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1 Quarterly Report September 2011

2 Highlights Carbon Energy achieves an Australian first in UCG power generation. UCG Panel 2 at Carbon Energy s Bloodwood Creek site in Queensland, Australia has been producing syngas continuously for 7 months. Bloodwood Creek project delivers an innovation in UCG, proving its keyseam Controlled Retractable Injection Point (CRIP). The Board elected Dr Chris Rawlings as the new Chairman. Events Subsequent to Quarter End Carbon Energy has embarked on a Capital Raising to raise up to $20 million (before costs). This includes a $10 million convertible loan from Pacific Road, the Company s second largest shareholder plus a $10 million 1 for 8 rights issue at 12 cents per share. The Prospectus was lodged with the ASX/ASIC on 7 October 2011 and the entitlements and acceptance forms dispatched on 25 October Carbon Energy announced that its Annual General Meeting is to be held on Thursday 24 November The Notice of Meeting was lodged with the ASX and sent to all shareholders on 21 October Page Carbon Energy Limited ABN

3 Company Overview Carbon Energy is a world leader in advanced coal technology. Our business is transforming stranded coal resources into highvalue fuels with lower emissions to meet the increasing global demand for, low cost, alternative energy sources. This is being achieved through the execution of our three core strategic objectives: Build a targeted international portfolio of coal assets suitable for UCG Apply our superior UCG technology, known as keyseam Supply UCG syngas to highvalue downstream markets Carbon Energy s current resources and resource targets Current Project Resources Commercial Target 1 JORC Resource 2 Recoverable Gas 3 (PJ) Queensland, Australia 668 6,680 Mulpun, Chile 103 1,100 Total 771 7,780 Project Resource Target Commercial Target 1 JORC Resource 2 Recoverable Gas 3 (PJ) Wyoming, United States 500 By June ,000 (target) Total 500 5,000 Total (current and targeted resources) ,780 Notes 1. Carbon Energy target 2. JORC compliant Competent Person: Dr C. Mallett 3. Carbon Energy calculation based on estimated energy content of the coal and 50% recovery (that takes into account pillars, losses and a gasification efficiency of 80%) Australia Project JORC Resource 1 Recoverable Gas 3 (PJ) Queensland, Australia 668 6,680 Notes 1. JORC compliant Competent Person: Dr C. Mallett 2. Carbon Energy calculation based on estimated energy content of the coal and 50% recovery (that takes into account pillars, losses and a gasification efficiency of 80%) Phase 1 Power Generation: 5MW Power Station Over the September quarter excellent progress continued to be made at Carbon Energy s Underground Coal Gasification (UCG) project at Bloodwood Creek near Dalby in Queensland; with the Company making two major achievements. In August 2011 the Company achieved an Australian first in generating electricity using syngas. This followed several months of continuous syngas production, which has now been operating for seven months at the end of the September 2011 quarter 3 Page Carbon Energy Limited ABN

4 During the period electricity was transmitted into a load bank on site. This process replicates the supply of power into an electricity grid and confirms the use of syngas for sustainable power generation. Carbon Energy also successfully achieved a UCG process innovation by confirming the Company s Controlled Retractable Injection Point (CRIP) using its proprietary technology. The innovation enables continuous retraction of the air injection point in the gasifier as coal is consumed, to deliver a continuous supply of consistent quality gas which is critical for the production of highvalue fuels in downstream markets. This process innovation is an important development in UCG which typically relies on manual intervention, causing inconsistent gas quality and fluctuating flow rates. Work continues to progress to complete construction of the powerlines, direct from our power station to Ergon Energy s distribution system. We anticipate completion of powerline connection to the grid, testing and commissioning work in November Work continues to progress with the Queensland Department of Environment and Resource Management (DERM) on amendments to the Company s existing environmental approvals to ramp up production to 5MW of electricity for export to the local grid. On 12 July 2011 DERM also advised Carbon Energy of charges laid against the Company and the Managing Director, associated with an alleged release of process water in August Carbon Energy conducted a thorough investigation of the issue at the time, and the resulting report concluded no ongoing environmental harm. The Department accepted the report in October 2010 and the Government subsequently confirmed the Company s findings. Proceedings in this matter have currently been adjourned until 15 November The Company will vigorously defend these charges. Tenement Status at end September 2011 Tenement 1 Status As at September 2011 Area km 2 MLA Application 1,343 ha 13 MDL 374 Granted 2,868 ha 29 Total 4,211 ha 42 Tenement 1 Status As at September 2011 Subblocks Area km 2 EPC 867 Granted EPC 869 Granted EPC 868 Granted EPC 1132 Granted EPC 1109 Granted Total 620 1, No change in tenement holding acreage since June Approximate km Phase 2 Power Generation: 25MW Power Station Bloodwood Creek s second phase of power generation and future planned export of a further 25MW from the Company s planned 25MW Power Station remains consistent with the previous quarter s update. Final commitments to the 25MW Power Station will be made once there is greater certainty on the Queensland Government s UCG policy such that the necessary financial investment is not subject to tenure and regulatory risk. 4 Page Carbon Energy Limited ABN

5 Phase 3 Power Generation: 300 MW Power Station, Blue Gum Energy Park Progress, plans and expectations for the third phase of power generation and the development of the 300MW remains consistent with the previous quarter s update. It is expected that because the carbon intensity of the syngasfuelled power station will be lower than the average intensity of coal fired power generation, a syngasfired power station would be a net beneficiary of the pass through of lower carbon costs into electricity prices. The Federal Government s Carbon Tax was passed by the House of Representatives on 12 October 2011 and will introduce a carbon price initially fixed at $23/tonne. The tax is designed to reward emissions reduction and as a result Carbon Energy expects to be a net beneficiary of carbon pricing. Chile Project JORC Resource 1 3 Mulpun, Chile 103 Recoverable Gas 2 (PJ) 1,100 Notes 1. JORC compliant Competent Person: Dr C. Mallett 2. Carbon Energy calculation based on estimated energy content of the coal and 50% recovery (that takes into account pillars, losses and a gasification efficiency of 80%) 3. Carbon Energy has the right to 30% contributing interest in Chile deposit upon completion of agreed milestones Activities at our project location in Mulpun, Chile continue to proceed at pace. Following last quarter s JORC Assessment (detailed above), tender submissions for the first panel drilling contract have been received and are under evaluation. Dispatch of long lead items, such as well heads and related materials, supplied from Australia has been completed. In addition the following activities continue to progress as planned: Drilling of water monitoring wells and preliminary site civil works with the construction of roadways and the drilling pads targeted for completion in first quarter calendar year Front End Engineering and Design (FEED) is well progressed with Antofagasta Minerals and Carbon Energy now finalising the FEED documentation prior to entering the detailed Engineering, Procurement and Construction (EPC) phase. The project schedule is progressing as planned and first gas production remains on track for mid In the last week of September 2011 Carbon Energy hosted several Managers from our onsite partners Mulpun Energy (a division of Antofagasta Minerals SA). The visiting group came to tour our Bloodwood Creek project and hold meetings with Carbon Energy Management to progress the Mulpun Project. As our project develops in Mulpun, we have found local authorities and the Chilean Government very enthusiastic towards Carbon Energy s project. Using our technology to unlock energy reserves, which until now had been stranded, is viewed as a very strong proposition. Similarly, the lower environmental impacts of our process over traditional mining is high on the agenda of local authorities. 5 Page Carbon Energy Limited ABN

6 Chile continues to provide an attractive market for energy projects due to the country s reliance on imported fuel and rapidly growing energy demand of 8% p.a. When Carbon Energy initially considered the Mulpun Project in late 2009, electricity spot prices were US$120/MWh. Recently, reports have indicated that spot prices have increased to US$220 /MWh making these some of the highest prices in the world. Electricity prices of $120/MWh would equate to fuel prices into a power station of $14.5/GJ to $27/GJ on a shortrun marginal cost basis. United States of America Project Commercial Target 1 JORC Resource 2 Recoverable Gas 3 (PJ) Wyoming, United States 500 By Dec ,000 Notes 1. Carbon Energy target 2. JORC compliant Competent Person: Dr C. Mallett Carbon Energy calculation based on estimated energy content of the coal and 50% recovery (that takes into account pillars, losses and a gasification efficiency of 80%) In the final quarter of FY2011 Carbon Energy established an office in the United States (US) to support the Company s project interests in Wyoming in conjunction with Anadarko and in Montana/North Dakota in conjunction with Great Northern Properties. The US office is based in New York and preliminary work is underway to establish the Wyoming Project. The establishment of the US Office has enabled Carbon Energy to more cost effectively initiate a program of work to promote the Company and its US based projects. Over the Quarter meetings have been held with potential investors in New York, Boston, San Francisco and Houston. Wyoming Carbon Energy has established a positive working relationship with the Wyoming Government, lead by a Governor wellversed in the significant benefits underground coal gasification can potentially bring to the energyrich State. Open dialogue with environmental regulators continued over the Quarter and Carbon Energy is encouraged by the welldefined regulatory pathway for developing underground coal gasification projects in Wyoming which leads the US in facilitating this permitting process. Field work has begun on Carbon Energy s site with cultural, biological and accessrelated surveys being undertaken to support the Company s environmental permit application. Turkey Since the last quarter Carbon Energy completed an extensive desk top study of the coal resources that form Hema Endustri (subsidiary of the diversified Hattat Group) coal tenements in Amasra northern Turkey. The results of the study are currently being used to form recommendations and proposed next steps in collaboration with the project team from Hema Endustri. Turkey continues to present a market opportunity for Carbon Energy with power and gas prices of around US$70/MWh and US $7.30/GJ respectively 4 subject to delineation of UCG suitable coal resources. Note 4 Sources: TETAS and BOTAS 6 Page Carbon Energy Limited ABN

7 India Carbon Energy s Memorandum of Understanding with Adani Enterprises resulted in a bid for two potential UCG coal blocks released by Coal India. The final assessment of the bids is still being undertakenby Coal India. Local reporting in India suggests that the lowest bidder has withdrawn from the process which may require resubmission of bids. Ammonia and Incitec Pivot Carbon Energy and major shareholder Incitec Pivot continue to explore ways in which syngas may be utilised either for the production of ammonia or pipeline quality Synthetic Natural Gas (SNG) which would allow the Company s gas to be injected into local gas distribution networks for use in other downstream markets. A joint study is being developed with the assistance of an international consulting group. Corporate On 6 October Carbon Energy announced a Capital Raising to raise approximately $20 million (before costs). This includes a $10 million convertible note to Pacific Road, the Company s second largest shareholder and a 1 for 8 rights issue at 12 cents per share. A prospectus was despatched to shareholders 25 October The Company also announced its Annual General Meeting to be held at the Brisbane Convention Centre on 24 November The Notice of Meeting was lodged with the ASX/ASIC on 7 October 2011 and Entitlements and acceptance forms and dispatched on 25 October 2011 Time table of important dates Announcement of Issue 6 October 2011 Lodgement of Prospectus with ASX/ASIC 7 October 2011 Notice to security holders containing Appendix 3B information 7 October 2011 Shares commence trading on an ex rights basis 17 October 2011 Record Date for the Offer 21 October 2011 Prospectus, Entitlement and Acceptance Form despatched to Shareholders 25 October 2011 Opening Date of Offer 27 October 2011 Closing Date of Offer 5pm (AEST) 10 November 2011 Shares quoted on a deferred settlement basis 11 November 2011 Advise ASX of any shortfall 14 November 2011 Expected date of despatch of holding statements for New Shares 18 November 2011 Commencement of trading of New Shares on ASX 21 November 2011 Board Changes On 1 July 2011, Dr Chris Rawlings was appointed a Director of the Company. The Board elected Chris as the Chairman of the Board on 26 July 2011 with Mr Kim Robinson stepping down as Chair and continuing as an nonexecutive Director. 7 Page Carbon Energy Limited ABN

8 Issued Capital & Cash Funds The total issued capital at the end of the September 2011 Quarter was 698,517,858 fully paid ordinary shares quoted on the Australian Stock Exchange. A total of 35,580,000 unlisted options with exercise prices between $0.25 and $1.60 are on issue (with expiry dates ranging between 1 April 2012 and 22 March 2015) and with the vast majority subject to meeting annual performance measures. 4,375,000 employee options were cancelled during the Quarter. The Consolidated Group retains cash of $4.3 million as at 30 September Listed Investments Carbon Energy held 29 million shares in ASX listed uranium company, Energia Minerals Limited (26.5%) as at 30 September For and on behalf of the Board A.M. Dash Managing Director 31 October Page Carbon Energy Limited ABN

9 Coal Resource Summary Appendix A As at 30th September 2011 September 2011 Quarter Resource Statement Location Bloodwood Creek, Australia Kogan, Australia Mulpun, Chile 2 Total Resource Coal Thickness CutOff (m) Measured Indicated Notes: 1. Optimal target for Underground Coal Gasification 2. Carbon Energy has the right to a 30% contributing interest in the Chile deposit upon completion of agreed milestones Inferred TOTAL Competent Person Statement Coal The information in this release that relates to resources is based on information compiled by Dr C.W. Mallett, Technical Director Carbon Energy Limited who is a member of the Australian Institute of Mining and Metallurgy. Dr Mallett has sufficient experience which is relevant to the style of mineralization and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2004 Edition of the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves. Dr Mallett consents to the inclusion in the release of the matters based on his information in the form and context in which it appears. In accordance with Society of Petroleum Engineers (SPE) guidelines, the reserves in these properties are: AREA CATEGORY GROSS GAS VOLUMES(PJ) Bloodwood Creek EPC 867 (including MDL 374) 1P Reserve (Proven) 11 2P Reserve (Proven + Probable) 743 3P Reserve (Proven + Probable + Possible) 1,042 The reserve estimates used in this document were compiled by Mr Timothy Hower of MHA Petroleum consultants, Colorado, USA, a qualified person under ASX Listing Rule Mr Hower has consented to the use of the reserve information contained within this document in the form and context in which it appears. 9 Page Carbon Energy Limited ABN

10 Appendix 5B Mining exploration entity quarterly report Appendix 5B Rule 5.3 Mining exploration entity quarterly report Introduced 01/07/96 Origin Appendix 8 Amended 01/07/97, 01/07/98, 30/09/01, 01/06/10, 17/12/10 Name of entity CARBON ENERGY LIMITED ABN Quarter ended ( current quarter ) September 2011 Consolidated statement of cash flows Cash flows related to operating activities 1.1 Receipts from product sales and related debtors Current quarter $A 000 Year to date (3 months) $A Payments for (a) exploration & evaluation (b) development (c) production (d) administration (e) commercial & other business development (g) Other projects UCG Panel 1, Project Support, Project Chile, Project USA (1,944) (564) (1,496) (226) (653) (1,944) (564) (1,496) (226) 1.3 Dividends received 1.4 Interest and other items of a similar nature received 1.5 Interest and other costs of finance paid 1.6 Income taxes paid 1.7 Other (provide details if material) Fuel Tax Credits (653) Net Operating Cash Flows (4,774) (4,774) Cash flows related to investing activities 1.8 Payment for purchases of: (a) prospects (b) equity investments (c) other fixed assets 1.9 Proceeds from sale of: (a) prospects (b) equity investments (c) other fixed assets 1.10 Loans to other entities 1.11 Loans repaid by other entities 1.12 Other (provide details if material) (978) (978) Construction of 5MW Plant, 2 nd and 3 rd UCG Panels and other site works + See chapter 19 for defined terms. 03/10/2011 Appendix 5B Page 1

11 Appendix 5B Mining exploration entity quarterly report Net investing cash flows (978) (978) 1.13 Total operating and investing cash flows (carried forward) (5,752) (5,752) Cash flows related to financing activities 1.14 Proceeds from issues of shares, options, etc Proceeds from sale of forfeited shares 1.16 Proceeds from borrowings 1.17 Repayment of borrowings 1.18 Dividends paid 1.19 Other (provide details if material) Trade Creditors/Debtors Net financing cash flows Net increase (decrease) in cash held (5,457) (5,457) 1.20 Cash at beginning of quarter/year to date 9,799 9, Exchange rate adjustments to item Cash at end of quarter 4,342 4,342 Payments to directors of the entity and associates of the directors Payments to related entities of the entity and associates of the related entities Current quarter 1.23 Aggregate amount of payments to the parties included in item Aggregate amount of loans to the parties included in item 1.10 $A' Explanation necessary for an understanding of the transactions Costs included in item 1.23 above cover Directors expenses for any services undertaken of Directors duties, salaries for the Brisbane based executive Directors, plus NonExecutive Directors fees and superannuation. Noncash financing and investing activities 2.1 Details of financing and investing transactions which have had a material effect on consolidated assets and liabilities but did not involve cash flows N/A 2.2 Details of outlays made by other entities to establish or increase their share in projects in which the reporting entity has an interest N/A Financing facilities available Add notes as necessary for an understanding of the position. Amount available $A 000 Amount used $A See chapter 19 for defined terms. Appendix 5B Page 2 03/10/2011

12 Appendix 5B Mining exploration entity quarterly report 3.1 Loan facilities 3.2 Credit standby arrangements Estimated cash outflows for next quarter $A Exploration and evaluation 4.2 Development 2, Production 4.4 Administration 1,500 Total 3,500 Reconciliation of cash Reconciliation of cash at the end of the quarter (as shown in the consolidated statement of cash flows) to the related items in the accounts is as follows. Current quarter $A 000 Previous quarter $A Cash on hand and at bank 1,342 3, Deposits at call 5.3 Bank overdraft 5.4 Other (provide details) Total: cash at end of quarter (item 1.22) Changes in interests in mining tenements 3,000 6,500 4,342 9, Interests in mining tenements relinquished, reduced or lapsed Tenement reference Nature of interest (note (2)) Interest at beginning of quarter Nil Interest at end of quarter Nil 6.2 Interests in mining tenements acquired or increased Coal Refer Covering Quarterly Activity Report Attached hereto 100% 100% + See chapter 19 for defined terms. 03/10/2011 Appendix 5B Page 3

13 Appendix 5B Mining exploration entity quarterly report Issued and quoted securities at end of current quarter Description includes rate of interest and any redemption or conversion rights together with prices and dates. Total number Number quoted Issue price per security (see note 3) (cents) Amount paid up per security (see note 3) (cents) 7.1 Preference Nil Nil + securities (description) 7.2 Changes during Nil Nil quarter (a) Increases through issues (b) Decreases through returns of capital, buybacks, redemptions Ordinary securities 698,517, ,517,858 Various Fully paid 7.4 Changes during quarter (a) Increases through issues (b) Decreases through returns of capital, buybacks Convertible debt securities (description) 7.6 Changes during quarter (a) Increases through issues (b) Decreases through securities matured, converted 7.7 Options Unlisted Options 25c Unlisted Options 40c Unlisted Options 25c Unlisted Options 35c Unlisted Options 70c Unlisted Options 80c Unlisted Options 80c Unlisted Options $1.00 Unlisted Options $1.20 Unlisted Options $1.60 Nil Nil 100, ,000 5,000,000 1,400,000 8,000,000 7,250,000 1,000,000 10,000, ,000 1,750,000 Exercise price 25c 40c 25c 35c 70c 80c 80c $1.00 $1.20 $1.60 Expiry date 01/04/ /04/ /12/ /12/ /12/ /12/ /03/ /12/ /12/ /12/ Issued during quarter 7.9 Exercised during quarter + See chapter 19 for defined terms. Appendix 5B Page 4 03/10/2011

14 Appendix 5B Mining exploration entity quarterly report 7.10 Expired or lapsed during quarter 500,000 1,000, ,000 1,000,000 1,000,000 $0.30 $0.60 $1.20 $1.20 $ /06/ /06/ /12/ /03/ /03/ Debentures (totals only) 7.12 Unsecured notes (totals only) Compliance statement 1 This statement has been prepared under accounting policies which comply with accounting standards as defined in the Corporations Act or other standards acceptable to ASX. 2 This statement does give a true and fair view of the matters disclosed. Sign here:..... Date: 31 October 2011 Print name: Title: Prem Nair Chief Financial Officer & Company Secretary == == == == + See chapter 19 for defined terms. 03/10/2011 Appendix 5B Page 5