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Leyshon Resources (LSE:LRL) shares have been unsuspended (at 25p) and have duly plunged back to 20.25p in the middle after the release of drilling news from China. I sense that a lot of Bulletin Board loons had got a little bit carried away last week pre-suspension and are now banking gains or just panicking as they do not really understand a statement which is, on balance, good. Some loons are even expressing disappointment that it is a gas discovery not oil which is odd as Leyshon always said it was drilling for gas in a gas rich region.
I tipped this stock at 11.5p (offer) in late October on the Nifty Fifty website and top sliced (sold half) at 24.75p (bid) last Thursday). I shall publish three new hot tips on the Nifty Fifty within 48 hours one this afternoon. For more details and immediate access ahead of the share tips click here
The statement says that the ZJS5 well was drilled without incident to its target depth of 2,155 metres and while analysis is ongoing, initial results indicate 56.4 metres of pay intervals and around 30.8 metres have “relative high porosity measurements which indicate that these zones could have the potential to flow gas at commercial rates. “
The company is now preparing to conduct flow tests on the potential pay zones – the first test should be complete by Christmas. And a second well, ZJS6 will spud soon and complete around Christmas. A point stressed in the statement (and overlooked by many I suspect) is that both wells are located within approximately 10 kilometres of a tie-in point on the recently commissioned Lin-Lin pipeline which supplies the growing demand in Shanxi Province where well head contracts have recently been struck in the US$ 6 – 7.5 per mscf range.
Leyshon says that it has A$ 47 million in cash and 249 million ordinary shares in issue (approximately A$ 19 cents per share and 12 pence per share) but that cash position does not take into interest due or liabilities for the first well so you can knock about 5% off those numbers for the position now.
What does this mean? Is this a commercial gas find? We do not know. Might it be? Yes very possibly it could. The proximity to the pipeline tie in gives real hope that it could be – this find does not have to be ginormous to be commercial. So does that make Leyshon a buy? If you are brave perhaps. I am a coward. If you have followed the Nifty Fifty portfolio you bought at 11.5p and sold half your holding at 24.75p. That means that whatever happens you have banked a gain.
I reckon that the implied value of the gas project (call it 9p a share) is about right as a risk weighting. It could be worth a multiple of that but with the data we have now you have to risk weight it accordingly. If this field is commercial (and we should have a good idea of that before too long) the shares are cheap. If not, the downside is back to 11p. But on Nifty Fifty have banked our gains already. I am happy to let the rest stay on the table. We hold and await more news within weeks. On balance I am marginally more bullish than bearish.
Others are outright bulls. In its morning report today VSA Capital notes:
This is very positive news for the company, as it is the first operational activity that it has undertaken in some years. The strategy is to develop gas assets located close to key demand centres in China. Drilling is low cost (US$2.5m per well) and production wells can be cheaply and easily tied into infrastructure. Leyshon is very well funded, with A$47m in cash, and we feel that the new strategy in China will have a very positive impact on the long-term share price.
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