Exploration Insights

The liberalisation of gas prices in Russia and the Ukraine is providing a useful fillip for several companies. It has certainly brought cheer to AIM-quoted Volga Gas, which encountered a gross pay zone of more than 100 metres at one Russian prospect, Vostochny-Makarovskoye, and a reserve boost at another, Karpensky.

The company, backed by investment group Baring Vostock, hopes drilling results will extend Vostochny-Makarovskoye significantly. Potential gas reserves could more than double from 254.3 billion cubic feet.

Volga aims to start production from Vostochny-Makarovskoye late this year and hopes to separate much higher-priced butane and propane from the other gas. Chief executive officer Mikhail Ivanov argues that this project could generate annual pre-tax cash flow of £50 million from 2010 or 2011.

Karpensky, meanwhile, should provide data from deep drilling this summer. Volga suggests a recently signed off-take deal for ten billion cubic feet a year implies a field with at least 250 billion cubic feet of gas.

With £45 million cash, a likely £10 million capital expenditure increase looks manageable and, despite police raids on BP’s Russian partner, Volga insists that if you stick to the rules Russia is still a good place to do business.

Under the radar
Paul Davies, chief executive of Ukraine-focused JKX Oil & Gas, argues its low profile should spare it unwelcome political attention as it moves into the Russian gas market. The fully listed company lifted Ukraine production 13 per cent last year and benefited from a 40 per cent gas price hike, which helped boost turnover 40 per cent to £92.3 million.

Davies says significant further price rises are on the way, both in Ukraine and in Russia. Last year, the company bought the Koshekhablskoye gas field in the southern republic of Adygea, with proven and probable reserves of more than 300 billion cubic feet, for £25 million. But the stock market has punished hitherto high-flying JKX for project delays and for impairment and exploration cost write-offs, which turned a 37 per cent pre-tax profit gain to £66 million into a mere four per cent advance to £57 million.

Poised to produce
Recent AIM arrival DiamonEx expects to start producing gems from Botswana’s Lerala kimberlite project in three months. Dan O’Neill, the Australian managing director of the Brisbane-based company, says wholly owned Lerala, once a De Beers prospect, should produce diamonds at the rate of 30,000 carats a year and has arranged to fund a significant proportion of expected £12 million capital costs with a Botswana-listed convertible, and £4 million from the European Investment Bank.

O’Neill says New York jeweller Tiffany sought the marketing rights for Lerala stones and offered other help, but no deal could be agreed. DiamonEx estimates a 3.87 million carat resource at Lerala worth £110 million gross at $60 a carat and is exploring US kimberlite prospects in Colorado and Wyoming.

At 16p, against January’s high of 20p and low of 14p, DiamonEx shares have speculative appeal.

Serabi stirs
Mike Hodgson, the recently installed chief executive of Brazil-focused gold miner and explorer Serabi Mining, is working to restore the company’s AIM rating by adapting production methods to the narrow-vein geology of its deposits in the northern Jardim do Ouro region. He hopes to boost grades and increase annual gold production to 45,000 ounces at a cost of below $400 an ounce, while intensifying the company’s exploration effort.

Floated at 30p last year, the shares peaked at 54.5p and now trade at 16p, where they offer a recovery gamble for the brave.

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