Bacanora(BCN) - Ending the drought

Firstly I should say I am still on my hols and will be for a few more weeks, so it takes something special for me to write anything now.

That something special is the first new mining company to float on AIM for 3 years...
Bacanora has been on my radar for a few years now, I've greatly admired the ability of BCN to find good sites to fund them and to advance them with minimal dilution.
It has two great projects in the Magdalena Borate project and the Sonara Lithium project.

Both Projects are in Mexico, both in the more stable northern aspects of Mexico with easy access to the worlds largest market. Both projects are advanced and have been advanced on minimal spend.
As per the BCN CEO "We're looking now to do the feasibility on both of the projects," Mr Orr-Erwing said. "We hope to be offering Borate by 2015 and Lithium in 2017."

The borate project is highly advanced with plans to produce $25m of borate per year starting in 2015 with an initial capex spend of 7.25m.
This is important, firstly it provides much needed money, secondly it demonstrates that the borate project is highly economic and with larger processing could be raking in $100m a year pretty easily, thirdly it demonstrates that BCN is capable of taking a project through to production.

Then we have the well known lithium desposit, i won't go into too much detail here as its well known. But with a potential $20-30bn of resources, a pilot that has confirmed the ability to produce battery grade lithium and at very low costs. BCN quite possibly has the largest lowest cost resource of lithium in the world.

Internals. 45% of all the shares are held by 3 long term investors. Another 20% are held my other longer term investors. That leaves around 20-30m in free float.
Of that 20-30m many will be in the hands of longer term investors, however despite this 7m shares traded hands today, maybe as many as 50% of all the tradable shares. In London BCN shares rose quickly and 3 times bounced of 80p. This is either a very very quick support level or its the level that somebody is wanting to load up at.

The AIM market makers shown strong signs of pushing the bid up, pulling in any issue shares and raising the ask with any string of buys. All of this points to strong rise next week.
Longer term BCN should reach parity of NPV discount to REM, maybe over 3-4 weeks for the lithium project.
There is also the expectation of news during this period. A jagged rise to 3-4p is certainly possible.

So a special case to break the drought on AIM and its taken a truly extraordinary company to do it. For many investors it will take them by surprise.....

Afriag Update.

Its interesting how things tend to pan, since I wrote my last piece on AFRIAG about an interesting 4 weeks, we did indeed have an interesting 4 weeks. We had the announcement of a new 100% owned division called Afriag Marketing. We had the cancellation of YA funding deal and a direct placing.

What has gone before with Afriag has been all about creating foundations and supports. We are now entering the next phase which is phase 1 of value.

Phase 1 of value will happen over the next 4 weeks again in my opinion, we have the first true trading update on Afriag SA which AFRIAG have committed to delivering, this will include the new important Mozambique contract and will be enough to give us the first clues as to how profitable Afriag SA should be. I am confident Afriag SA will be on course for 1m profit by the end of the year. BTW isn’t that it will make 1m in 2014, but that by Dec 2014 it will be creating at least £100k a month profit.

I am also expecting news on new contracts and new truck expansion. This will be the first official 6 month detailed trading update form Afriag SA do not underestimate it !

Over the 4 week time period we also have the official creation of Afriag Marketing. Now Lenigas and Strang are two of the busiest Directors in the small cap world, why on earth would they create a new small cap company that pays them no wages…..Its very clear that there is a detailed plan for this company and both men can see pretty quick, maybe even immediate business for it. Expect it to be launched with much publicity and lots of noise from David.

Now we can have a bit of fun.

We have Polemos, which has Lenigas and Strang on its BOD, which in June when Afriag raised its money and announced the creation of a new company, also raised money and has the investment line of “There are no restrictions in the type of investment that the Company might make nor on the type of opportunity that may be considered”.

We have Afriag Asia (thanks Phil who has been researching it). Set up by various funds and from my understanding, owned from the British Virgin Islands. Mr Lenigas is no stranger to working with, buying or dealing in the BVI, Just ask REM and some of its holdings companies.

We have Viking Fisheries that I have been told are expanding in this Asia and the middle east and might have discussed with some interesting South African’s.

Make no mistake David wants Afriag to be a large global player in an industry worth hundreds of billions.

Rose Rising

This blog will be in two parts, the first part is the summary of my direct liaising with Rose Petroleum, the second are my thoughts going forward. I feel its really important not to get the two confused as I don’t want to be seen misquoting. Something I’ve learnt in the past.

Rose has a considerable asset in the US and the US is a strong market for Shale exploration companies, is there any plans or long term strategy to float on a $ exchange ? i.e OTC etc “This is under consideration”

Rose confirms its Q3 intentions. “Rose plans to commence the Mancos drill programme in Q3, with completion in H1 2015. We plan to commence testing the vertical shut in well in the Paradox also in Q3 but will not be going horizontal until 3D seismic is available.”

How exactly will the paradox drill work, whats the plan with this drill. “This will very much depend on the 3D results. Fidelity, which operate directly south of us in the Paradox have some wells producing from vertical wells only and some have 2,000ft laterals. They use the 3D to target areas of high natural fracturing. If they don’t hit them vertically then they go lateral until they do. This can be 100ft, or 2,000 ft.”

What strategy do Rose have for the two resources “A number of industry partners have shown a good deal of interest in this opportunity as well, so we’ll probably bring in an industry partner for a portion of it,”

“For Mancos….finding and development costs less than US$17 a barrel”

“For Paradox…experiencing on a single zone completion, again we get over 100% rate of return and less than US$20 a barrel finding cost”

“Essentially we’ve raised enough money at this point to get us into production and then at that point if we need any additional capital, it will certainly be very easy to raise once we’ve already established production”

Thoughts.

http://www.bloomberg.com/news/2014-06-27/magnum-hunter-turns-891-million-in-debt-into-138-gains.html

As per the link I’ve used previously, a US listing for ROSE is critical in my opinion to see Rose rise from the 100-120mcap player potential to the 400m+. Rose have confirmed to me that they are actively considering such a listing. If this were to happen it would make Rose available to the largest market for shale exploration companies, a market which is very hot at the moment. We have seen a few pointers to ROSE courting this market over the last few weeks, not least the recent main story on a prominent US oil and gas e-magazine this week. This will provide explosive growth to the tightly held shares in the UK and it is purely my opinion but I see an announcement on this within the next 3-4 weeks.

Mancos is not going to be a single exploration drill. The plan seems to be a campaign (or programme as described by them) over 6-9 months. The BOD clearly talk about wells and not well. My understanding is that a vertical well will be drilled and tested with the hope of 300-1000bopd flows, using 2D, a horizontal drill will be completed through adjacent naturally fracked source rock to increase oil flow. A fall back solution of real-time pumping might be needed, but isn’t anticipated in the short or near medium term.

The vertical testing of the already drilled paradox hole will be equally interesting, with possible oil shows, we might get a figured of BOPD from possible pumping. ROSE are being very cagey about this hole and I have a feeling that a surprise is very likely from it, even before the lateral component is factored in….More news to follow when I get it.

3D should take place across paradox with several well defined areas. The initial area around the existing hole, should be completed fairly quickly. It will then be used to guide lateral lengths to natural fracturing again.

The BOD are confident bordering on outright expectant re oil production from paradox, this again reinforces my view that the existing hole is already known to be a good one, but that lateral drilling is needed to confirm it in the 1000bopd category.

One of the aspects I like most about ROSE is the simplistic strategy its deploying. Its essentially copying Fidelity. Back in 2012 Fidelity noticed some success with a new technique in this area. The technique was simply to drill a vertical hole, if oil shows are found, but nothing flowing naturally, to simply use 3D high def to examine the ground to find a natural fracture that it can tap into. They will target 3 or 4 natural  fracturing zones along a line and simply drill until they get the desired flow….With this fidelity have reached 20,000 bopd with each new hole, almost guaranteeing 1000bopd…. Hence why they have a MCAP well in excess of 1Bn.

Rose are simply copying this, just a few miles down the road in the same geology. They have even employed the same GEO consultants that helped define this strategy. Bit of a no brainer really.

Coupled with all this we have a low barrel exploration cost and the BOD being pretty adamant that it will not need money until production (notice no uncertainty at all that production will happen).

We have strong news flow still of Mancos drilling and the program planned their over the next 6-9 months. We have 3D and associated results, we have paradox and the simple vertical testing and then plans for horizontal testing. We have a significant and large JV to be announced(IMO) which could well be fidelity for a parcel of land, probably in Mancos as both companies would benefit if they can replicate the drill strategy in that geo-location. We have further possible licence buys planned for the next 10 weeks. We have also IMO an explosive  US listing.

What more do you want !

Probability and COS.

I read a post which really concerned me about oil drill and more specifically drill campaigns. It is absolutely vital for any investor in an exploration oil stock to understand cos and how it applies to multiple drills.

So firstly what’s cos? Cos stands for chance of success. 

This is not the chance that xxxx bopd will be found in the drill, nor that the drill will be commercial. It’s the chances that the drill will be a valid and working geological oil or gas trap. Many wild cat drills have a COS of less than 20%, many drills in existing oil fields will have a COS of more than 80%.

The COS applies to a single target zone normally and not to a large play nor always to a particular drill. For example a single drill will often go through several target zones, each as independent standalone traps, each with their own COS. Popular recent examples of this are Range’s, Lenigas’s and Citation Oils drills.

Now for a very quick overview of probability. I was fortunate enough to have attended a lecture about 6 months ago from a lecturer at Oxford University. Although nothing that was said was ground breaking it did reinforce how misleading probability can often be. With regards to oil we need to know, for example if you drill 5 holes each with a single different target and each with a 20% COS what are the chances that one of them will find oil? Hint it certainly won’t be 100%.

How about if we have a single drill that goes through 3 different targets ?

When working out risk/reward if we don’t understand the risk of the oil not finding oil, we certainly won’t get our risk/reward calculations right.

So probability; firstly the Monty Hall problem. If you know about this feel free to skip it.

“Suppose you're on a game show, and you're given the choice of three doors: Behind one door is a car; behind the others, goats. You pick a door, say No. 1, and the host, who knows what's behind the doors, opens another door, say No. 3, which has a goat. He then says to you, "Do you want to pick door No. 2?" Is it to your advantage to switch your choice?”

The answer is not that you have a 50/50 chance now…..The answer is if you don’t switch you only have a 1/3 chance of winning and if you do switch you have a 2/3 chance of winning. Strange…but true. If you don’t believe me, it’s been proven multiple times by computer software creations and just google Monty hall problem.

So next one, if we have a six sided dice and we roll it 3 times. We have a 1/6^th chance of success with the first roll..But we don’t have a 50% chance of success with 3 rolls….why on earth not.

Well yes the first roll has a 1/6^th chance but next roll is totally unconnected to the first roll, whether you have rolled a 6 or not previously won’t effect whether you roll a 6 on the 2^nd attempt.

However the chances are connected. If you rolled a 6 on the first attempt you wouldn’t have to roll a 2^nd time. On the 3^rd attempt you’ve had 2 unconnected attempts to roll a 6. So a bit of math.

“For three rolls, there is a 1/6 probability of rolling a six on the first

roll. There is a 5/6 probability that the first roll is not a 6. In that

case, we need to see if the second roll is a 6. The probability of the second

roll being a 6 is 1/6, giving us a probability of 11/36. There is a 25/36

probability that neither of the first two rolls was a 6. In that case, we

need to see if the third roll is a 6. The probability of the third roll being

a 6 is 1/6, giving us a probability of 1/6 + (5/6)*(1/6) + (25/36)*(1/6) =

91/216. Again, this is less than 3/6.”

So where does this leave us for investing in oil exploration. Well firstly some oil drills are connected as they have similar caps, an example of this was Loligo for FOGL. However for a company like ROSE where we have a likely 50% COS for one area (paradox) and a 30% chance for a second(mancos). If we add in the complication of 2 possible targets for mancos we get a % chance of one of the any drills well above 70%.

Different drill targets (unconnected) = good. Multiple zones in the same drill = good.

Don’t let idiots mention 20-30% chances and leave it at that, equally don’t let rampers mention 2 drills both at 50%, 100% certainty and believe it.

COS is massively complicated….