in a$ unless otherwise stated share price graph · environment has created a perfect storm of...

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BUY Current Price

Target Price

$0.15

$0.48

Ticker: KKO

Sector: Energy

Shares on Issue (m):

- fully diluted (m):

Market Cap ($m): 19.1

Market Cap Diluted ($m) 19.1

Net Cash ($m)*: 1.3

Enterprise Value ($m): 17.4

* estimate

52 wk High/Low: $0.36 $0.14

12m Av Daily Vol (m): 0.07

Valuation Risked Risked Unrisked

$m $/s $/s

Amersfoort Conv 43.9 0.34 0.49

Amersfoort CBM 40.7 0.32 0.81

Prospective 18.2 0.14 7.14

Cash 1.3 0.01 0.01

Debt 0.0 0.00 0.00

Corp Admin -10.0 -0.08 -0.08

Options 0.5 0.00 0.00

Total 94.6 0.74 8.38

In A$ unless otherwise stated

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Nov-12 Feb-13 May-13 Aug-13 Nov-13

Tuesday, 19 November 2013

Kinetiko Energy Ltd Right Place, Right Time, Right Asset, Right Team Analyst | Dave Wall

Quick Read

Kinetiko has secured exposure to a huge footprint with Coal Bed Methane (CBM) and

conventional gas potential onshore South Africa, where the changing regulatory

environment has created a perfect storm of opportunity. The lead project, Amersfoort

(KKO 49%, operator), has achieved spontaneous gas flow to surface from six of seven

pilot test wells. An eighth well is currently drilling. Significantly, the gas is flowing from

tight sandstones adjacent to the coal seams without minimal dewatering nor any

stimulation. The KA-03PT well flowed at a sustained rate of 332mcf/d – an outstanding

result given well costs of ~$200k. At a gas price of US$10/mcf (below the market price),

this well would have paid back in less than 6 months. Increased flow rates, with

contribution from the coals, are highly likely once dewatering is completed. The current

gross Contingent Resource of 1.5Tcf (2C) should be followed by a maiden Reserve in Q2

2014. We are initiating coverage on Kinetiko with a BUY recommendation and a price

target of $0.48.

Event & Impact | Positive

Conventional Gas Significance: It is important to note that none of the wells to date

have been stimulated and that gas is flowing spontaneously from the sandstone

horizons with minimal/no pumping. The effect of early revenue on the economics, prior

to dewatering and gas flow from the coals, is hard to overstate. Our modelling indicates

robust economics from the sandstone zones alone, before even considering the coals.

South Africa Thematic: Changes to the regulatory environment in South Africa are

facilitating an increasing role for gas in the energy mix, which is currently dominated by

less clean coal (with some power generated from burning diesel at an equivalent price of

US$22/GJ). The result is a high gas price environment and a quickly evolving regulatory

framework, which will allow fast-track of development for projects such as Amersfoort.

The changes have had a knock-on effect to the level of Industry interest in gas projects in

South Africa meaning that early movers like Kinetiko are in an enviable position.

Economics Hard to Break: Whilst it is early days in terms of flow rates, the inexpensive

well cost, at <$250k (tied in), high gas price environment and attractive fiscal terms

mean that economic hurdles for break-even are extremely low. At US$10/mcf

(conservative), break-even is achieved from peak flow of 48mcf/d (sandstone only) and

ultimate recovery of 0.08Bcf (Australian CBM wells require recovery of 0.3Bcf for break-

even). Based on the sandstones alone, we model risked NPV of $0.49/sh (net to KKO).

Recommendation

Kinetiko is partnered with a well-credentialed BEE group, Badimo Gas, an early mover in

the gas space in-country. A recent disagreement over payments caused sharp share

price decline, despite speedy resolution, creating a chance to invest at historic lows.

Huge resource potential and catalysts related to Gas Sales Agreements, well test results

and a maiden Reserve mean that we are initiating on KKO with a BUY recommendation

even though there is a near term funding requirement. Our price target is $0.48.


Highlights

Overview

Kinetiko listed in July 2011 when it partnered with Black Economic Empowerment (BEE)

group, Badimo Gas. The Joint Venture first acquired rights over the Amersfoort Area

(KKO 49%, Operator), which had well documented gassy coal measures and was located

close to infrastructure and markets. The project area is 1,601km2 and is located 300kms

ESE of Johannesburg. Exploratory core hole drilling and pilot well tests have confirmed

both the presence of prospective coal seams and also conventional gas potential

contained in sandstones adjacent to the coals. Six of the seven pilot test wells drilled to

date have spontaneously flowed gas to surface, unstimulated and without dewatering

(one was abandoned due to mechanical failure). A Contingent Resource for Amersfoort

was independently estimated at 1.5Tcf (gross 2C).

Kinetiko has applied for Exploration Rights over 4,288km2, from 7,890km

2 of Technical

Cooperation Permit (TCP) areas, and applied for additional TCPs over 6,217km2. Badimo

Gas has applications for 7,086km2 of Exploration Rights. We assume that KKO will

ultimately partner with Badimo on all project areas in South Africa, which have a gross

potential footprint in excess of 19,000km2.

In addition to the South African CBM permits, KKO has applications for 10,500km2 of

exploration tenure in neighbouring Botswana, which is also considered prospective for

CBM.

Figure 1: Project Locations – Huge Footprint, Strategically Positioned

Source: Kinetiko

The immediate forward program is to drill and test the first pilot well in the southern

portion of Amersfoort ahead of a 5 well program in Q1 2014. . Along with customer

offtake potential, this should enable booking maiden Reserves in Q2 2014.

Huge acreage position in emerging

CBM play in energy starved South

Africa – 1.5Tcf Contingent

Resource set to move to Reserve

Q2 2014

Conventional gas in sandstone

adjacent to the coals provides

significant kicker to economics

>19,000km2 footprint in South

Africa, close to infrastructure and

market

10,500km2 position in Botswana –

may benefit from early work by

others

6 from 7 wells have flared gas,

with 332mcf/d achieved over 6

week test period – payback in less

than <6months on US$200k well

cost

First well on new area currently

underway – 4 additional wells in

Q1 2014


Amersfoort (KKO 49%, Operator)

Overview

The Amersfoort Project is comprised of two Exploration Licences (56ER, 38ER) and is

1,601km2 in area. The licences are located 4 hours ESE of Johannesburg in the

Mpumalanga (formerly Eastern Transvaal) Coal Field. The immediate region is well

documented for the presence of gassy coals, initially indicated by 854 regional diamond

core holes drilled in the 1970s. Many of these holes were left open and gas could be

seen bubbling to the surface, indicating likely flow from sandstone intervals as the coals

had not been dewatered and thus would not be contributing. Subsequent work by KKO,

including 20 exploration core holes, has confirmed gas in both sandstones and coals,

which range in net total thickness from 1-4m. The coals and sandstones are interbedded

with carbonaceous mudstones.

Figure 2: Amersfoort Licences - The Story So Far

Source: Kinetiko, Argonaut

Deliverability of the gas located in the sandstone horizons has been proven by 7 pilot

wells to date at 56ER, of which 6 have flowed spontaneously to surface (one was

abandoned due to mechanical failure). The best well achieved up to 420mcf/d with

stabilised flow of 332mcf/d over a 6 week test period. The 38ER licence is deeper with

higher pressures than 56ER so may result in even better initial flow rates. The first pilot

well at 38ER recently spud with results expected in the near term.

The initial farm-in deal with Badimo called for the expenditure of ZAR$26m (~US$2.6m)

to earn 49% (completed Dec 2012). Kinetiko was designated as the operator of the

project. At the time of the deal an independent review by Gustavson Associates

estimated potential Gas in Place (GIP) of 1.7Tcf of which 1.12 was considered

Prospective Resources (i.e. recoverable).

As can be seen in the figure above, Kinetiko has applied for extensive Exploration Rights

and TCPs in the Amersfoort Area, which is likely to significantly increase its resource

potential. We interpret that the prospectivity of the existing licences, combined with

scale from the additional application areas (which are likely to be granted), will result in

strong industry interest for partnering, if Kinetiko desires to do so.

20 coreholes for 1.5Tcf of 2C

Contingent Resource

6 of 7 pilot wells have flowed gas

to surface – best flow rate

350mcf/d from conventional

sandstone interval

Northern permit de-risked by 7

pilot wells – first well at southern

permit drilling now

49% and operator through deal

with well credentialed BEE group,

Badimo Gas

Applications for Exploration Rights

and TCPs will increase footprint to

>19,000km2

Comments here


Operations

The coals and sandstones are located at shallow depths between ~150m - ~500m. Wells

are currently drilled vertically and cased to ~150m before being completed barefoot

across the entire coal / sandstone interval. Because of the shallow depth and simple

completion, well cost has initially been ~$200k. We estimate that wells could be

completed and tied in for ~$250k. Cost per well is likely to continue to decrease as

experience is gained.

As with all CBM operations, dewatering of the coals is required before desorption can

occur with resulting flow rate contribution. Currently, the Joint Venture is focussed on

assessing the potential of the conventional sandstone reservoirs and has been

undertaking minimal pumping / dewatering. Water production is at present limited to

10,000l per day per well under an old Act, which is likely to change. Importantly, water

quality appears highly suitable for local, agricultural purposes with minimal treatment.

Figure 3: Well Schematic with Geology

Source: Kinetiko

Geology

Amersfoort is somewhat unique, by comparison to most other CBM projects, as it has

significant resource potential in conventional sandstone reservoirs adjacent to the coals.

Gassy coals such as those at Amersfoort can expel greater than 10x the gas capable of

being retained within the permeability / porosity matrix of the coals themselves. Rather

than migrating through the strata to surface, as with most areas, the gas at Amersfoort

is trapped by the presence of an impermeable volcanic layer (dolerite sill). The

sandstones adjacent to the coals provide good quality reservoir for the gas to reside.

The coals themselves are of Permian age and range in thickness from 1-4m. Whilst

permeability (a key element for dewatering and gas deliverability) has not been

quantified, it is deemed to be decent, meaning that hydraulic stimulation is highly

unlikely to be required. Gas desorption is also visible from cores taken from exploration

wells, which have been used to locate the pilot production wells.

Shallow coals mean wells can be

drilled for $200k with cost

continuing to decrease

Conventional sandstone the focus

for now ahead of dewatering to

achieve flow from the coals in

2014

Gas in sandstones adjacent to the

coals trapped by impermeable

dolerite sill

Good permeability in the coals

means that fracking not necessary


Figure 4: Sandstone and Coal Intervals Proven Over Large Geographic Area

Source: Kinetiko

Reserve / Resource

Kinetiko’s Contingent Resource is detailed below. Gustavson estimated >25% of the

resource potential to be associated with the sandstones; however, subsequent analysis

has indicated that this number may increase to as high as 50%. The resource is based on

the results from 20 exploration core holes and was completed in August 2012.

Substantial additional data has been obtained from the 7 pilot wells drilled to date and a

maiden Reserve is expected to be delivered in Q2 2014.

Figure 5: Large Contingent Resource – Maiden Reserve Q2 2014

Source: Kinetiko

The independent expert has also estimated 9.3Tcf of Prospective GIP on the original 4

TCP application areas.

Large sandstone intervals seen

over extensive geographical area

1.5Tcf in 2C Contingent Resource

with up to 50% contribution from

the sandstone

Maiden Reserve expected in Q2

2014

Over 9.3Tcf of GIP estimated as a

Prospective Resource


Well Results

Results from corehole exploration have proven an extensive area with continuous coal

and sandstone presence. Thickness and quality of both is not homogenous across the

entire project area; however, we interpret the range is generally from medium to

excellent, rather than poor to medium. A summary of the pilot well results to date is

included below. All wells are currently shut in to avoid waste of gas through flaring.

Figure 6: Pilot Well Results to Date – More to Come

Source: Kinetiko, Argonaut

The shallow depth of the wells means that cost is low; however, pressure is also

relatively low. The presence of the trapping dolerite sill appears to have resulted in a

mildly overpressured regime caused by capture of the gas escaping from the coals. Flow

rates from the shallower sandstones are expected to be limited to some extent by this

low pressure. The results from KV-04PT, and other wells drilled in 38ER, may give rise to

better flow, on average, due to the greater depth and pressure in this area.

Figure 7: Gassy Coals!

Source: Kinetiko

Well Location Flow cf/d Notes

KA-06PT 56ER 10,000

12 day rate, barefoot completionfrom 146-368m,

unstimulated down hole pump. Ongoing testing limited

by water production quota

KA-03PT2 56ER 25,000

Barefoot, no water pumping or stimulation. 458m

depth. 330m from KA-03PT

KA-03PT 56ER 420,000

332mcf/d stabilised from sandstone interval over 6

week period

KA-10PTR 56ER 45,000 Sustained rate over 10 day test period

KA-05PT 56ER Low pressure gas, possible water disposal

KA-07PT 56ER

Good pressure, low gas flow, adjacent to collapsing

dolerite

KA-11PT 56ER Water from basal dolerite, requires workover

KV-04PT 38ER Drilling ahead

Continuous coal and sandstone

proven by 20 corehole exploration

wells

Pilot wells show spontaneous gas

flow to surface from conventional

horizons – highly encouraging at

this stage

Shallow depth = low cost and low

pressure - economic hurdles are

modest so flow rate of 47mcf/d is

breakeven

Gas desorption from coals – once

dewatering is achieved will

provide significant uplift to flow

rates


Infrastructure

Kinetiko is located in the heart of South Africa’s energy infrastructure. Over 10 power

stations are located within a 200km radius of Amersfoort, and the major gas

transmission pipeline from Sasol’s Secunda gas to liquid plant runs through the permit

area to Durban. Once the project reaches maturity, it will not be a complex task to tap

into the infrastructure framework; however, it will require partnering with a larger

player. The initial path to market is likely to be via small scale power generation or, more

likely, compressed natural gas (CNG). Once greater scale is achieved, production into a

main transmission line is likely.

Figure 8: In the Heart of South Africa’s Infrastructure

Source: Kinetiko

Forward Program

Kinetiko is currently drilling the first of five planned pilot wells at the 38ER licence area,

where there is potential for higher pressure / flow rates due to the greater depth. A

maiden Reserve is also planned for Q2 2014 ahead of continued corehole drilling and

pilot wells in 2014.

Additional newsflow is expected in relation to conversion of several of the TCPs into

exploration licences as well as likely progress on agreements for supply of gas.

Discussions with potential offtake customers have commenced.

Located in the heart of South

Africa’s infrastructure in close

proximity to pipelines, power

plants and markets

Near term catalysts expected in

relation to well test results, offtake

agreements, award of exploration

rights and maiden Reserve


Other – Amersfoort Region, Badimo and Botswana

Kinetiko has strategically secured TCPs over a large area surrounding Amersfoort. Of

particular interest are the southern licences where depths are greater and the higher

pressure regime may result in higher flow rates. TCPs allow the holder to carry out

desktop studies for 12 months before the right to convert to exploration licences.

Figure 9: Strategic Application of Adjacent Amersfoort Acreage

Source: Kinetiko

The likely conversion of the TCPs would result in up to 11,500km2 in additional

exploration licences. Gustavson estimated 9.3Tcf GIP Prospective Resource at the TCP

areas. Currently, Kinetiko holds the TCPs at 100%; however, we assume that they will

partner with Badimo Gas upon conversion. Badimo has an additional 7,086km2 to

contribute and we assume that Kinetiko will partner on these also, bring the total

footprint in South Africa to over 19,000km2.

Additionally, Kinetiko has applicatons for 10,500km2 of exploration licences in

prospective early stage areas in Botswana.

Figure 10: Badimo (green), Botswana (yellow)

Source: Kinetiko

Large strategic positions secured

around Amersfoort through

applications for Exploration Rights

and Technical Cooperation Permits

Deeper coals 500m-900m – higher

pressure higher flow rates?

Conversion of applications and

additional acreage with Badimo

will results in >19,000km2 of

exposure

10,500km2 in Botswana in early

stage permits but with significant

industry activity nearby


South Africa

Overview

Only since 2007 has onshore gas exploration licence tenure been granted to allow CBM

evaluation to commence in South Africa. Given this, Kinetiko is a front runner in terms of

the maturity of its asset (at Amersfoort) and likely to be one of the first to market with

its gas.

South Africa’s economy is heavily reliant on the energy sector for power generation to

fuel its mining, smelting and petrochemical industries. Coal/peat is far and away the

largest source of energy supply at >70% as compared to the global average of 18%. Gas

consumption as part of the energy mix is comparatively low to the global average at ~3%

versus 25%.

Rolling blackouts and power shortage issues have been well publicised as has the

extremely high level of carbon emissions from burning of coal as well as conversion to

liquid synthetic fuels.

Additional sources of fuel, such as imported diesel or synthetic liquid fuels from coal, are

also very expensive. The equivalent netback price for a diesel fuelled power plant at

current prices is ~$25/GJ. This means that Kinetiko is likely to achieve a price in excess of

US$10 per GJ (1GJ = 0.95mcf).

The South African government has attracted significantly increased industry interest in

both offshore and unconventional onshore exploration. This may serve to meet future

energy needs; however, the immediate needs require solutions that a project like

Amersfoort can solve in the near-medium term.

Energy starved environment with a

strong desire to diversify from coal

– Kinetiko ahead of the play with

its CBM / conventional gas assets

High price environment as

competition is burning diesel for

US$25/GJ, imported LNG or gas

from Mozambique – industry

interest increasing for

development of gas assets in South

Africa


Corporate

Overview

Kinetiko has a clean capital structure with 127.65m shares on issue and 2.25m options,

which are incentive options held by the Managing Director, Andrew Lambert.

The Company listed in July 2011, issuing 50m shares at $0.20 to raise $10m. A

subsequent raising was undertaken in December 2012 at $0.18, which raised $3m.

The Company has cash of ~A$1.0m so will require additional funding in the near-term.

We understand that the Company is currently in the process of restructuring its Joint

Venture with Badimo to further align the interests of stakeholders; however, the final

configuration from this process is not known. We assume no change in effective

ownership for shareholders.

Shareholders

Figure 11: Board Exposure

Source: IRESS, Company Announcements

Figure 12: Top 20 Shareholders

Source: IRESS, Company Announcements

Name Position Options Perf Shares Ord Shares Total

Directors

Adam Sierakowski Chairman 0 0 10,062,500 10,062,500

Andrew Lambert Managing Director 2,250,000 0 1,000,000 3,250,000

Dr James Searle Non Exec Director 0 0 10,725,000 10,725,000

Geoffrey Michael Non Exec Director 0 0 21,550,000 21,550,000

Clean capital structure but low on

cash

Skin in the game - 35% Board owned


Badimo

Badimo is a black empowerment controlled entity. The Company is controlled by its

majority shareholder and Chairman, Mr Donald Ncube. Mr Ncube is widely

acknowledged and respected as a leader in black empowerment business issues in South

Africa both by Government and the business community. He has a long involvement

with the mining industry in South Africa, extending back to senior management positions

with Anglo Gold Ltd in the apartheid era. Mt Ncube has subsequently held many

prominent business and government board positions including Executive Director of

Cincinnati Mining and is current a Director of Gold Field Ltd.

Previously, he was an alternative Director of Anglo American Industrial Corporation and

Anglo American Corporation, a Director of AngloGold Ashanti as well as Non-Executive

Chair of South African Airways.

The Technical Director of Badimo is Mr Paul Tromp BSc, MSc AAP, a petroleum geologist

with over 20 years’ experience in exploration and production in CBM in North America

and in Africa.

Kinetiko halted operations earlier this year after Badimo had failed to meet its cash calls

for expenditure on the project. This issue was resolved and we interpret that Badimo is

capable of meeting near-medium term funding requirements. We do not believe the

partnering risk to be significant and understand that additional restructuring of the Joint

Venture is currently underway to further mitigate risk. Whilst the risk is interpreted to

be small, it should not be completely ignored.

BEE High Level Explanation

Current legislation states 26% BEE ownership requirement for mining project and 10%

BEE ownership for oil and gas projects; however, proposed changes have been mooted

to bring the oil and gas code in line with that of the mining code. Questions have been

raised about funding capability at this higher working interest in the more capital

intensive oil and gas industry (where exploration success rates are also relatively low).

In any case, Kinetiko is protected against changes to the legislation through its

agreement with Badimo, where the BEE interest in its projects is likely to be 51%.

Badimo well-credentialed early

mover in CBM in South Africa

Partner issues resolved and

additional initiatives underway to

further mitigate future risk


Valuation

Overview

Our valuation for Kinetiko is based on discounted cash flow modelling at Amersfoort,

separated into Conventional and CBM potential. Both models are heavily risked for

recoverable resource due to the early stage nature of the projects and then discounted

again to take into account additional risks associated with scheduling / regulatory

environment. Our assumptions are summarised below:

Figure 13: Valuation Assumptions for Amersfoort

Source: Argonaut

The result is a combined risked valuation for Amersfoort of $0.66.

We value the 9.3Tcf Prospective Resource at A$18m, or $0.14/sh, based on 40%

assumed recovery factor, A$0.50 per mcf notional valuation and 2% chance of

commercial success.

It is early days and we have risked all of the Company’s assets conservatively, as is

appropriate; however, note that substantial upside exists to our valuation. Without

taking into account further dilution (either at the corporate or asset level), we estimate

this upside potential to be in excess of A$8 per share.

Our total valuation is $0.74/sh and is detailed below. We apply a further discount to this

of 35% to arrive at our price target of $0.48/sh. This discount is largely qualitative based

on size, liquidity and lack of takeover premium. We also note that additional capital is

required, which may result in dilution; however, given the heavy discounts already

applied we have not taken this into account at this stage.

Metrics

Amersfoort

Conventional Amersfoort CBMPeak flow rate per well 100mcf/d 120mcf/d

EUR per well 0.16Bcf 0.2Bcf

No wells 900 900

Total recovery 144Bcf 171Bcf

Annual decline 20% 20%

Opex US$1.50/mcf US$1.50/mcf

Capex per well US$0.25m US$0.25m

Capex infrastructure US$140m US$140m

Royalty 5% 5%

Tax 28% 28%

Gas Price US$10/mcf US$10/mcf

Working Interest 49% 49%

NPV@10% (net) A$63m A$81m

Risked NPV A$44m A$41m

per share $0.34 $0.32

Heavily risked valuation still well in

excess of current market cap

$0.66/sh risked valuation for

Amersfoort

Exploration upside conservatively

valued at $0.14/sh

Huge upside, in excess of $8/sh

Total valuation of $0.74/sh with a

price target of $0.48/sh


Figure 14: Valuation Summary

Source: Argonaut

Recommendation

Overview

Whilst Kinetiko is not far along the project development path, the progress to date is

highly encouraging, particularly the early gas flows achieved from the conventional

sandstone reservoirs. This is being achieved against the backdrop of increasing industry

interest in-country due largely to changes in the regulatory environment, which will

enable development of large scale gas projects into a high price, energy starved

environment. Results from 20 coreholes and 7 pilot wells underpin the 1.5Tcf Contingent

Resource (2C), which is expected to grow substantially over time. A maiden Reserve is

expected to be finalised in Q2 2014 and we also expect additional newsflow in relation

to agreements to supply gas and conversion of TCPs into exploration licences. The

Company is trading at historic lows despite the results to date and expected catalysts.

We are initiating on Kinetiko with a BUY recommendation as share price appreciation in

the near-term is highly likely, despite a funding gap. Our price target is $0.48/sh.

Valuation Summary $m $/sh

Amersfoort Conv 44 0.34

Amersfoort CBM 41 0.32

Prospective 18 0.14

Cash 1 0.01

Debt 0 0.00

Corp Admin -10 -0.08

Options 0 0.00

Total 95 0.74

Early CBM mover with huge

acreage position and kicker from

conventional gas horizons adjacent

to the coals

Low cost wells with high gas price

and attractive fiscal terms means

economic hurdles are very low

Initiate with BUY recommendation

and price target of $0.48/sh


Board and Management

The following text is an excerpt from the Company’s website:

Chairman: Mr. Adam Sierakowski

Mr. Sierakowski is a lawyer and founding director of the legal firm Price Sierakowski. He

has over 17 years’ experience in legal practice, much of which he has spent as a

corporate lawyer consulting and advising on a range of transactions to a variety of large

private and listed public entities. He has advised and guided many companies

undertaking fundraising activities in Australia and seeking to list on the ASX.

As the co-founder of Trident Capital Adam has also for years advised a variety of public

and private clients on structuring of their transactions and has been engaged in

developing assets and corporate structures and co-coordinating fundraising both

domestically and overseas. Adam has vast experience in IPO’s, restructuring, mergers

and acquisitions and has played a key role in the recapitalization of many ASX listed

shells.

Mr Sierakowski is currently a Non-Executive Director of ASX-listed companies My ATM

Limited and Coziron Resources Limited. He was previously involved with Carnavale

Resources Limited (Non-Executive Chairman), Triangle Energy Group Limited (Non-

Executive Director) and Stirling Biofuels International Limited. He is a member of the

Australian Institute of Company Directors and the Association of Mining Exploration

Companies.

Managing Director: Mr. Andrew Lambert B.Sc (Hons), MSc (Lon), MMgt (Fin),

GAICD

Mr Lambert is a Geoscientist with more than 16 years’ global experience in exploration,

operations, business development and corporate advisory.

Mr Lambert's career began in petroleum exploration. He then worked as an iron ore

exploration geologist, followed by a petroleum geophysicist role in MENA. He has

worked in business development and corporate advisory roles with KPMG and PwC

Strategy Consulting; where he focused on oil and gas (Upstream and Midstream) and

mining in Australasia, the Middle East and the UK.

Andrew has a Bachelor of Science (Honours), Master of Science in Petroleum

Exploration, Masters of Management and is an Australian Company Directors course

graduate.

Non Executive Director: Dr. Donald James Searle B.Sc., PhD, MAusIMM, MAICD

Dr. Searle is geologist with 35 years’ experience in exploration, project management,

project financing and development in both the minerals and energy industries. He has

spent 20 years in executive and non executive capacities as Director, Managing Director

and Chairman of ASX-listed companies. He has led exploration and development teams

for successful projects in Australia, Africa and Europe.

Dr Searle has a Bachelor of Science Honours degree in soft and hard rock geology, and a

PhD from the University of Western Australia. He is a Member of the Australian Institute

of Mining and Metallurgy and a Member of the Australian Institute of Company

Directors.


Non Executive Director: Mr. Agapitos Marcus Geoffrey Michael B.A. (UWA)

Mr Michael has been an Executive Director of various companies, investment syndicates

and enterprise start-ups across a range of asset classes for more than 20 years. His

experience ranges from property development and investment to resources, mining

services, civil engineering and contracting to information technology and hospitality.

These activities have been carried out in Australia, Europe, Asia and Southern Africa. He

has approximately three years continuous experience to date as a non-executive

Director of ASX listed companies.


Risks

Sovereign

South Africa has received bad press related to nationalisation rumours and strikes at

several mines and is generally perceived as a difficult place to do business if you are in

resources. This perception is largely misplaced and what applies in the mining industry

rarely applies to oil and gas, which regulated in a very different way through the

Department of Energy and the National Oil Company, PetroSA. Our view of sovereign

risk is considered low in relation to Kinetiko’s projects, in part due to the strong BEE

relationship with Badimo but also due to the internal desire and need to solve the

energy issues in-country. Regulatory risk related to timing of approvals remains the

biggest risk, in our view, although this is improving.

Kinetiko had issues with its partner earlier this year in relation to failure to meet cash

calls. This was quickly resolved and is, in part, a testament to the strong internal push to

move gas projects forward. Additional initiatives are underway to further mitigate any

partnering risk.

Technical

Significant technical work has been completed at Amersfoort; however, it remains early

stage. Uncertainty remains as to reservoir deliverability from both the sandstone and

coals. The shallow depth and consequent low pressure may also have an impact on

ultimate recovery, which has not yet been quantified.

Operational

Operational or execution risk is another key risk and Kinetiko has had mechanical issues

in some of its wells. As knowledge of the geology and optimal well design increases, this

risk will decrease. Kinetiko are undertaking recruitment to ensure a local representative

by Q2 2014, this will improve management and cost effectiveness.

Commercial

Cost blowouts, change in pricing and fiscal terms all contribute towards potential

commercial risk. Pricing and fiscal terms are considered low risk due to the internal

desire to promote development of additional and cleaner source of energy in South

Africa. Until feasibility has been completed on development concepts, visibility on the

quantum of value associated with the projects will be difficult to predict accurately.

Funding

Funding risk remains a key risk for all junior exploration companies; however, beyond

the small near-term requirement, we view the potential to secure a strategic partner as

high.


Important Disclosure Argonaut acts as Corporate Adviser to KKO and may receive fees commensurate with these services.

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RESEARCH:

Ian Christie | Director, Industrial Research +61 8 9224 6872 [email protected] Adam Miethke | Director, Metals & Mining Research +61 8 9224 6806 [email protected] Dave Wall | Director, Energy Research +61 8 9224 6864 [email protected] Patrick Chang | Analyst, Metals & Mining Research +61 8 9224 6835 [email protected] Emily Reilly | Analyst, Industrial Research +61 8 9224 6809 [email protected] Matthew Keane | Analyst, Metals & Mining Research +61 8 9224 6869 [email protected] INSTITUTIONAL SALES - PERTH:

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