Companies: ALK   

Saving the planet is set to become a big investment theme – or so it would seem from the ease with which Alkane Energy raised nearly £30 million (at 90p a share) from the stock market to generate power from methane buried in old coal mines.

But there is the potential to roll out 100 power plants under licences granted by the government that cover about a third of Britain’s abandoned coal mines.

Alkane is the brainchild of geologist Cameron Davies. He has worked for Premier Oil and Kuwait Foreign Petroleum Corporation, and in 1989 led the team that found the big Sidi el Kilani oilfield in Tunisia.

Burning methane brings a double benefit. Laid down naturally alongside coal, methane is both poisonous (a whole community at Arkwright in Derbyshire had to be rehoused recently because of escaping methane fumes) and a harmful greenhouse gas.

Alkane produces methane by creating a vacuum within sealed-off areas of the mine. That leeches methane molecules off coal surfaces. The gas is then collected and piped to industrial users or small generating plants. They may be built on adjacent land rented out by Alkane.

Although the burning of the methane creates carbon dioxide, the destruction of the more dangerous methane leads to an 87 per cent net benefit to the atmosphere over time.

It has not all been plain sailing. A leak developed recently at Alkane’s first mine, Markham in Derbyshire. Alkane failed to seal a next-door mine tight enough during a period of extreme decompression necessary to satisfy high demand from end-user Coalite.

But new chief executive David Cross says Alkane is learning from every setback. Cross transformed mini-conglomerate Elswick into a printing business that was then sold on for a profit. He finds transforming methane into orders for power even more stimulating: ‘the concept is fascinating’, he says.

Alkane’s biggest problem to date was finding a replacement for Independent Energy, which went bust after agreeing to take the output from the company’s two other pilot plants, at Steetley and Shirebrook.

‘We’ve now signed up Clarke Energy on better terms than before – at 12p a therm’, says Cross. That is only half the market price for North Sea gas, but assured contracts make that worthwhile.

The money raised will finance the construction of 112 plants by the end of 2005. Alkane has already identified 48 sites suitable for sealing and construction work.

The company could make an operating profit reasonably quickly, but it will not be cash flow positive until 2004, according to its broker, SG Securities.

Alkane’s current market value of £120 million is not far out of line with the £86 million valuation placed on the company’s licences by petroleum consultants Gaffney, Cline & Associates plus the float proceeds net of some £5 million of debt, now repaid.

But SG Securities argues that future roll-outs could add some £200 million of value. Prospects would be brighter still if Alkane can persuade the government to include its sites within the ‘renewable energy’ classification. It is also lobbying to get exempted from the climate change levy.

Hard-nosed investors such as Deutsche Asset Management, Henderson, Gartmore and Morley have all bought into the idea. Mark Redway of broker Teather & Greenwood – who remains sceptical Alkane can compete with traditional power suppliers – says ‘a stock seen as capable of helping the environment is now more than capable of attracting a premium rating’.