EXR's project is on the border of the clean-energy hungry China, seeking transitions to cleaner, nearby energy sources.
Opened: 10-Mar-2022
Closed: 29-Mar-2023
Shares Held at Open: 3,500,000
Shares Held at Close: 2,795,000
Reason Memo Closed: OVERPERFORMED: It's been 12 months since our latest EXR memo
What does EXR do?
Elixir Energy (ASX:EXR) is looking to build out a clean-energy producing hub consisting of Coal Seam Gas and Green Hydrogen in southern Mongolia, bordering China.
What is the macro theme?
Decarbonisation via natural gas energy production and green hydrogen technology. As the world looks to cut greenhouse gas emissions, gas and green hydrogen may prove to be major building blocks towards a net zero economy.
[Memo Assessment - 29-Mar-2023]: Sentiment = Very Strong
Prices of natural gas continued to climb in 2022 as supply shortages across Europe and the rest of the world manifest.
Our Big Bet for EXR
EXR to achieve a $1BN market cap through successfully advancing one or more of its three projects: its Mongolia gas project, Mongolia green hydrogen project, and/or its Queensland gas project.
Why did we invest in EXR?
Strategic location in Mongolia
EXR's project is on the border of the clean-energy hungry China, seeking transitions to cleaner, nearby energy sources.
[Memo Assessment - 29-Mar-2023]: Grade = B
Mongolia remains a strategic geographical location on the Mongolian/Chinese border with excellent infrastructure, mines and planned pipelines, providing access to both Chinese and European markets.
However, being situated between both Russia and China also broadly adds geopolitical risk for investors. Such risks have been heightened this year with Russia’s invasion of Ukraine and increased hostilities between China and the West.
Strong board & management team
A history of success in coal seam gas.
[Memo Assessment - 29-Mar-2023]: Grade = A
Added Queensland gas project - a reflection of the management’s industry connections and ability to bring in a new asset.
Brought a project partner with experience in the renewables sector SB Energy. SB Energy already has an operating 50MW wind farm in the Gobi Desert of Mongolia (Tsetsii wind farm).
Green-Hydrogen potential
A research report indicated a strong base for a potential Green-Hydrogen project over EXR’s Nomgon PSC.
[Memo Assessment - 29-Mar-2023]: Grade = A
The vast wind and solar resources of the Gobi Desert make this location particularly attractive for green hydrogen production. EXR’s project is estimated to have a combined wind and solar utilisation rate of ~79%. For context, the utilisation rate across WA sits at ~40-60%.
In addition, transportation of hydrogen via land to customers in China is cheaper than shipping hydrogen.
Fully funded exploration
Drilling planned across giant landholding seeking to open up new sub-basins and add to existing prospective gas resource.
[Memo Assessment - 29-Mar-2023]: Grade = A
Exploration across EXR’s landholding in Mongolia continued over the past year, including the discovery of a new gassy coal-bearing sub-basin called Big Slope.
In addition to exploration drilling, EXR has split its time and resources on the pilot production program, along with preparations for the first drilling program at the new Queensland asset, and investigations into the Gobi green hydrogen project.
Strong balance sheet
EXR’s $28.4M in cash (at 31/12/2021) can fund its existing business lines for the indefinite future, plus allows for potential acquisitions.
[Memo Assessment - 29-Mar-2023]: Grade = A
EXR’s balance sheet was a unique strength over the last ~16 months. With the macro environment getting more challenging and capital raisings becoming harder to close, EXR was in the fortunate position where it didn’t need to raise any capital and had enough cash to continue executing on its projects.
In a year (2022) where most companies deferred major expenditures, EXR didn’t have to pull the handbrake on any of its projects.
What do we expect EXR to deliver?
Objective #1: Pilot production program at the gas project
Design, costings, and permitting leading to a maiden pilot production program this year.
[Memo Assessment - 29-Mar-2023]: Grade = A
EXR successfully began its pilot production program, making it the first to flow gas in Mongolia, pioneering gas production in the country.
The two well program (Nomgon-8 and Nomgon-9 pilot wells) resulted in:
- Produced Mongolia’s first ever gas flare
- Production test passed of 200,000 cubic feet per day
- Nomgon-9 has a better production profile to date than that in a large producing Chinese field to the south.
Objective #2: Exploration drilling
In addition to the pilot production program, Elixir will continue its exploration program across the Nomgon PSC, with ~20 wells planned for 2022.
[Memo Assessment - 29-Mar-2023]: Grade = B
EXR discovered multiple new sub-basins, drilling ~17 exploration and appraisal wells in 2022.
During the period, EXR expanded its efforts with its Queensland gas project acquisition. This took some of the focus off exploration drilling in Mongolia.
Objective #3: Evaluate the Commercial Viability of a Hydrogen Project
[Memo Assessment - 29-Mar-2023]: Grade = A
Partnered with SB Energy (SBE), a subsidiary of Japan’s Softbank Group.
In February 2023, EXR executed a term sheet with SBE, building on its earlier MOU signed last June to progress investigations into the project's feasibility.
The Term Sheet provides a pathway to a formal joint development agreement and a 50/50 joint venture once a FEED (Front End Engineering and Design) entry decision is made regarding a green hydrogen pilot project.
What could go wrong?
Production risk
EXR is drilling for “Coal Seam Gas”. There is a risk that while there are gas shows, they may not be commercially extractable. CSG gas is more complex in nature as compared to conventional gas deposits.
[Memo Assessment - 29-Mar-2023]: Risk = Decreased
Successful pilot production testing: the two well program (Nomgon-8 & 9 wells) reached a milestone - flowing a combined 200,000 standard cubic feet per day (scfpd) of gas. It has also reported continued stable and low water rates of 150 barrels per day.
Commercial risk
Green hydrogen project economics depend on governments putting in place mechanisms to support net zero goals.
[Memo Assessment - 29-Mar-2023]: Risk = Decreased
Achieving net zero continues to be a goal for governments around the world.
EXR’s partnership with subsidiary of Japan’s Softbank Group, SB Energy, will help project development and attract project financers. SBE is now investigating various potential sources of Japanese Government fiscal support.
Pre Feasibility studies (PFS) currently being refined for a pilot project.
Geographic risk
There is country-risk. Any political instability might put the production sharing contract at risk.
[Memo Assessment - 29-Mar-2023]: Risk = Unchanged
Whilst broader geopolitical risks may put off some investors looking at Mongolia, EXR continues to have a strong relationship with the Mongolian government.
This relationship is evidenced by the granting of an MoU for its Gobi H2 project.
EXR and Soft Bank Energy continue to brief the central government’s Ministry of Energy under that MOU.
Existing CBM operations in the South Gobi region provide Gobi H2 with a platform of multiple level
Government engagement and support provided to local communities.
We also note that EXR diversified its project portfolio with the acquisition of its QLD gas project.
What is our investment plan?
We have been holding EXR since 2019, while we free carried and took profit during 2020 and 2021, we recently added to our position on market at 16.5c.
Our plan with EXR is to hold to see the company achieve our 2022 objectives, but will look to de-risk our position by selling 20% if the share price significantly re-rates on achieving our 2022 objectives OR based on the strong macro theme of global gas shortages and green energy.
[Memo Assessment - 29-Mar-2023]: Grade = B
We last increased our position in EXR in January 2021 at 16.5c.
Over the past 12 months the EXR share price has drifted sideways and then down in line with the broader weakness across the small cap market.
In line with our Investment Plan, we sold ~20% of the Shares Held at the start of our EXR Investment Memo - de-risking our position.
We still think that EXR’s fundamentals are strong and will retain the majority of our position during this current down market - see our updated Investment Strategy in new EXR Investment Memo #2 for more details.
Disclosure: The authors of this article and owners of Next Investors, S3 Consortium Pty Ltd, and associated entities, own 3,500,000 EXR shares at the time of publication. S3 Consortium Pty Ltd has been engaged by EXR to share our commentary and opinion on the progress of our investment in EXR over time.
Opened: 29-Mar-2023
Shares Held at Open: 2,795,000
What does EXR do?
Elixir Energy (ASX: EXR) is advancing three projects: a coal bed methane gas project, a green hydrogen project, both in Mongolia, and a Queensland onshore gas project.
What is the macro theme?
Decarbonisation via natural gas energy production and green hydrogen technology.
As the world looks to cut greenhouse gas emissions, natural gas and green hydrogen may prove to be major building blocks towards a net zero economy.
Our Big Bet for EXR
EXR to achieve a $1BN market cap through successfully advancing one or more of its three projects: its Mongolia gas project, Mongolia green hydrogen project, and/or its Queensland gas project.
Why did we invest in EXR?
Strategic project locations
Two of EXR's projects are in Mongolia, on the border of the clean-energy hungry China which is seeking transitions to cleaner, nearby energy sources. This location provides many market options, both local and export.
The third project is in Queensland, on the east coast of Australia, which is in need of gas.
East coast gas exposure in Australia
EXR is gearing up to drill its QLD gas project where it has a 395 Bcf contingent resource (which sits inside an initial 3.3 Tcf unrisked mean prospective resource).
The project is right next to existing infrastructure, and acreage held by Shell and Santos. EXR plans to drill the well this year, providing a near term catalyst.
Strong board & management team
A history of success in gas in Queensland, with many years experience operating in Mongolia.
Green-Hydrogen potential
There is a strong case for a green-hydrogen project over EXR’s project area (Nomgon PSC) in Mongolia. A partnership with SB Energy, a subsidiary of Japan’s 12th largest listed company Softbank Group, is exploring the project’s potential.
What do we expect EXR to deliver?
Objective #1: Start drilling at Queensland Gas asset
We want to see EXR drill its maiden appraisal well at its 100% owned Queensland gas project where it already has a 2C (contingent resource) of 395 billion cubic feet (BCF).
Milestones
Land access Agreements
Drill permits
Drill rig secured
Secure partner / funding for the drilling
Drilling starts
Objective #2: Progress the Nomgon CBM Project in Mongolia
We want to see EXR progress its Nomgon CBM project in Mongolia.
Milestones
Drill four appraisal wells (Big Slope and Yangir)
Drill five exploration wells
Prepare for pilots in new area [if drilling successful]
Proof of concept for commercial development
Progress with government and review possible private sector offtake
Consider delivery options for liquefied natural gas (LNG) and compressed natural gas (CNG)
Objective #3: Evaluate the Commercial Viability of a Hydrogen Project
The Term Sheet with SB Energy, signed in February, provides a pathway to a formal joint development agreement and a 50/50 joint venture once a FEED (Front End Engineering and Design) entry decision is made regarding a green hydrogen pilot project.
Milestones
FEED (Front End Engineering and Design) entry decision made (mid-2023)
Sign binding joint development agreement with Japan’s SB Energy
What could go wrong?
Exploration risk
There is risk that EXR does not achieve a reasonable flow rate from appraisal drilling at its Daydream-2 appraisal well at its Queensland gas project.
Production risk
PIlot production testing is underway at EXR’s Mongolian coal seam gas project, but it must still be demonstrated to be commercially extractable. CSG is more complex in nature as compared to conventional gas deposits.
Commercial risk
Commercial success of the Mongolian gas project will rely on regional customers buying EXR’s eventual gas product.
Green hydrogen project economics depend on governments putting in place mechanisms to support net zero goals.
Geographic risk
There is country-risk, primarily in Mongolia, where any regional political instability might put the production sharing contract at risk. But is perhaps a risk in Australia too, which is facing talk of gas market price caps.
Funding risk
To drill its Queensland appraisal well, EXR must still secure funding, which it is now pursuing but is not guaranteed.
What is our investment plan?
We have been holding EXR since 2019, while we free carried and took profit during 2020 and 2021, we added to our position on market at 16.5c in January 2021.
We have been Invested in EXR for over 3 years now - EXR is in our “long term hold” basket, where we retain a Free Carried position to hopefully see our EXR “Big Bet” come true.
This year we may consider Taking Profit by selling up to ~15% of the position IF the EXR share price has a decent run in the lead up to the QLD drilling result (including flow tests).
Disclosure: Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 2,795,000 EXR shares, and the Company’s staff own 100,000 EXR shares at the time of publishing this memo. The Company has been engaged by EXR to share our commentary on the progress of our Investment in EXR over time.
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