A recent report published by the Cohen Independent Research Group, called Wall Street’s #1 Independent Research Firm, rated Pacific Asia China Energy (TSX: PCE: Other OTC: PCEEF) a Buy. The 68-page research report set three wide-ranging valuation levels as price targets for PCE shares for the company’s coalbed methane concessions in China. Considerations such as the wide range of the Guizhou’s abundant gas reserves, expected prices of natural gas during the research firm’s forecast period, and discounting factors, such as the stock price’s high volatility, were included in their price targets.
PCE shares, which closed at C$1.16/share on nearly 131,000 shares trading hands on June 19th, were given long-term fair market pricing of C$1.96/share by Cohen Research. This pricing was under the most pessimistic scenario. The low-case scenario included a natural gas price as low as $275 per 1000 cubic meters, and included a discount rate of 25 percent on the stock price. Cohen also reported, in the report, that at the current market price, PCE is “grossly undervalued.”
Cohen Research wrote, “As per our Base Case scenario estimates, the NAV of PACE’s resources falls in the range of C$5.31 – 7.83 per share (with a discounting factor of 20 percent).” Under the most optimistic pricing, assuming natural gas at $375 per 1000 cubic meters, Cohen targeted PCE shares at C$11.56/share. Cohen Research used the Net Asset Value (NAV) based method, which is one of the most accepted methods to value mining companies.
PACE, the acronym for Pacific Asia China Energy and not the stock’s ticker symbol (which is PCE, trading on the Toronto Venture Exchange, or TSX), is fortunate that one of its concessions is in the Guizhou province of China. Estimates describe this Chinese province as hosting more than 20 percent of China’s coalbed methane (CBM) reserves. The country’s total CBM reserves have been independently estimated to exceed 31 trillion cubic feet.
PACE was the first Canadian publicly traded company to participate in China’s granting of CBM concessions. PACE is participating in the Baotian-Qingshan CBM project through its wholly owned subsidiary Asia Canada Energy (ACE). China’s state-owned CBM company, China United Coalbed Methane (CUCBM), granted the 970-square kilometer CBM concession in September 2005 to ACE. The Baotian-Qingshan concession is located in the CBM-rich Guizhou province.
The Cohen Research NAV levels confirm what we anticipated. Earlier this year, we had reported on the assessment by Sproule International on the Baotian-Qingshan property. On March 1st, PACE had released three scenarios presented in the technical report filed by Sproule. The worst-case scenario on the property showed 504 billion cubic feet for three coal seams. The high case volume scenario for seven coal seams reached as high as 11.2 trillion cubic feet. Sproule’s assessment, called the “Most Likely Case volume” estimated 5.2 trillion cubic feet. Some analysts have valued each trillion cubic feet of gas at C$1 billion market capitalization.
This valuation does not include PACE’s other CBM concession in China, the Huangshi project, where the company began drilling test wells in mid May. Nor does this include the company’s joint venture partnership with Mitchell Drilling Services of Australia for the exclusive use of the drilling company’s Dymaxion® system in China. We interviewed Nathan Mitchell, president of the drilling company, who was both optimistic and excited about his company’s joint venture with PACE, and looked forward to expanding his drilling operations into China.
Mitchell told us, during that interview, his drilling company’s technology made it possible to extract gas for around US$1.25 per mcf. This would help make potentially “uneconomic” gas more economic under a very pessimistic scenario. Revenues from others using the Dymaxion system in China would flow into the coffers of both PACE and Mitchell. Obviously this joint venture is moving forward. On June 8th, PACE announced it had appointed a country manager for the joint venture, writing, “Mr. Pacey will oversee all aspects of the joint venture activities in China as the Joint Venture Company prepares to deploy Mitchell Drilling Contractors Pty Ltd’s proprietary Dymaxion Surface to In-seam Drilling System later this year.”
Cohen Research did warn of negatives in making a hypothetical Bear Case for PACE’s projects. The research team wrote, “Commercial viability has not yet been proven.” The report also pointed out that technical studies were insufficient to “accurately assess the quality of CBM” to be extracted. Current drilling is underway on both CBM concessions. On June 12th, PACE reported, “Early stage desorption data from 12 samples show a range of gas contents between 105 and 407 scf/t (3.3 to 12.7 m3/t) after 4 to 19 days of testing. These values will be exceeded as desorption will not be completed for several weeks.”
The company appears on the right track and has been issuing regular progress reports, which are encouraging. As PACE progresses to its final drilling in Guizhou province, and as the price of natural gas recovers, we suspect Cohen Research will be pleased with their price targets, as might shareholders in Pacific Asia China Energy.