Hold SGX, TZN, JML, EPE, Buy OSH

Oil Search (OSH) - Buy around $6.30
Moving forward with its own LNG development

The partners in the Papua New Guinea liquefied natural gas (LNG) joint venture have signed an important gas sales agreement with the PNG government last week. The gas agreement was the final hurdle before the project could enter the Front End Engineering and Design (FEED) stage.

The terms of the agreement are quite standard for the industry and we certainly don’t see any reason for concern. The joint venture will pay a base 30% tax rate on their earnings, in addition to a further tax once the project achieves an unspecified level of return.

The FEED process is scheduled to take approximately 16 months to complete. Key goals over the period will be securing all final licenses and environmental approvals and awarding engineering contracts. A final investment decision should follow in late 2009, with initial production scheduled for late 2013.

The company’s share of the FEED expenses are expected to be in the region of US$120 million.

Oil Search is also benefiting from the positive momentum in the energy sector in Northern Australia at present, particularly with respect to emerging LNG hopefuls (refer to our separate report on Arrow Energy). Within the space of a few weeks, we have seen major developments involving all of the Queensland coal seam gas (CSG) hopefuls, including Santos, Origin Energy, Arrow Energy and Queensland Gas.

Oil search will remain held within the Fat Prophets Mining & Resources Portfolio, but for those Members still without exposure we recommend the stock as a Buy around $6.30.

Sino Gold (SGX) - Take up rights offer at $4.00 per share
Closing out its gold hedge-book

Sino Gold has announced details of a $204 million capital raising, of which $122 million will be used to close out the company’s gold hedge-book, whilst the rest will help bolster the balance sheet and finance future exploration and development.

The capital raising comprises two parts: a placement that will raise up to $68 million, and a non-renounceable rights issue to existing shareholders that will raise up to $136 million.

The rights issue allows each eligible Sino Gold shareholder to take up 2 new Sino shares for every 15 shares that they currently hold, at a price of $4.00 per share. Sino Gold shareholders who were registered as at 23 May 2008 are eligible to participate in the issue.

The entitlement is non-renounceable (i.e. not-tradeable) so it cannot be sold. However, shareholders that do not participate in the offer will have their entitlement sold through a book-build process. Should the book-build achieve a higher price than the entitlement offer, the additional amount will be paid to the non-participating shareholders.

Given the sizeable discount to the current market price, we would encourage all Members that are Sino Gold shareholders to apply for their full entitlement. They should send their payment and accompanying application forms to the Australian Share Registry by 12 June 2008.

Terramin Australia (TZN) - Take up SPP at $3.40 per share
Enhanced funding to develop new projects

As a follow-up to last week’s report on Terramin Australia where the company was suspended at the time of our report, the company has since announced a $16.5 million capital raising by way of a Share Purchase Plan (SPP), which will allow all existing Terramin shareholders to fully participate.

The capital raising will help the company fund the exploration and development of its existing zinc projects in Australia and Algeria, but will also help the company fund new opportunities. We understand that the company is in the box seat to gain approvals to acquire new project acreage in Algeria.

Terramin has obviously done a great job of impressing Algerian authorities since it acquired the Tala Hamza project a couple of years ago. Indeed, Terramin hosted a group of Algerian delegates recently at the company’s Angas mine in South Australia.

Terramin has built up a lot of goodwill with Algerian authorities and is now well positioned to acquire exciting new project acreage in that country. The company obviously wants to be cashed-up in order to move quickly.

Under the SPP, existing Terramin shareholders registered as at 28 May 2008 will be entitled to purchase up to $5,000 worth of new shares at a price of $3.40 per share, which is a nice discount to Terramin’s recent share price peak of almost $4.00 a share.

We encourage eligible Terramin shareholders to take up their full SPP entitlements. The company will send documentation to Terramin shareholders shortly and we will provide more detail for Members with regards to acceptance cut-off dates, etc in the very near future.

Jabiru Metals (JML) - Hold
Jaguar mine production ramping up nicely

Jabiru Metals has announced a $52 million share placement at a price of $0.80 per share to institutional investors, which will help it on several fronts. Firstly, the funding will allow Jabiru to fast-track exploration around its Jaguar and Teutonic Bore mines in Western Australia, and secondly it will allow the company to fast-track exploration and feasibility study work on its second project, Stockman’s, in Victoria.

We pointed out in previous reports that the company’s brand new Jaguar mine was starting to ramp-up to full capacity, and this was confirmed over the past week, with the company saying that it is comfortable with the ramp-up of concentrate shipments. During May, Jabiru averaged the planned 1,000 tonne per day shipment target that was set down when production began.

There has also been good news on the cost front, with the commissioning of the gas-fired power station on site at Jaguar leading to cost savings of around 50% when compared to current diesel prices. The company has now fully decommissioned its diesel generators on site.

We are encouraged by the fact that the Jaguar mine is really starting to hit its straps and the fund raising, whilst temporarily weakening the Jabiru share price, will be of long-term benefit. Jabiru Metals will therefore remain firmly held within the Fat Prophets Mining & Resources Portfolio. 

Enterprise Energy (EPE) - Hold
More detail on Dingo West project

Enterprise has announced further details with respect to the Dingo West coal project, which forms a major component of the previously announced acquisition deal with Bandanna Coal. Under the current deal, Bandanna currently owns 100% of the Dingo West project, which is ideally placed on the Blackwater railway line, 150km west of Rockhampton.

Highly-respected and much sought-after coal player Macarthur Coal can earn a 70% stake in the Dingo West project by completing certain tasks, including: achieving a 40 million tonne JORC-compliant resource, preparation of a feasibility study based on production of at least 1.9 million tonnes of coal annually, as well as securing mining leases, rail and port access, as well as land and water rights, and completion of a project budget and development programme, all by the end of March 2009.

Macarthur must continue to sole-fund all project expenditure until the first 50,000 tonne cargo of coal is sold to a third party and loaded onto a vessel. Furthermore, Macarthur must also contribute a further $5 million in exploration expenditure by March 2011. We expect the first resource estimate from Dingo West almost any day now.

We maintain our positive stance on Enterprise Energy. The recent focus on coal seam gas plays in Queensland, as well as record prices for oil and coal and renewed interest in uranium; all reflects a world placing a much higher value on energy. Emerging coal plays in the Australian market are relatively rare, so Enterprise Energy will remain firmly held within the Fat Prophets Mining & Resources Portfolio.