CARBON ENERGY LIMITED ABN 56 057 552 137
ASX Code: CNX OTCQX Code: CNXAY
The Company undertook a transformational step with the signing of a Joint Venture Agreement with Beijing JinHong Investment Co., Ltd (JinHong) to develop the first commercial Demonstration Project of its keyseam technology in China. JinHong is committed to providing US$30 million in capital required for the commissioning of the commercial Demonstration Project in China.
The Company submitted its first Rehabilitation Status Report for its Bloodwood Creek Pilot Project to the Department of Environment and Heritage Protection (DEHP). The report concluded rehabilitation remains on track.
The Company received $2 million from Kam Lung Investment Development Company Ltd ('Kam Lung'), the Company's largest shareholder, has increased its interest in the Company to 19.99% with a private placement. Kam Lung will also nominate a representative to join the Carbon Energy Board of Directors.
The Company received $2.5 million as a research and development (R&D) tax incentive cash rebate from the Australian Taxation Office for R&D expenditure in the 2015 financial year and subsequently repaid the $1.2 million Macquarie Facility.
SUBSEQUENT TO QUARTER ENDThe Company allotted 123,845,128 shares to Kam Lung at a price of $0.016 per share representing a 14% premium to the closing price on 25 September 2015, increasing its shareholding to 19.99%. Mr Zhuang, 100% shareholder of Kam Lung, was appointed as Kam Lung's Nominee Non-executive Director on 29 October 2015.
The date for the Annual General Meeting has been set for Monday 30 November 2015 at 9:30am Brisbane time to be held at HopgoodGanim Lawyers, Level 7, Waterfront Place, 1 Eagle Street, Brisbane. Along with the normal business of the meeting, the Company is also seeking shareholder approval to form a Joint Venture in China (refer to Notice of Meeting (NOM) announcement made on 29 October 2015)
To assist the Board and shareholders assess the merits of forming the Joint Venture with JinHong and entering into binding Agreements with the Joint Venture, the Company appointed PricewaterhouseCooopers Securities Ltd as an Independent Expert ('PwC Securities'). PwC Securities have concluded that the proposed transaction is FAIR AND REASONABLE to all non- associated shareholders. The Independent Expert's Report (IER) is available to read on the website at www.carbonenergy.com.au/ShareholderSupportingMaterial and is included as part of the NOM distributed on 30 October 2015.
COMPANY UPDATE CHINAJinHong Joint Venture
During September 2015 Carbon Energy announced that it had entered into binding Agreements with JinHong to form a joint venture in China (JV). The Parties will form a Joint Venture with JinHong for the purpose of establishing a vertically integrated gas business in China. The first goal of the Joint Venture would be the establishment of a commercial Demonstration Project in China.
Formation of the JV is conditional upon approval from Carbon Energy non-associated shareholders (refer to NOM distributed on 30 October 2015) and then the Ministry of Commerce in China which is expected to be granted before the end of the first quarter of 2016, following which the initial capitalisation of the Joint Venture by JinHong of US$10 million is required.
After receiving the above approvals Carbon Energy will then transfer a non-exclusive license to the JV to utilise the keyseam technology in China and, only upon successful commissioning of a commercial Demonstration Project will Carbon Energy issue an exclusive license to utilise the keyseam technology in China for which Carbon Energy will receive a 30% entitlement to the dividend distributions (the Transaction).
The Joint Venture parties have agreed that Jinhong will capitalise the joint venture to US$30 million (A$40 million1) over a 3 year period to achieve its initial goal of developing a demonstration project within 18 months of establishing the Joint Venture. The JinHong investment provides sufficient capital to build a complete showcase of keyseam's technical ability on a commercial scale outside of Australia and provides the crucial access to funding in order to construct and operate such a project.
Significantly, the funding for the JV will provide Carbon Energy greater capacity to infiltrate the Chinese market as well as providing a strong local partnership with proven Chinese business knowledge on how to successfully maximise company value in China at a time when China is embracing cleaner energy production technology and has acknowledged UCG as playing a major part.
Advantages to shareholders of supporting the formation of the Joint Venture include:
provides access to a source of funds for the development and commercialisation of the keyseam technology in China which Carbon Energy would otherwise not have access to, particularly given current depressed market conditions for coal and gas assets;
first commercial mover to market to capitalise on China's supportive political environment which recognises UCG as a source of cleaner energy production;
it has been structured to enable Carbon Energy to move forward on multiple fronts thereby reducing execution risk and maximising returns. Carbon Energy can license projects before the ignition date of the JV commercial Demonstration Project and retain 90% to 100% of the profits depending on whether it introduces a project to the JV or it licenses a project outside the JV, rather than the 30% of distributions that would otherwise be received from the JV;
1 Assuming an AUD exchange rate of 75 cents
through the Technical Services agreements established with the JV, Carbon Energy is contracted to provide technical services to the JV thereby providing a source of revenue and cash flow to the Company;
offers strong links to China through business and government contacts that JinHong holds. This is expected to enable greater access to China and suitable coal resources thereby enabling Carbon Energy to capitalise on opportunities that would potentially not be possible to access in the Chinese market without a local Chinese partner;
provides Carbon Energy with non-dilution rights up until a possible IPO of the Joint Venture. This avoids the risk of Carbon Energy being severely diluted through the introduction of additional capital or investors into the IPO, unless Carbon Energy agrees to such dilution.
To assist shareholders assess the merits of forming the Joint Venture with JinHong and entering into binding Agreements with the Joint Venture, the Company appointed PricewaterhouseCooopers Securities Ltd as an Independent Expert ('PwC Securities'). PwC Securities has concluded that the proposed Transaction is FAIR AND REASONABLE to the Non-Associated Shareholders.
The further investment in Carbon Energy by Kam Lung through a private placement of $2 million shows strong support from the Company's cornerstone investor.
The Company continues to be active in Asia and has been in discussions with a number of parties developed through established contacts as well as those gained from the International Underground Coal Gasification Research Centre, a partnership the Company has formed with the leading mining university, China University of Mining Technology. The research centre's purpose is to cooperatively promote China's UCG market in China and to establish the highest international standards in this field. It is expected to be backed by funding and support of China's National Development and Reform Commission.
During the quarter the Company continued to meet and communicate with the Queensland Government regarding progress to commence a commercial project near its Bloodwood Creek trial site 30km west of Dalby in south-east Queensland (Blue Gum Gas Project).
Letters from the Honourable Dr Lynham, Minister for Natural Resources and Mines (NRM), acknowledged Carbon Energy's performance during the trial and noted its technology will form part of the Government's decision making process. The Minister was, however,not able to advise when a Government decision on the future of UCG in the State was likely to be made.
Representatives from Carbon Energy also met with other DNRM staff as well as the Department of Environment and Heritage Protection (DEHP) regarding a range of business, including submission of the Company's first Rehabilitation Status Report and soil gas testing. Carbon Energy noted that ongoing rehabilitation status reports will be submitted until the rehabilitation meets or exceeds the criteria in the Rehabilitation Plan submitted to the Government in October 2014. Soil gas testing was undertaken during the quarter with DEHP noting that no further testing is scheduled.
Blue Gum Gas Project
The Company continues to engage with the Queensland Government to move this project forward. The project is planned for development on MDL374 and freehold land owned by the Company in the Surat Basin. The proposed Blue Gum Gas Project is intended to deliver 25PJ per annum of pipeline quality gas. It is anticipated that first gas could be supplied to local industry three years from commencement of the EIS process, assuming suitable investment partners are secured.
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