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Admiral Bay, an interesting energy play

Bob Moriarty
March 7, 2003

A financial advisor of mine has turned me on to a number of good gold exploration companies this past year. He approached me recently and suggested I take a looksee at Admiral Bay Resources. (ADB-V on the TSE and ADBRF on the OTCBB). It's an energy play and given the current unleashing of the dogs of war, it's perhaps worth considering.

Before I go any further, let me explain how I determine what companies I want to write up. I never, never, never pay any attention to media packages that come from management. I get maybe 20 requests a week. I think there is somebody in every company who does nothing but send out literature to different people in the hopes of getting them to write them up. But you are always going to get a very one-sided story. I have no doubt the PR lackey for Barrick is convinced it's the best gold stock in the world. So I just ignore info from management of gold companies, you won't get the information you need.

I do pay a lot of attention to the voice of actual investors, especially those with a lot of money at risk. Believe it or not, they are far more willing to be candid and discuss both sides of the coin. For some reason, the management of every company in the world wants writers to believe stories come with only one side.

In any case, my advisor suggested the company to me a couple of weeks ago and I've been watching it since. The company was as low as $.13 a share (all dollar figures are Canadian) a year ago and it began a steady climb in May of 2002. A month ago the stock traded as high as $1.24 before correcting to the $.90 area. As of Thursday March 6, the stock closed at $.95 a share with a total number of fully diluted shares outstanding of 20 million for a market cap of about $19 million Canadian.

Coal is nothing more than biological material converted to coal through heat and pressure over time. Other products associated with low grade coal include methane gas and some heavier hydrocarbons. Under other ownership, the 14,000 acres presently controlled by Admiral Bay were drilled between 1978 and 1983 in a series of eight drill holes. Though all the drill holes found significant coal seams, the low price of coal didn't justify a full scale mining project.

Low grade coal produces a natural gas known as CBM or Coal Bed Methane. CBM is created when plant material is converted to coal over millions of years. Methane gas is contained within the coal seams where it is adsorbed into the coal. The overlying rock pressure and water within the coal fractures keeps the CBM absorbed in the coal.

Admiral Bay presently controls 14,000 acres of coal which they believe has the potential to contain 1,500 Mcf of methane gas per acre. They are in the midst of a giant land acquisition program to stake and permit a total of 250,000 acres. The Moose River Basin they are working in has a number of similarities to the Powder River Basin in Wyoming. In the United States, more than 10% of all natural gas now comes from CBM which commands a price premium due to its low sulfur content.

Daily production from a CBM project depends on the number of wells and their spacing. Typical CBM gas wells in the Powder River Basin produce between 100 and 4,000 Mcf per day. Using a figure of 10 wells producing 1,500 Mcf per day would generate $27 million dollars a year cash flow. These wells would be shallow and low cost to drill.

So far, it's been an interesting tale. I didn't know coal produced commercial quantities of methane and I've never even heard of CBM. If this is all I learned when talking to Admiral Bay, my story would be boring indeed.

But the numbers get interesting. Admiral Bay knows they have coal. And they know the deposit is virtually identical to that of the Powder River Basin. And there is good reason to believe that what works in Wyoming will work in the Moose River Basin deposit. They have drills turning as you read to determine the flow of gas and the quality. Once they know that, they can plug the numbers into a spreadsheet.

Let me give you some of the numbers. I worked out what a small drill program could produce in cash flow above. Let's say they have completed their land acquisition program and control 250,000 acres rather than just 14,000.

They ESTIMATE the reserves may contain between 37 BCF and 1 TRILLION Cubic feet of CBM. Given a natural gas price of $2 Canadian per MCF and assuming the low side reserves of 37 Bcf, the company would have a Net Present Value of $740 million dollars. You can do the math if you are an optimist and want to assume the high side reserves of 1 Trillion Cubic feet of gas. Just multiply $740 million by 33 times. And for a really interesting number, the current price of a Mcf is about $10 Canadian. Put that in your pipe and smoke it.

In short, Admiral Bay controls a lot of coal which isn't economical. And it looks as if they control a lot of natural methane gas which is way economical. They have a drill program in progress which will give them the data they need shortly to determine just how economical the project really is. This is not a deal where you need 5 years to get into production to produce cash flow. Gas wells and the interstructure to support a gas line is easy to set up.

If they hit a good gas flow in enough of the wells to justify the cost of construction and going ahead, it will be like walking into Las Vegas and throwing a nickel on the crap table, rolling the dice and collecting a pile of hundred dollar bills when you roll a 7.

Them ain't bad odds.

Admiral Bay's website contains more information about their Moose Bay CBM project.

I don't own any of their shares and this writeup is not paid for by anyone. Any information contained in this report is my opinion and before you invest in anything, you should do your own due diligance and consult with your own investment advisor.

Bob Moriarty
March 7, 2003
Please note I'll be in Toronto Sat 8th Mar thru Wed 12th March at PDAC, and I won't be answering emails.

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