Horse Hill Investors beware

Horse Hill Investors beware

I think most people will know that I am not a fan of Horse Hill and the way that it has been discussed by David Lenigas. I haven’t been for months and wrote a piece back in August that I never actually put up on the site. I don’t like writing negative pieces on companies, but do feel that Horse Hill is perhaps one of the biggest injustices on AIM this year.

Lets start with Geology. Despite a few people not believing me, I did study both the Portland and Kimmeridge formations with an onsite geological study maybe 20 years ago. I have held kimmeridge clay that contains oil in my hands.

Now lets have a quick visual practical. If we take a sponge, put it in a bucket of water, then place the sponge on a piece of wood at an angle.

The water will quickly flow out of the sponge down the wood. After a little while the sponge will stop flowing water  and will just sit on the wood. If we poke the sponge it will be wet as it still contains water, even though all the free flowing water has disappeared.

The same applies to the Horse Hill potential oil layers, if we think of oil instead of water and the oil bearing rock layers as being sponges. Most of the oil a long time ago migrated out of the zones, however the zones still contain lots of oil. The problem is that the oil that’s left is stuck in the zone(sponge) and is not readily free flowing. If we poke the sponge with our fingers, it does get wet and in the same way if you drill into the oil soaked zones you will get oil shows, a very small portion of which will be moveable.

This is very well known. It’s always possible that the zones contain very large pockets that just happened to have a store of accessible oil or gas, but trying to find such pockets is still very very difficult particularly without newer 3D methods. 2D is notoriously bad at finding such targets (see FOGL and Scotia).

I do think that investors need to understand why UKOG and the associated rabble of companies attached to it have partaken in Horse Hill. In my opinion finding oil is not one of the primary reasons. Inflating a share price with wild talk about massive oil finds is a major reason, the ability to raise money is a reason, exposure is a reason and the longer term goals of the drill are a reason. Finding oil or gas would again in my opinion be a nice to have if we are lucky enough.

Many will remember David coming onto Twitter, ramping his poor little heart out, only to hit investors with a share placing, once the SP had gone up.

Many will also have just experienced the useful “leak” that talked in detail about a commercial oil discovery, which gathered in investors, spiked the share price and might, just might have enabled a few people to sell out at the top of the spike because they  knew the word “commercial was not actually in the release”.

Longer term drill reasons:  This was mentioned above, its important for investors to understand what I think these are. As many protestors at Horse Hill have known and also as the planning permission clearly hints at, Horse Hill is an exploratory drill aimed at assessed oil and gas porosity with a view to fracking. Obviously the Horse Hill consortium will flatly deny this, as will many gullible Private investors, but the geological reasons stand out a country mile. With lateral drilling alone Horse Hill might be commercially economical. With simple water pumping it might be or it might need the full fracking works. None of the above though will be allowed so close to such populated areas next to one of Europe’s busiest airports.

 

Target Reservoir Oil	OOIP Upside Potential (MMSTB)	OOIP Mean (MMSTB)	Prospective Resources Mean (MMSTB )
Upper Portland Sandstone	116	57	17
Lower Portland Sandstone	284	147	44
Corallian Sandstone	67	33	10
Greater Oolite Limestone	204	104	16
Total Oil	671	341	87
Target Reservoir Gas	OGIP Upside Potential (Bcf)	OGIP Mean (Bcf)	Prospective Resources Mean (Bcf)
Triassic Sandstone	456	234	164

(Taken from UKOG RNS)

So despite the above table taken from UKOG own data, this drilled showed 3.1 for the upper Portland, Water wet nothingness for the lower Portland target,  0 for Corallian and 0 for the greater Oolite, giving a total mean oil of 3.1, against even the lower target of 87 (lets not mention the higher 671 target, which was scary fantasy).

If we assume even a very generous 10% recovery that gives total reserves of just 300k, if we look at other similar plays then 2-3% is probably more likely giving just 100,000 barrels worth. Compared to the similar drills and nodding donkeys we would be looking at maybe 10-15 BOPD. Which by the way,  isn’t even coming to the surface at the moment  and almost certainly wouldn’t be economical with unconventional extraction.

A few final points.

UKOG and the Horse hill consortium are not the only ones to partake in exploration for the sake of doing something rather than actually exploring with a realistic aim of finding and extracting a resource. Its very common in gold exploration business for this to happen.

Horse hill only has a few days left on its exploration license so the management will be well aware of what the Gas plays contain even now. Remember that no logs will be ran on non-conventional targets.

And finally a prediction.

This will be spun out massively, rather pathetic rumours of a missed target to the south (which will keep things going a bit, despite never getting planning permission for a new drill, even if they did it would take a year or two in the UK). Any offshoot drilling should be forgotten about as there simply isn’t time on the license to do this.

New targets will be “discovered” with major potential…much like these existing targets with possible upside potential of 600m barrels of oil(in reality being a meagre 3m, which is never going to economical). New drills in exciting new areas will be discussed.

But most of all in 2 years time Horsehill will be seen as the cynical attempt it was to fool investors into putting money into an impossible pipe dream.

If you have lost or will lose money then I hope you learn from it, if you made money then your very lucky, if you made money selling whilst telling everyone how great it was then…

BTW I haven’t actually read, listened to any blogs etc on Horsehill, nor really read the forums, having obtained my info from RNS’s, tweets  el al  so sorry if this steps on anyone’s toes.

Herencia #HER– past, present and future….

Herencia #HER– past, present and future….

I’ve got quite a history with my investments into Herencia. I well remember the Mike Bohm times when Herencia was 2p a share and folks talked about PCD’s and potential share prices of 20p.

At the time Herencia was full of possibilities, it had the excellent Patricia prospect, the silvery caps of Doris. The mystery of Guam with its shallow IOCG and copper gold elephants. We had Nyrstar one of the largest zinc players on the board, each drill was adding more new veins.

Then came the delays, the snowballing, the costs and wages, new prospects such as Picachos that were going to take a little while to get traction, new CEO and the prospects of a good 18 months of dilutions….

Herencia suffered from a CEO who imho didn’t really care about or understand the role of private investors on AIM.

So where are we now..

Firstly we need to separate those that have been invested for a while and those that are looking at Herencia as a new investment. For those current investors, it’s been hard, the SP has been diluted and has fallen down to a range of around .4. The news on the 1^st has hit it again taking it down to .27 to .29. I really do feel for those investors.

However for new investors the possibility of buying into a vastly undervalued company at a price below the BOD and below the placing is starting to ring profit alarms…

Herencia has, with Patricia, the highest, most secure JORC it’s possible to obtain, (Measured being the highest and inferred the lowest). In the higher categories of measured and indicated combined there is total of 4m tonnes of resource with 3.2-5% zinc, 1 to 1.8% lead and 70 to 98g/t of silver. Given current prices we still get £ hundreds of millions of resources. This has been taken to an advanced stage with a completed DFS and mine design, economic assessments are positive and its believed the project is only awaiting a recovery in the zinc and metal prices before production starts. For the purposes of this document a valuation of £15m seems fair, using a very heavy discount to NPV. Its important to note here that the geo-phys indicates that the resource has much more potential to come, with a likely total conservative commodity value of well in excess of £2bn once fully explored.

Added to this we have Guam, where Herencia have convinced a large, cash rich (just over $500m cash in hand) copper giant to invest into Guam. They are committed to spending $3m over the first period for 50%, given this a fair value of $6m seems reasonable. Existing drilling of Guam has delivered an IOCG but the wild cat drlling has uncovered copper, gold, moly  at depth, with 2g/t of gold from one drill. Considering the wild cat nature over such a large area, it was quite amazing that such gold and moly where found by random. Given this it’s hardly a surprize that Oz minerals have agreed to invest and explore and it’s highly likely imho that a very gold, moly rich PCD is situated in Guam with a greater total tonnage than SOLG.

Finally we have the Picachos copper project, again very advanced with a MOU to produce 1m tonnes a year of ore to be processed through a local plant. This isn’t a huge amount roughly 3000t a day given 50 down days. But would require minimal capex to pay for the simple extraction, crush and transport components. A capex of around 10m sounds reasonable. Income @2% copper(copper/silver equiv) would be 60t of copper per day, with a price pre mill, post costs of $1500 a tonne giving 90k a day.(approx. 40m a year) The economics of the project would mean a very quick pay back of initial capex and also allow Herencia to self fund Patricia in 2-3 years time.

It really does seem to be a very good strategy the BOD have embarked on. With first deliveries of copper ore to the mill plant in 12-14 months time, It’s not too long away either for the stock market.

Picachos is largely derisked re mining permits and environment permits due to the existing on site unapproved mining and the extensive mining operations in the local area.

As well as the above the Paguanta license area which hosts Patricia, also has shown evidence of a significant PCD with 2-3% copper, gold and silver. Where over the summer a number of interesting JV parties took viewings and expectation is high that a JV might well take place.

Funding is always a problem for an explorer, 10 months ago Herencia raised 1.8m, now it’s just raised 2.4m. This will go towards considerable development and exploration, however expectation is that funding will last now until around June time. Herencia has announced that it is in advanced funding for development of the production at Picachos. Funding will likely be majority debt with dilution minimal and restricted to around a 10% convertible. This will restrict further share issues and the current share issue is expected to be the last of the major dilutions thanks to the revenue coming on stream in 12-15 months time.

I have heard the rumours that the share issue was done now due to bad news from Guam, however this makes no sense at all. Most placings either happen after good news, if the company wants to raise capital cheaply or before good news, so that they can take part in cheap shares and grow the company’s market cap. The Herencia BOD would not issue shares, take part in the issue, just to see the SP drop on bad news and have their reputation ruined with the placing makers.

I personally think Guam has come in very favourably and the BOD want to use this as a spring board with any thoughts of dilution kicked well into the long grass. I can’t stress how strong the likelihood is that Oz minerals will further develop Guam on some very good results.

Looking at the trades it seems to be that a few shorts have been closed at around the .28 mark. AIM ain’t pretty at times like this.

So should you invest ?

Herencia has been well and truly pummelled by the markets for the factors already discussed, however as mentioned by Graeme over the last few months the Zinc market has started to turn and Patricia’s time is getting close, dilutions look to be over, a plan for a significant revenue stream which most explorers would kill for is firm and being progressed. The significant assets of Herencia could turn it into a mid tier miner over the next 2-4 years.

News flow is very strong over the next 2 months.

For new investors getting it at .28 or around this looks to be very risk free.  A rise to .4 or .5 would not see a great deal of selling from private investors, making a 75-100% return short term likely.

If folks are happy to wait for 8-10 weeks then they get the benefit of the funding to production announcement for Picachos which could see .7 to .9 with supporting news flow.

Existing shareholders will need to grin and bare it with an average of .5 to .7 and would be ill advised to sell at such a low point. Dilutions are horrible things, but can provide fantastic advantages for new investors and for existing investors to average down. This is unmistakably one of those opportunities.