flexure) zones… and fortunately logic works here, because that exact strategy has led to the drilling and completion of a number of very prolific wells in a number of North American resource plays. So if early development might target natural fractures… how will they target those? Answer: With 3D seismic.
For those who thought Statoil was just being generous when they completed their seismic earn-in work way ahead of schedule (covering the balance of Banarli in 3D seismic for 100% coverage now), think again. Statoil has been several steps ahead of the market for some time now and likely knew that 3D coverage would be critical to the targeting and planning of appraisal and development wells. Faults and fractures show up well on seismic, especially when they are big or there are a lot of them. So if I’m Statoil and I’m going to go into development, and I have a handle on the pressures and lithologies that I’m going to be dealing with after drilling a few evaluation wells, I’m probably going to try to target naturally fractured reservoirs for the first development phase in the BCGA as long as I can handle drilling them from an operational standpoint. By the time I run out of those locations, I’ll probably have drilled enough wells over a large enough area that I can lean harder on stratigraphy for the next development phase, but that would be far, far in the future. In the near term, nature has done its own frack job in those structural corridors and vertical wells with modest fracks should be enough to get some jaw-dropping flow rates.
How many times have you heard about wells with high flow rates being spoken in the same sentence as the presence of natural fractures? Wells drilled into highly fractured areas in comparable plays can produce at rates in the range of several tens of millions of cubic feet per day. If I were Statoil, I would already be thinking about an initial pilot development in an area like that, or a test well at the very least. Being somewhat close to a fault, Yamalik-1 shows some limited evidence of natural fracturing, but even closer to the fault you would expect the fracturing to be even more pervasive, which is what could lead to productivities that are many multiples of what Valeura and Statoil are already seeing at Yamalik-1… and that’s really something to think about, because the early results continue to exceed all pre-drill expectations where extrapolated fully completed well rates could already be in the 10+ mmcf/day range.
I said I would get around to valuation and I promise I’ll get there soon. First though, you have to realize that the well costs on Yamalik-1 well are like “prototype” costs on a new invention or vehicle. Time and time again, the energy industry has demonstrated what the drilling cost evolution curve looks like as a play develops. Initial wells are investments in learnings to be applied to future development… and economies of scale kick in once you get into operations like pad drilling. A lot of people might look at Valeura and wonder what all the excitement is about when a $25 million well produces a few/several mmcf/d of gas with 40-50 bbls/mmcf of condensate, but they would be missing the point. With pad drilling, Cormark analyst Garett Ursu has suggested that well costs could fall into the $6-8 million range and there’s very good precedent for that. At $7 gas, if you can drill wells for $8 million in naturally fractured areas that come onstream at 20 mmcf/d and have an ultimate recovery of say, 10 BCF, you could get payouts of under a year and F&D costs of something like $5/boe. I get those numbers based on looking at a number of U.S. tight gas plays. Netbacks will probably be something like $25/boe in Turkey. That’s completely ignoring condensate so as to leave lots of margin for error and I think I may actually be conservative on flow rates and EURs for wells with pervasive natural fracturing.
Now imagine a time, not that far from now, when Statoil decides they want to do a pilot pad development somewhere in the Banarli block. Let's further imagine that they choose the location of this pad to be over an area that they expect to be naturally fractured, based on their 3D seismic coverage. Not right down the throat of a fault or anything, but close enough such that they are in one of the fractured “corridors” that have formed over time as the Thrace Basin has been pushed and pulled by large-scale tectonic forces. Eight wells per pad might be a decent place to start based on other comparable developments. That would mean that one pad could conceivably represent 160 mmcf/d of initial production. If your pilot pad development goes well, it’s onto full development.
In development mode, tight gas does have steep decline rates, but once you have multiple pads going, your flush production just blends into your overall production profile. And what does it cost to build the pad and drill those wells? At $8 million a well in full development (remember that we’re not even talking about horizontal wells here in this example), that’s $64 million per pad. Now, what if you had 5 or even 10 pads going like that? Even with declines you’re talking about 0.5-1.0 BCF/d of production (100% basis) that’s throwing off at least $4/mcf in cash flow (again, never mind the condensate). That’s $2-4 million a day, or $700 million to $1.4 billion a year… and what’s the capex for that? $320 million for a 5-pad case and $640 million for a 10-pad case. Then you have to add in capex for pipeline tie-ins and some processing facilities… let’s just throw $300-500 million at that. Seem fair? All-in, in very, very rough numbers let’s just say that initial development costs a cool billion dollars and then you’re up and running for 20-30 years or so (365 BCF/year at 7-10 TCF recoverable). 
Payback is maybe a year-and-a-half or two in the above example once you’re operationally and logistically prepared. Where else in the world could you spend a billion dollars and have it come back to you that quickly? And how about the next year when your facilities capex is out of the way and you’re just doing maintenance drilling?  Two words. Gravy train. That’s how I think a supermajor (Statoil 100% or Statoil+1) could turn one billion dollars into billions here. It’s embarrassing to actually put numbers like this out there at this stage because it’s so early, but unless I run some kind of hypothetical economic case, how am I to know when I think Valeura is under- or overvalued based on the data that I have to work with?
Given that I’m comfortable that this is a BCGA, and that my thoughts and assumptions regarding initial development are reasonable to me, I can easily see a world where Valeura is valued at $1 billion for its 50% interest and would still look like an attractive buyout target. At a $1 billion valuation any buyer would need to also account for $500 million in net initial capex (drilling plus facilities) so they’d be in for $1.5 billion to have 0.5 BCF/d of production coming to them. That implies capital efficiencies of $18,000 per boe per day including the acquisition cost. In the following years, with capex and acquisition capital treated as sunk costs, the buyer would be looking at perhaps $250 million (max) in net drilling and maintenance capex versus net cash flow of $730 million per year using 0.5 BCF/d with $4/mcf netbacks. If you run an NPV10 on that 0.5 BCF/d for a 20-year development, you get around $3 billion (net to the 50% interest). So, just to reiterate, a buyer could pay $1 billion for Valeura and capture a $3 billion NPV10. This is not about picking up dimes and quarters folks, these are the large-scale numbers that major energy companies need to work with. Think a BCF per day (gross) out of a BCGA is too high? Consider that the Piceance Basin produces around 2 BCF per day and has been held up as one of the possible analogues for the Thrace, so I don’t think the numbers are totally ridiculous. If you wanted to step production up to say, 2 BCF/d in a future development phase, you could likely nearly double the NPV of the project, but the numbers seem good enough already.
BCGAs are really their own animals in a lot of ways, and once you understand them on a large scale, you know just how much gas they can deliver if you put enough technical work, money, and pipelines into them. I am fully aware of the number of assumptions within my back-of-the-envelope development scenario that’s outlined here, but I have to start from somewhere. It may take longer than I think, but if this BCGA is real, I think that my numbers are in the ballpark. First you have to understand the “micro” technical data (the rocks, the well results, the potential productivities, etc) and then you zoom out and start looking at the whole basin as “the thing”, not the wells within it. The basin is just the sum of the wells and if you’re confident in the capability of the wells, then you’re confident in the capability of the basin. Once you get to that point, you’re thinking in billions, not in millions of dollars.
That’s what I think the supermajors know and it’s what I think will bring them to the table sooner than most people would think. When you’re a big fish in an ever-shrinking pond, you have an insatiable appetite for big projects that can move the needle and deliver good returns for your shareholders. The problem is that assets like that are hard to find and a lot of them are in regions with limited or non-existent infrastructure, marketing challenges, and/or poor fiscal terms. The fact that Valeura’s Banarli project just happens to be surrounded by regional gas pipelines is like a gift from above. And how can it get better than finding a giant resource play in a country that imports 99% of its ever growing gas needs that also happens to be on the doorstep of Western Europe?
The bottom line is that once you wrap your head around the BCGA concept and are comfortable that this is truly a nascent resource play, you can start thinking of Valeura as a vessel that can take massive amounts of capital and return them to you with a nice profit. The well details at that point are just details, and Valeura and Statoil might only be one or two wells away from drilling a vertical well into one of these structural corridors where the Thrace will really show what it can do.
Does a supermajor step in before that well is drilled? Quite possibly. If I learned anything while doing my studies in geodynamics, it’s that there’s no doubt that the rocks in the central Thrace have been put through some pretty major tectonic forces over time and that there’s a very good chance that there are some very fractured rocks down there. If I know that, then there’s no doubt a guy smarter than me at any one of many supermajors that knows that, and he’s the guy who will be part of the team whose job it is to identify and capture assets like these before anyone knows how much they’re really worth.
I’ll likely be accused of being a dreamer for putting something out there like this that requires as many leaps of faith as I have taken here, but a friend of mine likes to say that he doesn’t know any billionaires who are pessimists, so maybe I’m on the right track after all… time will prove me right or wrong, but at least I'll have a record of what I was thinking in the early days.
Happy hunting.

<![CDATA[Fire in the Hole: Valeura Energy's Second Flow Test Continues to Impress]]>Mon, 11 Dec 2017 12:43:58 GMThttp://hydracapital.ca/hydra-blog/fire-in-the-hole-valeura-energys-second-flow-test-continues-to-impressBy: Malcolm Shaw

(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long VLE.TO)

This morning Valeura Energy (VLE.TO, last @ $2.75) reported test results from the second of four planned tests on the Yamalik-1 well in the Thrace Basin, Western Turkey. The well flowed at an average restricted rate of 0.8 mmcf/d over the final 24-hours of a 39-hour test period, despite a downhole equipment failure that restricted the flow in the well (before the equipment failure initial productivity was even higher than the initial rate seen in the first zone). Condensate yields were estimated to be 30-40 bbls/mmcf, which confirms the presence of condensate over a thickness of 350 metres vertically in the well.  The company will move uphole and begin the third flow test in a zone at ~3,550 metres shortly. Today's test result continues to confirm that pay as interpreted from wireline log interpretations is in fact, pay, which adds further credence to the idea that the gas saturation is pervasive (as you would expect from a BCGA). Given that Cormark analyst Garret Ursu had previously pegged an aggregate rate of 0.5 mmcf/d as the “technical success” hurdle for the whole well, to see another zone match/exceed that rate from a single zone is impressive indeed. I believe this bodes very well for the potential productivity of not just the greater Yamalik area, but for the Thrace BCGA play as a whole. To see back-to-back test results exceed pre-drill expectations in a primary evaluation well is very, very encouraging. I believe this test makes it highly likely that Yamalik-1 will be tied in for a long-term in-line production test regardless of the results from the remaining two zones.
Valeura and Statoil continue to show that not only are they very likely to be dealing with a BCGA, but that they are dealing with a BCGA that has good condensate yields within the ~3,800 to 4,150 metre level (at least). Initially, I had always assumed dry gas in my evaluation of the potential in the Thrace, but with condensate recovered on test from two zones now, over some 350 vertical metres, the data strongly suggests there is significant condensate potential here that will likely be reflected in the resource assessment that’s expected early in the New Year. The continued recovery of condensate in tests is indicative of source rocks that are capable of generating liquids as well as gas, which likely has implications for the play as a whole. Even if no other tests were to recover condensate, the potential incremental value of the associated condensate is already material in my view.
Today's test result adds another key data point for the resource evaluators to work with in their pending prospective resource estimate. In light of the fact that this second test further confirms that what is interpreted as gas pay is in fact gas pay, it should serve to increase the quality of that resource assessment (i.e., less uncertainty) when it comes out. At the risk of being repetitive, it’s also important to note that before these first two tests, there was little indication of any condensate potential within the Thrace Basin aside from a barrel or two per million cubic feet from wells in the overlying shallower conventional reservoirs from time to time. It would seem that the Thrace Basin kept its condensate potential a secret, trapped within the underlying BCGA for Yamalik-1 to reveal.
Valeura and Statoil continue to show that the Thrace BCGA has major resource potential in a highly strategic region. The licenses on which they are drilling are literally surrounded by large gas trunk lines, so the infrastructure situation could hardly be better. With tie-ins to regional trunk lines involving laying pipe across only tens of kilometres of rolling farmland, I can’t imagine a better place to find a BCGA resource. Most large discoveries that I see these days are located in areas with limited access or infrastructure. Quite the opposite is true in this case, which is a major advantage in terms of its future development potential.
I want to get this note out before the open so I’ll cut it short here, but I am also working on another note to frame up what I think this play could look like in just a few years’ time. I’ll leave you with a thought that super-majors of the world constantly grapple with and one that I hope to grapple with myself one day: “How do I turn a billion dollars into ten billion dollars?” It takes a big project to do that and I think the Thrace is starting to look like it may fit the bill. Very briefly, based on the tectonic history of the Thrace, I think there are areas where Valeura and Statoil could see productivities that are multiples of those already indicated by the Yamalik-1 well. I think that’s a pretty big deal given that one analyst (i.e., Garret Ursu at Cormark) has already suggested that full-well rates in the range of 10+ mmcf/day may already be in play here, which is impressive on its own.
I know I said I wouldn’t jump up and down about individual test results, and I’m not doing that here… I’m just seeing confirmation of what I think the future holds for Statoil and Valeura in the Thrace. I’m already convinced of what the path ahead is – I’m just looking for the signposts along the way now. In the next little while, I’ll try to post a little more detail on how this could all play out. It’s still early days (read speculative), but exploring what an initial development program might look like seems like a decent way to pass the time… and I’m pretty sure I’m not the only one doing it.
In closing, I’d like to summarize what I was trying to say on Friday a little more succinctly, so forgive the “pared down” summary nature of the following paragraph:

Given that all signs point to the Thrace Basin being a legitimate BCGA, it appears to be full of gas below about 2500-2700 metres. That means that every pore, every pore throat, every fracture, and every micro-fracture is full of gas down there. The prospective area is huge and Valeura owns the vast majority of its thickest parts. The resource potential is therefore huge as well. Valeura is partnered with one of the largest energy companies in the world on the project. The location of the basin is highly strategic, with multiple evacuation options and export markets. The fiscal terms, pricing, and access are excellent. Naturally, some areas within the BCGA will be more productive than others, but the whole thing looks to be full of gas, with at least some intervals already showing very good productivity potential and condensate yields. Any future development will be guided by the 3D seismic coverage that now blankets the whole Banarli block. In my view, it’s the rare combination of all of these factors that make Valeura’s Banarli project so attractive and it gives me a great deal of confidence as a shareholder. In light of the fact that the data continues to support the BCGA interpretation, there appears to be a lot of runway here. Rarely have I seen a project of this scale in the hands of a junior. In this situation, I think that time may be a patient investor’s best friend. I just hope that Valeura is given enough time to let it play out before someone much larger decides they would like to own it...
Happy hunting.

<![CDATA[Valeura Energy: The Big Picture]]>Fri, 08 Dec 2017 18:03:36 GMThttp://hydracapital.ca/hydra-blog/valeura-energy-the-big-pictureBy: Malcolm Shaw

(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long VLE.TO)

I’ve seen and heard a lot of chatter regarding Valeura Energy lately (VLE.TO, last at $2.79).  Some of the discussion revolves around what plays here in North America might be comparable to Turkey’s Thrace Basin. Others focus on the pending gas-in-place or resource estimates, or try to predict flow rates from the intervals yet to be tested in the Yamalik-1 well. Interest in the play is clearly building, and rightly so. Even at this early stage, the Thrace BCGA appears to be a gas accumulation with the potential to have a significant impact on the energy balance within the region. Given what’s at stake (and with flow tests pending) chatter around a play like this can really build, which is a great thing, but I thought it might be a good time to step back and take a look at the big picture that’s already beginning to come into focus, even at this early stage. There are three more tests to go at Yamalik-1, but that’s really only the first chapter in what’s to come...
To be clear, there’s absolutely no doubt in my mind that Statoil and Valeura have discovered a BCGA in the Thrace. None whatsoever. The Yamalik-1 well was intentionally drilled outside of any structural closure (to prove that the gas charge is pervasive and independent of structural closure) and away from any faults that could have caused drilling issues (when drilling your first deep well in an area, it’s best to avoid potentially faulted or fractured areas so as to minimize operational risk). After all, as the first true test of the BCGA concept, there were a lot of unknowns going into this well and Valeura and Statoil picked a “boring” drilling location to start from (a simple monoclinal ramp with no structural closure or nearby faulting). When it comes to exploration wells like this, you first want to prove the exploration concept with minimal operational risk. Once that is done, you can start the process of delineation and targeting specific sub-areas based on productivity potential. What’s so exciting about the early results from Yamalik-1 is fact that Valeura and Statoil are already seeing gas test rates that may be commercially interesting, with a healthy condensate kicker to boot. Not bad for their first time out.
With the market likely to be hyper-focused on the results from individual well tests, I want to make a point that I think is critical to understanding the big picture here. When I met with incoming CEO Sean Guest in November, our discussion came around to what he thought was a good analogue play in North America, and he suggested that the Granite Wash play in the Anadarko Basin was a good model for what he sees in the Thrace. In the Granite Wash, he mentioned that wells can produce at rates from anywhere from 3 to 30 mmcf/d, which is obviously a huge range, and that led to the natural question of what makes the difference between a 3 mmcf/d well and a 30 mmcf/d well. The answer apparently lies in the prevalence of natural fracturing in the area being targeted and/or the drilling and completion method. As one might expect, areas with high degrees of natural fracturing have enhanced permeability and deliverability relative to less or non-fractured areas. Other areas may also exhibit facies changes that lead to higher inherent porosity and/or permeability. All of this is to say that, as in any resource play, some areas will have higher productivity potential… hence the term “sweet spot” that you often hear when discussing the development of any given resource. The key with a BCGA is that there is a huge volume of trapped gas with regional extent, and that gas wants out. It’s up to the companies to target the areas with the best economic potential. Defining those areas will be part of the delineation program that Valeura and Statoil will begin in 2018 as they move towards development.
My long-winded point is that the real key with Yamalik-1 is that it has already proven the BCGA concept, and future wells will build on that foundation. The gas saturation appears to be pervasive and the next job will be to delineate the play further with wells in new areas and potentially to even deeper depths. The fact that Yamalik-1 is already showing producible gas and condensate from limited completions in just a portion of the thick interpreted pay intervals is what has Valeura’s share price running. That’s not to say that flow rates aren’t important, but the flow rates that come out of the Yamalik-1 well should be seen as a starting point, not an end point.
This is the first inning of a game that will play out over a multi-year period and the main question in my mind is whether or not Valeura will get to stick around to ride it out. My suspicion is that Valeura is already in the sights of a few majors that wouldn’t mind going down the road with Statoil as their partner in this project and at least some of those majors have probably already been through the data room once before. As long as the interpreted pay intervals are confirmed to contain moveable gas and/or condensate, Valeura will have done its job in this well. With three more test results pending, followed by a prospective resource estimate, it’s sure to be an interesting couple of months for VLE holders, and this is just the start of what’s sure to be quite a journey. I won’t be the guy jumping up and down about results from individual zones as they come out, but each test that produces moveable gas and/or condensate will further confirm my view that Valeura and Statoil may have found the holy grail of a large tight gas resource play in a very, very strategic region. When you step back and look at the big picture, it already looks pretty darn good. Now it's just a matter of letting it play out. 

Happy hunting.

<![CDATA[Putting Valeura Energy's BCGA in Context]]>Wed, 29 Nov 2017 14:47:24 GMThttp://hydracapital.ca/hydra-blog/putting-valeura-energys-bcga-in-contextBy: Malcolm Shaw

(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long VLE.TO)

Given that Valeura Energy's (VLE.TO, last at $2.14) chart looks like a blockchain-weed stock on steroids, I've had a lot of inbound calls and emails wanting to understand the story further. Look, I get it, it seems crazy that little Valeura may have found the holy grail of a basin centred gas accumulation (BCGA) in one of the most strategic regions of the world, but all you can do is look at the facts and work from there. In light of that, I thought I'd put together a few thoughts to frame the potential scale and significance of what Valeura and Statoil are drilling in the Thrace Basin right now as a bit of a hand-hold for those getting dizzy at these heights. In one of the best research notes I've read on the name thus far, yesterday Cormark Securities analyst Garett Ursu perhaps summed it up best with this comment "... we believe the market continues to underestimate the potential ultimate impact on Valeura despite yesterday's stock price move" (November 28th, 2017). Mr. Ursu goes on to walk through the details regarding the Thrace Basin potential, additional market data points, and some of the technical details surrounding the play. The note was a pleasure to read and I would highly encourage anyone looking at the story to contact Garett for his views.

Now, while it's still relatively early days and some risks remain, I believe the strength of the move in Valeura's share price is being driven by the realization of just how significant this project could be for the region and for VLE. We are talking about a potential resource that very likely tallies in the multi-TCF range... truly something of world-class scale. Importantly, Turkey is located at a veritable crossroads of gas infrastructure located at the junction between Asia, Europe and Africa. A major gas resource in this area would not only be a boon to Turkey, but also to any energy player in the region. To that end, it's maybe best to first consider the fundamentals of Turkey as a country. Valeura sums it up well in their slide deck, so I've copied and pasted it here below.
At the risk of being repetitive, Turkey is one of the fastest growing economies in the OECD and it relies on gas for 50% of its energy generation with gas demand growth projected to grow at 8% per year. Turkey imports 99%, yes 99%, of its gas needs. That means two things: 1) Turkish gas prices are underpinned by import prices (overland or LNG) and 2) Turkey can use every molecule of gas that the Thrace Basin can produce. On top of that, Turkey's "junction" position geographically makes it a strategic hub for gas transportation into and out of the region, especially to Western Europe. And how about that gas pricing and those fiscal terms? $7/mcf gas, a 12.5% royalty, and 20% corporate tax? Those are some of the best metrics one could hope for... and that's all in a region with excellent access to infrastructure and services, which is a big part of what may make the project very attractive economically. It's one thing to have a lot of gas... it's another to have that gas in a captive market with multiple export options and real (and scalable) operational readiness.

Below are two slides showing the pipeline infrastructure in the project area and the country. It's important to point out that Valeura secured a 100% interest in all of the infield pipes and infrastructure with the Transatlantic deal earlier this year and has direct access to industrial consumers in the area who can take gas volumes far in excess of what VLE currently produces. Meanwhile, major gas trunk lines are all in close proximity for when and if a much larger development is warranted. This is a very clean set up and has taken years for VLE to assemble. None of what is happening is by accident. I have to remind people that Valeura has been working towards this for years. What looks like luck is, as Richard Branson might say, the residue of design. The whole way along, VLE has been laying the groundwork for a real project with real development and sales/export options and shareholders are now set to reap the rewards.
In terms of potential scale, I think the map below is important to understand. The dashed line represents what VLE maps as being the regional pressure seal that defines the BCGA. Below about 2,500 metres (approximately) VLE has seen a completely different pressure gradient than what is present above 2,500 metres. That change in pressure gradient is theorized to represent the top of the BCGA cell, below which depth the gas is trapped in the rock with no way to escape. Technically, EVERYTHING below the top of the BCGA cell should be charged with gas. That's what makes this so exciting. If you look at VLE's concessions (outlined in yellow), they control the vast majority of the BCGA cell, including the vast majority of the deepest and thickest parts of it (denoted in blue). This is a project with world-class scale... and Valeura and Statoil have a lock on it.

I've suggested that the OGIP numbers here could be huge and recent press releases from VLE have confirmed some of my prior assumptions. VLE said that its first test was over a 15 metre interval that represented "approximately 10% of the planned total net pay to be tested in the well". VLE also previously said that its testing program would be testing "less than half" of the total net pay in the well. Putting those two data points together, it means that the total net pay would be close to 300 metres or even a little more. That makes for huge potential OGIP numbers if extrapolated over the total 200,000 gross acre (~300 section) land base. Even if you cut the prospective sections in half, you have 150 sections in play, which my math says could equate to multi-tens of TCF of gas in place and that's without even discussing the newly identified condensate potential (70-80 barrels per million cubic feet). Assuming even a 10-15% recovery factor, this is a massive prize and VLE has tied as much of it up as one could ever hope for... and the first test suggests that the prize is very much in play. 
There are at least three more tests to do in the Yamalik-1 well after which the market will see the first ever independent 51-101 compliant prospective resource estimate on the play. There's still some risk (operational and geological) associated with the remaining tests, but strong gas shows during drilling and detailed wireline log analysis suggest that the next tests are also targeting gas-saturated intervals, which is consistent with the BCGA interpretation given that this well is outside of any structural closure. As I've detailed before, past comparables have reached market caps of $700 million to in excess of $1 billion which should frame the upside potential well for those looking at VLE. With only about 79.5 million shares outstanding on a fully diluted basis, VLE's capital structure gives huge leverage to an asset that could end up being a jewel in many an energy company's crown.

Yes, there's work to do. Yes, the stock is up on a stick. Yes, it's the first well... BUT the point of this note is to frame the big picture in terms of what's on the table here while remembering that Statoil is VLE's partner here. VLE ran an extensive data room before Statoil came in as its partner and I have to think that some of the industry players that weren't able to match Statoil's terms on the initial farm-in are sharpening their pencils now -- that's certainly something to keep in mind. Valeura has the super-duper trifecta of world-class scale, top-tier pricing, strong regional demand, multiple export/sales options, and an amazing fiscal structure to boot. That's an excellent confluence of elements critical to a project's potential economic success. In light of that, I think there's a very real chance that Valeura, if it gets to stick around before being bought out, would be able to farm down another portion of its JV interest in exchange for a big cash payment and/or a significant carried work program to avoid further significant dilution.

Exciting times indeed. It's going to be a wild couple of months as more data comes available. I've only added stock since the news and will happily wait for the remaining test data and prospective resource estimate in January. If you're reading this, you need to try to remember that you are in the tiny minority of people that are even aware of the fact that VLE exists. If this plays out the way this looks like it's going to play out, we're only in the first inning. With that "earliness" comes some risk, but based on the data available, that's a risk I'm still very happy to take.

There's more work to do yet and anything can happen between now and then, but I expect that Valeura will hit the radar of a much wider audience once the prospective resource assessment is released. At that point, I think VLE will have made the all-important shift from obscurity to the mainstream and a whole new set of institutional players will discover Valeura for the first time...

Stay tuned.

<![CDATA[Valeura Energy Confirms Liquids-Rich BCGA Play with Test of First Zone]]>Mon, 27 Nov 2017 15:05:21 GMThttp://hydracapital.ca/hydra-blog/valeura-energy-confirms-liquids-rich-bcga-play-with-test-of-first-zoneBy: Malcolm Shaw

(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long VLE.TO)

Valeura Energy (VLE.TO, last at $1.07) surprised the market this morning by announcing results from the first of four planned test intervals in its Yamalik-1 exploration well ahead of schedule, where JV partner Statoil is paying the full drilling and completion costs. Readers are encouraged to read the press release linked above for full details. Perhaps this quote from the press release sums up the situation best:

"Although the Corporation had previously advised that aggregate test results would be disclosed at the end of the test program after all four planned production tests were completed, these interim production test results have exceeded expectations and are viewed as material to the Corporation."

The headline result is that the Yamalik-1 well was flowed at a restricted rate of 0.8 mmcf/d with a condensate yield of 70-80 barrels per million cubic feet. The test was conducted over a 44 hour period and the well was still cleaning up at the end of the testing period, but Valeura and Statoil view the result as sufficient for primary evaluation purposes. The zone that was tested represents only 15 metres of the total pay in the well and also represents the deepest and lowest porosity interval that will be tested. When one considers that the total net pay in the well is likely in the 250-300 metre range, it's easy to see why the market reaction is so strong this morning with the stock up some 35% as I write this. 

​First and foremost, this test, in my mind, definitively confirms the presence of a liquids-rich basin centred gas accumulation (BCGA) in the Thrace Basin. This is the holy grail that VLE has been searching for over all these years and I expect long-term investors will settle in for what could be quite a ride. Those on the sidelines will likely be motivated to jump in as VLE awaits further well test results and the first prospective resource assessment on the project expected in January. It's very important to note that the Yamalik-1 well was drilled outside of any structural closure and still encountered gas-saturated reservoir with condensate. The wonderful thing about BCGAs is that when you have one, the gas saturation is pervasive regardless of any structural closure... i.e., the gas saturation will persist over the entire area of the BCGA cell. The reservoir appears to be 85-95% overpressured (that's significantly overpressured), which means that there's a lot of energy in the reservoir to push that gas out. That overpressure also means that original gas in place (OGIP) per section numbers could be very impressive as more gas molecules can be shoved into the same volume at higher pressures. The condensate yield of 70-80 million barrels per million is a very, very nice bonus and I'll frame that up a little later below. 
Even though it may not sound impressive to a layman, 0.8 mmcf/d is a very good rate at this stage from just one 15-metre interval... in full development, one would expect to see much longer completed intervals and bigger fracks.

I've said before that if I assume half of Valeura's 200,000 acre (~300 sections) holdings in the Thrace is "good", that puts about 150 sections in play. If I assume OGIP of 300 BCF/section, I get a very large OGIP number. I'm too superstitious to even write it here. In full development tight gas recoveries can easily be in the 10-20% range, so you'll see that the prize is very material if the first multiplication doesn't break your calculator. Now if you add 70-80 barrels per million cubic feet of gas (it's a bit of a stretch to extrapolate that over the entire thickness of the BCGA, but still a worthwhile exercise) you are going to end up with a prospective recoverable condensate resource in the hundreds of of millions of barrels. It should be clicking right around now why Statoil cares about this play. It has the potential to be a hugely strategic resource in a very captive energy market with geography that allows for export to any number of end users if desired. I should point out that all of my musings here are pie-in-the-sky, but I feel that it's always good to frame what's on the table, especially when a data point like today's well test comes into the picture. 

​As the first true test of the BCGA, the Yamalik-1 well was intentionally drilled in an area with little faulting or structural complexity. That's important because flow rates in plays like this can be greatly enhanced by the presence of natural fractures that are commonly observed in close proximity to faults or areas of structural complexity. With analog wells in comparable plays flowing anywhere from 3 to 30 million cubic feet per day in full development, VLE is very much "in the wheelhouse" of where it should be in terms of preliminary results, which is why I think they elected to make an earlier-than-expected press release today. There are three more intervals to be fracked and tested, with aggregated results expected to be available in mid-January. Given that VLE has already tested 0.8 mmcf/d from a 15-metre interval in a well that may have something in the neighbourhood of 250-300 metres of total gas pay (my guesstimate), it's easy to see why there may be something to be excited about. 

More information is needed and I'm sure that VLE and Statoil are already talking about where to drill the second well, but I truly believe that the biggest risk to VLE holders now is that the company is bought out too soon. Anyone, and I mean anyone, in the energy industry (remember that a lot of majors went through VLE's data room before the farm-out to Statoil happened) will recognize that VLE is "on the curve" to proving out a massive BCGA play in the Thrace Basin and could pre-emptively make a move on the company at just about any time. If you're Exxon or Chevron, you wouldn't even blink at paying $200 million for an option like this with a partner like Statoil at your side.

So what's it worth? Well, it's early days, but Falcon Oil and Gas, FO.V (last at $0.32), is probably the only market comparable to Valeura at this point with its Beetaloo Basin play in Australia where Origin Energy is in the midst of a A$200 million farm-in on the project (link to Falcon's corporate slide deck here). With 930 million shares out, Falcon has a market cap pushing C$300 million. That valuation appears to be based largely on well test from its Amungee NW-1H well and subsequent prospective resource assessment.  Recall that VLE has 73 million shares outstanding at this point... the potential leverage should be fairly clear.

Don't let my enthusiasm make you think that there's no risk left in the story, but today's news is a BIG step in the right direction and I'm obviously quite encouraged. I've added to my position on the news and very much look forward to additional test information and the prospective resource assessment in January. I've been waiting for this for years and today feels a bit like an early Christmas present.

Time will tell. In the meantime, here's a picture of the flare to keep you feeling warm and fuzzy...

<![CDATA[And So It Begins: Valeura Energy Starts Testing Program at Yamalik-1]]>Wed, 15 Nov 2017 18:49:28 GMThttp://hydracapital.ca/hydra-blog/and-so-it-begins-valeura-energy-starts-testing-program-at-yamalik-1By: Malcolm Shaw

(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long VLE.TO)

Valeura Energy (VLE.TO, last at $0.59) reported its quarterly results last night and the long-awaited completion and testing program of the Yamalik-1 well has begun. Yamalik-1 is targeting what Valeura believes is a large basin centred gas accumulation (BCGA) in the Thrace Basin of Western Turkey which my estimates peg in the multi-TCF potential range. Valeura's joint-venture partner, Statoil, is paying the entire costs of the completion and testing program up to 110% of the US$10.3 million budget and the operation is expected to take 60 days. This is the JV's first substantive test of the BCGA concept in the Thrace and the results are expected to be ready in time for inclusion with the first ever independent resource assessment on the play. Should the stars align, early 2018 could be a very interesting time for VLE shareholders. The potential of the opportunity verges on ridiculous given VLE's tight share count and Statoil's basically infinite financial resources. I don't worry about Statoil's potential to outspend VLE once Statoil has completed its earn-in, because if the company gets to that point, it's likely that there's something there worth pursuing. Any number of global companies and/or investment funds will be happy to write cheques for a resource play like this in a success case.

The testing program is designed to evaluate four separate intervals with a fracture stimulation program that screened as having favourable gas saturations and porosities on logs. Valeura says that the testing program will evaluate "less than half" of the interpreted net pay in the well, which implies to me that "close to half" of the pay will be tested. That's a lot more than I had initially thought. My own estimate assumes that 25% of the 1,200 metre-thick overpressured section may be "net pay", which means that this testing program could be evaluating something close to 150 metres of interpreted reservoir rock. Everyone wants to know what a "good" test rate would be, but I'm hesitant to put a number on it as I just don't have enough information about the rock, size of the fracs, or the reservoir engineering behind the program. It's clear to me that Statoil very much likes what they see or they would not be spending over US$10 million on such a comprehensive and extensive testing program. The current plan is to tie the Yamalik-1 well into VLE's existing infrastructure should suitable gas flow be established, which will allow for gas sales to be made during an inline extended test.

In order for Statoil to earn its 50% interest in the JV, Statoil must drill, complete, and test one additional well in the BCGA play, so investors can rest assured that Valeura doesn't need to come up with significant funds for the play any time soon. If the company is fortunate enough to have a good test out of its first well, the per share leverage verges on ridiculous. With roughly 73 million shares out, Valeura could easily be looking at an eventual $500 million to $1 billion valuation if it can demonstrate the likely presence of an economic multi-TCF gas play in Turkey, one of the most captive gas markets in the world (and on the doorstep of Western Europe).

It's all pie-in-the-sky right now, but things are about to get real. Early in 2018 (likely mid-to-late January) the initial (aggregated) test data should be available and at that point all bets are off. This is not a story for the faint of heart and remains highly speculative, but this is the kind of situation where even just following the story can put you at a huge advantage when the news finally hits. With current production of 1,000-1,100 boepd and a stock that trades at a substantial discount to its 2016 year-end net asset value, I'd argue that the risk-reward is as asymmetric as one could hope for at current levels. That doesn't mean that it's a risk-less trade -- far from it -- but I think the speculative appeal of the story is as good as anything I've seen in a looooong time and it's not even on the radar of most people yet.

Fingers crossed. 
<![CDATA[Plateau Uranium May Have a Lithium-Uranium Tiger by the Tail at Falchani]]>Wed, 15 Nov 2017 15:07:51 GMThttp://hydracapital.ca/hydra-blog/plateau-uranium-may-have-a-lithium-uranium-tiger-by-the-tail-at-falchaniBy: Malcolm Shaw

(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long PLU.V)

If you are reading this, there's a good chance that you have seen me write on Plateau Uranium (PLU.V, last at $0.41) before. Plateau is unique in a couple of ways. For one, it controls a large, and unique, "energy metal" (uranium-lithium) deposit in Peru that really has no global comparable in terms of mineralogy or deposit type. Second, a PEA completed in January 2016 pegged operating costs at $17.28 per pound U3O8 without any credits for the subsequently evaluated lithium potential, which puts the project at the low-end of the global uranium cost curve. The lithium has been shown to be amenable to acid leaching at atmospheric pressures with good recoveries after only limited metallurgical/processing work. In short, Plateau has shown that it is sitting on a true "energy metal" deposit given that uranium and lithium are critical inputs into any realistic projection of the world's energy future in light of rising concerns surrounding urban air pollution and global warming.

This morning PLU put out a press release that detailed the discovery of uranium and lithium mineralization in a completely new area of the project called Falchani within the Chaccaconiza community, south of the company's already defined uranium-lithium deposit to the north. And what a press release it was... grades of 633 ppm U3O8 were intersected from surface to 45 metres depth (that's over 2x the grade of the existing resource to the north) and a new lithium-rich rock unit was discovered at a depth of 95 metres that graded 0.71% lithium oxide (Li2O) over 36.5 metres. These intervals are estimated to have true thicknesses of 37 metres and 30+ metres respectively. Drilling is ongoing in the Falchani discovery area within a radiometric anomaly on surface that covers some two square kilometres.

​Now, granted it's relatively early days, but two square kilometres is just a monster deposit footprint. I would argue that at this scale and with these two energy metals occurring at or very close to surface, Plateau has found something capable of attracting the largest players in the mining industry. If Falchani is as big as the radiometric anomaly suggests it is, it would be truly a world-class deposit that would put Peru on the map in terms of both lithium and uranium potential.

Drilling is ongoing with more results expected over the coming weeks that should further define what Plateau believes is an extensive new area of this unique uranium and lithium mineralization. In my mind, the next step for the company is to attract a major to carry the project costs in order to minimize share dilution in order to maximize per share leverage for shareholders. Unless you've been living under a rock, you are surely aware of Cameco's recent decision to put its McArthur River and Key Lake on care and maintenance, which has sent a very clear signal to the uranium market and uranium consumers about the future direction of the uranium price. Meanwhile, lithium stocks have been on fire this year as investors grapple with the projected growth of electric vehicle (EV) demand and the increased lithium needs of the planet in an EV-dominated future. These are two major macro winds blowing at PLU's back at a time when very few people are looking at the story. There's lots of work to do yet, but there are precedent transactions that put a $1 billion valuation on the table for what PLU has already defined. Should Falchani prove to be even better than what's already been found on the Macusani Plateau, it could make for substantial returns from current levels.

Time will tell.

<![CDATA[Room to Run: Altura Energy Sizes Up Leduc-Woodbend... and It's a Biggie]]>Fri, 10 Nov 2017 12:59:31 GMThttp://hydracapital.ca/hydra-blog/room-to-run-altura-energy-sizes-up-leduc-woodbend By: Malcolm Shaw

(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long ATU.V)

Ever since my first meeting with Alberta-junior Altura Energy (ATU.V, last at $0.45), I've been following the company's progress with great interest. That's because Altura has a first-class management team and board that are some of the best proven value creators in the industry and the company has been hinting at a game-changing play since May. This is a team that understands the concept of building value per share, period. Early investors have made a lot of money with independent directors Brian Lavergne (CEO of Storm Resources) and Darren Gee (CEO of Peyto) over the years, and as a result, Altura is unlikely to suffer from the "too small to fund" problem that a lot of juniors come across in the early days of production growth. For months, Altura has been teasing those following the story with comments like this one, made in May of this year:

"The Corporation has now drilled two horizontal oil wells targeting an accumulation that Altura believes to be one of the largest conventional oil pools identified in the Western Canadian Sedimentary Basin within the last 20 years. The Corporation currently has 52 sections of 100% WI land capturing a significant portion of this stratigraphically trapped Upper Mannville pool defined by nearly 700 vertical wellbore penetrations with bypassed pay."

Well, last night for the first time, Altura put some numbers to to the Leduc-Woodbend oil play (link to the new corporate slide deck here). Altura's internal estimates peg the OOIP (original oil in place) of the pool at a massive 700 million barrels, with 400 million barrels of that on lands (60 sections) captured by Altura. This is bypassed Mannville oil with enough vertical well control to allow for mapping with a high degree of confidence. Assuming 8-10% primary recovery, Altura is looking at a 32-40 million barrel opportunity... and the real kicker is that if the "waterflood potential" that Altura alludes to on its Leduc-Woodbend slide is real, that number could increase to 80-100 million barrels recoverable at a 20-25% recovery factor, which would be a reasonable target/estimate for  waterflood recoveries that I've seen. Those are company-making numbers folks.
Now, having a lot of oil is one thing, but the economics of extracting that oil are another. Again, for the first time, Altura has provided an indicative type curve for its extended reach horizontal wells (ERH) at Leduc-Woodbend. The economics shown here are for one-mile horizontal wells, but ATU is showing that it can drill 1.5-mile ERH wells for only about $400,000 more. Those ERH wells are expected to 1) have higher initial productivity and 2) increase reserve recovery. At a high-level, it looks to me that the ERH wells access 50% more reservoir for 20% more cost... that sounds like a pretty good idea. In terms of actual IP30 and IP45 numbers, the market will get an update on those numbers in mid-December, when Altura will have enough production history to discuss them. It might be worth pointing out the tag-line at the bottom of the below slide that says "early results are meeting expectations"... and that's on a slide that shows the expected type curve for the 1.5-mile ERH wells for the first time. Hmmmm.... given that the one-mile wells have a 3.0x recycle ratio and a 53% IRR at strip pricing, I like the read-through for the potential economics of the 1.5-mile ERH wells indeed. It feels like an early Christmas present is coming for ATU holders.
To me, Altura looks like a wolf in sheep's clothing. Quiet and conservative, it has been assembling and evaluating the Leduc-Woodbend Rex oil play, waiting for the day that it is ready for showtime. It seems that the company is just about ready to show that Leduc-Woodbend is a company-maker... and I intend to be there for the ride.

Happy hunting.
<![CDATA[Mineral Mountain is Going for Big Gold in the Homestake Trend]]>Wed, 08 Nov 2017 08:00:00 GMThttp://hydracapital.ca/hydra-blog/mineral-mountain-is-going-for-big-gold-in-the-homestake-trendBy: Malcolm Shaw

(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long MMV.V)

Several months ago, a long-time acquaintance brought a little gold company that I'd never heard of in South Dakota to my attention; Mineral Mountain Resources (MMV on the TSX Venture, last at $0.24). The asset of interest is 25 kilometres south of the Homestake District where its namesake mine produced a stunning 40+ million ounces of gold over a 125-year period from the "richest, deepest iron-formation hosted gold deposit in the world" (as quoted from the company's slide deck linked here... 152 million tonnes at 8.4 g/t Au).
Mineral Mountain has spent the last several years aggregating claims covering Homestake-like geology within what it has named the Rochford Gold Project. These claims cover the down-plunge trends of small historic mines in the immediate area where the iron formation of interest has been proven to be mineralized at shallow depths, but has seen no modern exploration and only limited historical deep drilling. This is the first time these claims have been aggregated into a single, coherent, district-scale project worthy of a gold major's attention should a sizeable deposit be found. The evolution of the claims map is show below.
MMV is hunting for a multi-million ounce deposit(s) at Rochford and the company has spent years compiling historical drill data and interpreting geological information in the area. The exploration model is relatively simple... look for Homestake-like "ledge-type" deposits where structural folding has (a) thickened the targeted iron formation, and (b) cross-cutting deformation zones have focused gold mineralization within the thickened package of rocks. Five high-priority target trends have been identified where, to quote the company, "...each target trend has the space to host a multi-million ounce gold resource". One of the things that I look for in an exploration project is that it has enough scale potential to be relevant in the market. The Rochford Project certainly clears that hurdle in my books. The historic Standby mine mineralization is almost untouched at depth and MMV's data indicates that the target zone thickens as you move down-plunge. As modelled, the Standby Mine deposit appears to be the figurative tip of the iceberg... the gold-hosting iron formation is expected to thicken substantially with depth.
With 51.9 million shares outstanding currently, MMV should end up with around 66.9 million shares out if the company closes on the full amount of the current $3 million capital raise that is underway at 20 cents. With the stock trading at 24 cents as I write this, this implies a post-money $16 million market cap and a fully funded and permitted drill program that should begin soon after the financing is closed. An initial program of 9-12 holes is planned, targeting the down-plunge extension of the historic Standby mine mineralization where a hole drilled by Getty Oil in 1982 (Getty S-1) intersected 37.5 metres (123 feet) of the targeted iron formation. That hole was found to have "locally quartz-flooded, heavily mineralized iron formation and visible gold noted in 4 areas along the core". In a bizarre bit of history, the assays from that hole were never released as Getty got out of the gold business right around the same time that the hole was drilled. MMV has reviewed what is left of the Getty S-1 core and the first hole will essentially be targeted as a twin of that historic hole. The balance of the program will aim to follow the same zone down-plunge for at least another 300-350 metres (1000-1200 feet). Depth modelling of a recently completed 3-D magnetic survey (iron formations are magnetic and show up well on mag surveys) suggests that the targeted magnetic body extends to a depth of at least 1,500 metres (4500 feet).

Top-down (top left) and oblique (top right) views of the modelled magnetic bodies within the 
Rochford Project are shown below, followed by a "zoom in" on the Standby Mine target (bottom):
The two principals involved in Mineral Mountain have had some success in the past. CEO Nelson Baker and VP Corporate Development Brad Baker were instrumental in the discovery and early delineation of the Rainy River project in northwestern Ontario, which was ultimately acquired by New Gold roughly a decade after the father-son duo got involved. I remember those days well as an early investor in Rainy River who watched the company make the transition from obscurity to the mainstream. This time, Nelson and Brad have added some homegrown South Dakota iron-formation-hosted-gold-deposit expertise through VP Exploration Robert Brozdowski, Chief Geologist Curt Hogge, and Project Manager Kevin Leonard (you can read their bios on slide 8 of the corporate slide deck). Will the Bakers do it again this time? Time will tell, but at the current market cap this looks like a very attractive speculation to me. Given that the initial program is employing a proven drilling strategy developed at Homestake and is starting by offsetting the historic Getty S-1 hole, I like MMV's setup. If the company can confirm its thesis that the Standby gold zone continues down-plunge and that the modelled magnetic volume is in play to depth, the market will have no choice but to take notice.

I should emphasize that this is a speculative venture, but historically I've found the best way to mitigate speculative risk is to get an entry price that is as low as possible. With MMV trading close to its lows of the year and on the cusp of drilling, I like the cost of entry. The stock trades around 50,000 shares per day on average, which means that buying or selling large positions in a hurry could be a challenge, but I've found that volumes tend to increase quite a bit when news starts to flow.

As it stands, I haven't come across a single person on Bay Street that is familiar with MMV, which is usually a good indicator that I'm early on a story. If the results from the initial drill program confirm continuity of mineralization down plunge from the known Standby Mine mineralization, the Rochford Project could attract real interest from the mining and investment communities given the size of the targeted magnetic bodies and Homestake-like geology. Sometimes new discoveries can seem to come from nowhere and that's often because they come from somewhere that no one else is looking... but if the results are good enough the market's eye always turns towards them in due course. Drilling should start later this month and the first batch of assays may be back before Christmas. 

Happy hunting.
<![CDATA[Transglobe Delivers a Trick, Not a Treat, at Boraq-5]]>Fri, 03 Nov 2017 13:10:38 GMThttp://hydracapital.ca/hydra-blog/transglobe-delivers-a-trick-not-a-treat-at-boraq-5By: Malcolm Shaw

(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long TGL.TO)

This morning before market open Transglobe Energy (TGL.TO, last at C$1.92) announced test results from the Boraq-5 appraisal well. In what comes as quite a surprise to me, Boraq-5 is a duster. Two zones were tested in the well, with one flowing water and the other too tight to flow. This is particularly surprising in light of the well's proximity to the proven discovery at Boraq-2 only about a kilometre away. It just goes to show that there's no such thing as a sure thing, even in the appraisal stage. Having said that, I would have bet 10 times out of 10 that the Boraq-5 well would be a success and would have set the stage for the first development at the South Alamein concession. There are multiple additional exploration targets at South Alamein and the company is evaluating what the 2018 program looks like for this block. As I've said before, I don't think anything was priced into the stock for South Alamein, but it doesn't mean the market can't sell the stock off on the removal of a potential catalyst. South Alamein is not dead, but it's certainly taken a punch in the gut.

Based on the figures in the company's latest presentation, Transglobe trades with an enterprise value of roughly US$160 million, which is a substantial discount to its 1P (proven) after-tax NPV10 of US$213 million and its 2P (proven plus probable) after tax NPV10 of US$338 million based on its year-end 2016 reserves. It's worth noting that no reserves or value were attributed to South Alamein in Transglobe's year-end 2016 reserves. 

Transglobe is scheduled to report its quarterly results on Thursday November 9th, at which time I would expect additional information from the ongoing testing of the company's recent Cardium oil wells at Harmattan in Canada. I'd also expect an update on the 2018 exploration plans at South Ghazalat and NW Sitra in Egypt. Transglobe's Egyptian exploration portfolio continues to offer very attractive upside optionality, but in the near term the South Alamein disappointment is, well, a disappointment. From a valuation perspective, I think TGL remains attractive and it offers good leverage to Brent pricing, which has likely helped its share price performance lately. I'm not giving up on Transglobe, but given that I thought South Alamein would be the company's next step change of production growth, I am reducing my position until I see a discovery capable of bringing that "step change" or a suitably sexy exploration target that can conjure the animal spirits again.