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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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 321gold Inc Miami USA
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