PAC Partners believes there’s plenty of upside to TMK Energy, and here’s why…

TMK’s large coal seam gas endowment and ready access to gas markets are behind PAC Partners decision to initiate coverage of the company as a speculative buy with a $0.04 price target.

In a video presentation, PAC Partners senior research analyst Lawrence Grech explained the reasoning of why the equities provider has a bullish view of the company.

He noted that since Mongolia became a democratic country in 1992, it has leveraged international assistance to tap its “fantastic resources”, which led to spectacular discoveries such as the Oyu Tolgoi copper-gold discovery.

Thick, high quality coal seams were also discovered some 20 years ago and while these were initially mined for sale to China and their steel mills, parties with experience in Queensland’s CSG sector saw huge potential in this resource.

TMK Energy (ASX:TMK) teamed up with an in country team to pick up some excellent and prospective ground just as legislation and regulation changed to enable CSG exploration and exploitation.

The company took the approach of looking through over 2,000 coal bores, which provided it with a wealth of information to high-grade areas for exploration.

This paid off in spades with company delineating a gas resource of over 1.2 trillion cubic feet of gas after drilling just seven shallow wells last year.

For context, this is equivalent to Beach Energy’s (ASX:BPT) entire gas endowment though the mid-cap energy company has obviously put in a lot more work into its resource and knows more about it.

Adding further interest, this was achieved at a cost of just a few million dollars with most of it paid by a farm out to fellow Australian Talon Energy (ASX:TPD).

Pilot program significance

Bridge added that the company was currently drilling three pilot wells to determine the quality of the resource, which would determine how well the gas could flow from the well bores.

He noted that TMK had intersected coal seams with cumulative widths of about 50m or more with indications of quite a lot of gas within them.

This compares with the prolific CSG fields in Queensland, which had between 10m and 15m of coal seams and were capable of producing 5 billion to 6 billion cubic feet of gas per square kilometre.

He also noted that in the latter half of the year, TMK would drill another eight wells into another trend, which if successful, could add hundreds (if not more) Bcf of gas to its already substantial resource endowment.

Further targets for exploration and development could result from its plan to carry out two seismic programs in 2024.

Easy access to markets

The other point in TMK’s favour is its ready access to markets including an existing coal operation less than 1km away which currently uses expensive diesel to generate electricity.

Grech noted that should the company’s pilot program result in decent flows of gas, it could easily do a test run of producing power and sell it to the coal mine to replace the diesel.

Should the company be able to prove up enough gas, the Ulanbaatar market alone – where 50% of the Mongollian population lives – becomes available to them.

This could potentially ease pollution in one of the most polluted cities in the world given its extensive use of brown coal for its power plants.

However, it is the project’s proximity to China that could potentially be the real game changer with Bridge noting that the Chinese market is readily capable of absorbing any gas TMK produced.

He added that while there were always unknowns, TMK had a very good chance of going to the next stage of investigation and that there was potential for large upside for the $75m market cap.