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23 March 2011
BUY Oil & Gas ASX: RMP 149.6m 157.1m A$44.1m A$1.33 Barney Gray +44(0)20 7518 2607 bg@oldplc.com Forbes Cutler +44(0)20 7518 2603 fc@oldplc.com
CORPORATE BROKING:
ASX-listed Red Emperor offers investors the opportunity to gain exposure to two exciting near term exploration projects with differing yet highly attractive risk/reward profiles. As a pure exploration play, Red Emperor represents an elevated risk proposition compared to its larger partners in Puntland and Georgia. However, we believe that the company provides strong leverage into a very exciting asset portfolio at a significant discount. Following a successful round of fundraising in February, Red Emperor has approximately A$14m in the bank. Consequently, the company has sufficient cash to participate in two exciting exploration programmes in Puntland, Somalia and the Republic of Georgia. In Puntland, Red Emperor has farmed into a 20% interest in the highly prospective Nugaal and Dharoor exploration licences. Exploration drilling is expected to commence in July. With independent analysis estimating total oil in place on both blocks of over 18 billion barrels, Red Emperor is exposed to more than 3.6 billion barrels of potential upside. In Georgia, Red Emperor holds a 20% interest in onshore blocks VIa and VIb. The company will contribute 40% of the drilling costs of a two well programme, capped at a total cost of US$5.6m net to Red Emperor. The first exploration well is expected to spud in late April/May. Independent consultant, RPS Energy, estimates that the acreage could contain over two billion barrels in place, providing Red Emperor with net exposure to more than 400mmbls. Although Georgia possesses more modest resource potential than Puntland, the preliminary exploration work completed over the last twelve months has done much to de-risk the upcoming programme. On 10 March, Red Emperor announced its intention to dual list the company on AIM in May 2011. Old Park Lane Capital has been retained as broker to the company upon completion of the AIM listing.
We have valued Red Emperors oil and gas interests and its cash resources at approximately US$210m (c.A$209m), equivalent to A$1.33 per share on a fully diluted basis. Given that we have applied a raft of conservative risk factors to our estimates, we believe that our assessment reflects the significant upside potential that Red Emperor represents.
A marketing communication from OPLC, broker to Red Emperor Resources NL upon admission to AIM
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Contents
Executive summary Senior management Introduction to Red Emperor
Portfolio development
Page 3 4 5 5 6 7 9 10 11 12 13 14 14 15 16 16 19 21 22 23 24 24 26 26 27 28 28 29
Background to Puntland
Red Emperors licence interests Geological assessment of the blocks PSA conditions and timeline
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Executive summary
Red Emperor is an ASX-listed natural resources company with core oil and gas interests in Puntland, Somalia and the Republic of Georgia. The company also has a 25% free carried interest in the Jillewarra Project, which is a copper and gold project in Western Australia. Following a successful period of fundraising in February, Red Emperor now has cash resources of approximately A$14m. This will be sufficient to fund the groups commitments to participate in the first exploration well in Puntland since the early 1990s and also pay the companys share of costs for a two well exploration programme in the Republic of Georgia. In Puntland, Red Emperor has entered into a farm-out agreement with Africa Oil (TSX: AOI) to acquire a 20% working interest in the highly prospective Nugaal and Dharoor exploration licences. Exploration drilling is expected to commence by 27 July 2011 and Red Emperor will pay 30% of the costs to earn its 20% interest. AIM and ASX-listed Range Resources also holds a 20% working interest in the acreage. As the operator in Puntland, Africa Oil is required to drill a second well on either licence by 27 September 2011 and Red Emperor has an option but not an obligation to participate in the second well. Independent expert, Gaffney Cline, estimates that total oil in place on both blocks is over 18 billion barrels, exposing Red Emperor to more than 3.6 billion barrels of potential upside. In Georgia, Red Emperor holds a 20% farmin interest in onshore blocks VIa and VIb, covering approximately 10% of the country. The companys partners in Georgia are Range Resources and private company, Strait Oil & Gas UK Limited (operator); both with 40% interests. Under the terms of the farm-in agreement, Red Emperor will contribute 40% of the drilling costs of a two well programme, capped at a total cost of US$5.6m net to the company. Activity is accelerating in Georgia and Red Emperor expects to participate in the first of two exploration wells in April/May 2011. Independent consultant, RPS Energy, has identified 68 potential structures containing over two billion barrels of oil in place on the Georgian acreage, of which Red Emperor has net exposure to more than 400mmbbls. Although Georgia possesses more modest resource potential than Puntland, Range and Straits work programme over the last twelve months has done much to derisk the upcoming exploration programme. Red Emperor offers investors the opportunity to gain exposure to two exciting near term exploration plays with differing yet highly attractive risk/rewards profiles. We have valued the companys oil and gas interests and its cash resources at US$210m, equivalent to A$1.33 per share on a fully diluted basis. Red Emperors valuation summary
Asset Puntland Nugaal PSA Dharoor PSA Georgia Cash Jillewarra Project Net asset value US$126m US$39m US$31m US$14m $210m A$0.84 A$0.26 A$0.21 A$0.09 A$1.39 A$0.80 A$0.25 A$0.20 A$0.09 A$1.33 Estimated value Value per share Fully diluted value per share
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Senior management
Greg Bandy Executive Director Greg has over 12 years of broking and corporate finance experience in Australia. He is a Senior Advisor with Patersons Securities, a leading Australian stockbroker headquartered in Perth, Western Australia. He was the former Managing Director of ASX-listed Empire Beer Group, prior to its takeover in February 2011.
Jason Bontempo Non-executive Director Jason is a company Director with over 10 years experience at senior board level in Australia. He has worked in Investment Banking and Corporate Advisory since qualifying as a chartered accountant with Ernst & Young in 1997. Jason has also worked for investment banks in Australia and the UK and has been closely involved with the advising and financing of companies in the resources industry specialising in asset sales and ASX listings. He is also Executive Director of International Goldfields Limited (IGS).
Stephen Brockhurst, BComm - Non-executive Director Stephen is an Accountant with seven years' corporate and company secretarial experience. He has been involved in the listing of over 16 junior gold and mineral exploration companies on ASX in the past 6 years with capital raisings exceeding $60m. He has experience in capital raisings, due diligence, ASX compliance and regulatory requirements. Stephen is currently a Director and Company Secretary of Blackham Resources Limited.
Tony King Executive Consultant Tony is Managing Director of Max Capital, a securities and corporate advisory company based in Perth, Western Australia. He is Red Emperors corporate advisor to Puntland and Georgian farmin deals and has advised Range Resources NL on all capital raisings since 2009.
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Portfolio development
Puntland, Somalia Prior to the companys focus in the oil and gas sector, Red Emperor was involved in projects in the potash mining and timber sectors in Russia. However, the group has terminated these activities in order to realign the company as a frontier oil and gas play. In August 2010, Red Emperor entered into a farm-out agreement with Africa Oil (TSX: AOI) to acquire a 10% working interest in two licences in Puntland, Somalia. These are the highly prospective Dharoor and Nugaal Exploration Areas. Red Emperor also acquired an option to increase its interest by a further 10% to 20%, conditional on the satisfaction of certain conditions including due diligence and government and shareholder approvals. Red Emperors 20% interest in both the Dharoor and Nugaal Production Sharing Agreements (PSAs) was formally approved in January 2011 in tandem with the Puntland governments agreement to extend the PSAs for a further 12 months to 17 January 2012. Africa Oil has confirmed plans to drill an exploration well on Dharoor by 27 July 2011 and Red Emperor will pay 30% of the drilling costs to earn its 20% interest. Africa Oil is also required to drill a second exploration well on either licence by 27 September 2011 and Red Emperor has an option but not an obligation to participate. Africa Oil is the operator in Puntland with a 60% working interest. AIM and ASX-listed Range Resources holds the remaining 20% interest.
Republic of Georgia In the Republic of Georgia, Red Emperor holds a 20% farmin interest in onshore blocks VIa and VIb, covering approximately 7,000km of the country. The companys partners in Georgia are Range Resources and private company, Strait Oil & Gas UK Limited (operator); both with 40% interests. Red Emperor signed a Heads of Agreement (HoA) with Range and Strait in January 2011. The company agreed to acquire a 20% interest, comprising 10% each from Range and Strait. This agreement will see Red Emperor contribute 40% of the drilling costs of a two well programme, capped at a cost of US$14m, in order to acquire a 20% interest. Red Emperors contribution will therefore be capped at US$5.6m. Red Emperors joint venture partners completed 2D seismic acquisition last year and independent consultant, RPS Energy has identified 68 potential structures containing an estimated 2.05 billion barrels of oil in place. Activity is accelerating in Georgia and Red Emperor will participate in the first of two exploration wells in May 2011.
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Recent fund raisings Red Emperor completed a placing of 50 million new shares to raise A$10m at A$0.20 per share in February 2011. In addition, the company placed a further 9 million new shares, raising A$1.8m with a number of Range Resources shareholders who wished to participate in the fund raising. Red Emperor also announced that it had agreed to place an additional 2 million shares at A$0.20 per share to parties directly associated with the companys Georgian activities. This will provide a further A$0.4m of cash to Red Emperor. In combination with the companys pre-placing cash position, Red Emperor now has cash resources of approximately A$14m (A$2m is in an escrow account with Africa Oil in order to fund activities in Puntland). We believe that this is sufficient to fund the groups commitments to drill two wells in Georgia and the first exploration well in Puntland.
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Impending activity Africa Oil has confirmed plans to drill an exploration well on Dharoor by 27 July 2011 and Red Emperor will pay 30% of the drilling costs to earn its 20% interest. We assume that one well is likely to cost approximately US$25m, implying that Red Emperors share of drilling costs will be approximately US$7.5m. Africa Oil is also required to drill a second exploration on either licence by 27 September 2011 and Red Emperor has an option but not an obligation to participate. Red Emperor is not funded to participate in a second well in Puntland and we believe that further fund raisings will be contingent upon success with the first drilling foray. Africa Oil has now appointed a rig manager and has identified a drilling contractor for the first well of the two well programme. We anticipate further updates regarding full mobilisation over the course of the next quarter.
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Reservoir
Gross best estimate Oil in place 1,830 681 1,663 207 114 278 1,079 611 1,457 330 184 453 319 176 421 378 210 507 227 126 308 293 162 391 12,405
Gross best estimate Recoverable 458 170 416 52 29 70 270 153 364 83 46 113 80 44 105 95 53 127 57 32 77 73 41 98 3,101 Gross best estimate Recoverable 299 166 440 90 50 130 55 30 80 36 20 55 1,451
GCoS 0.11 0.09 0.13 0.08 0.07 0.09 0.11 0.09 0.13 0.10 0.08 0.12 0.10 0.08 0.12 0.11 0.09 0.13 0.11 0.09 0.13 0.12 0.10 0.14 11.3% GCoS 0.08 0.06 0.09 0.06 0.05 0.07 0.06 0.05 0.07 0.06 0.05 0.07 7.4%
Reservoir
Gross best estimate Oil in place 1,196 664 1,760 360 200 520 220 120 320 144 80 220 5,804
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Our valuation of a barrel of discovered oil in the ground is based on a per barrel NPV of a theoretical 200mmbbl field development. Our assumptions factor in a US$250m exploration and appraisal programme and a US$1bn development plan with first production in late 2014. We have assumed the terms and conditions of the PSA regarding state take and cost recovery and our forward oil price assumption is US$80 flat over the life of the development. Our indicative valuation is outlined below.
Nugaal 12,405mmbbls 20% 2,481mmbbls 25% 620mmbbls 11.3% 70mmbbls US$7.21/bbl US$504m 75% US$126m 157.1m A$0.80
Dharoor 5,804mmbbls 20% 1,161mmbbls 25% 290mmbbls 7.4% 22mmbbls US$7.21/bbl US$156m 75% US$39m 157.1m A$0.26
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Background to Puntland
Puntland is a large autonomous region located on the north east tip of Somalia. It is approximately 212,000km and represents approximately one third of both Somalias geographical area and its population, with the exclusion of Somaliland to the immediate west of Puntland. Puntland was established in 1998 following efforts for national reconciliation after the Somali civil war, which began in 1991. Puntland is part of the Federal State of Somalia, recognised in the Transitional Federal Charter of the Somali Republic. Like the rest of Somalia, Puntland bases its political structure on the support of tribal elders in the federal regions and governmental functions are based along clan relationships and kinship lines. Puntland is not independent from Somalia and is not trying to gain international recognition as a separate country. However, it does have autonomous status unlike neighbouring Somaliland, which is seeking full independence from the rest of the country. Somalia has a long history of political and civil instability which is unlikely to be resolved in the near term. In particular, Puntland is in dispute with Somaliland over the Sool and Sanaag regions, which are claimed by both Puntland and Somaliland. However, the Dharoor Block is not in a disputed region and the Sool clan in Nugaal considers itself part of Puntland.
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As can be seen from the photographs below the landscape, being flat, barren and very sparsely populated is well suited for oil exploration activities. The photograph on the right depicts the site of an old exploration camp prior to the exit of the oil majors in the 1990s. Typical Puntland terrain
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Historical activity indicates hydrocarbons The Puntland basins are defined by large depressions which are clearly visible from satellite imagery and Canadian independent geological and petroleum engineering consultant, Sproule, posits that hydrocarbons found in Cretaceous and Jurassic sedimentary formations in the Yemen rift system could also be present in Puntland. The Nugaal Basin has been identified as having distinct reservoir, source rock and trap potential as a result of 2D seismic collection in the 1980s by a number of international oil companies including Conoco, Shell, AGIP, Phillips and Amoco, which collectively spent over $150m in the region. The 2D seismic, as indicated on the map above, was shot perpendicular to the axis of the rift system in the basin and Africa Oil has identified a number of large, closed, fault-controlled structures. This evidence is supported by oil seeps along the main basin-bounding faults. As can also be seen on the map above, several wells have been drilled in the Nugaal Basin in particular and oil shows were encountered. However, for reasons unknown, two wells, namely Nugaal-1 and Kalis-1 did not probe their main exploration targets. Conocos Nugaal-1 well, which was drilled to over 10,700 feet in 1990, encountered oil shows but did not reach the deeper Jurassic horizons. The Kalis-1 well was only drilled to 5,100 feet and fell short of the target depth of 14,850 feet. There is currently no comparable date available for the Dharoor Block.
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Likely reservoir characteristics in Nugaal Valley The Nugaal Valley Basin fill is extremely thick with more than 10,000 feet of sediments in some areas and Sproule believes that the main target for exploration drilling will be the deeper Jurassic sandstones in the Gabredarre Formation which overlies organic rich source rocks. Secondary targets for exploratory drilling may include Upper Cretaceous horizons in the shallower Gumburo Formation. Previous drilling activity on the Nugaal Block, although limited, has indicated that reservoir quality rocks are present within the basin and porosity and water saturation estimates suggest that recovery factors within the Jurassic target sandstones could be up to 30%. Given that it is not possible to determine whether hydrocarbons have migrated through the system, these assumptions are indicative pending further drilling.
Recent amendments to the PSA In December 2009, initial exploration periods for each block were extended from 36 months to 48 months with a revised expiry of 17 January 2011 for exploration drilling to commence. This was subsequently extended until 17 January 2012 given instability in the region over the intervening period. The total exploration period for both licences does not expire until 17 January 2014 and the Development Period is licensed for 20 years in the event of a commercial discovery. The terms of the exploration programme have also been amended so that Africa Oil can drill one exploration well in each block or two wells in the Dharoor Block during the initial phase of exploration.
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Georgia partners
Partner Strait Oil & Gas Range Resources Red Emperor Ticker Private AIM: RRL, ASX: RRS ASX: RMP Interest 40% 40% 20% Notes Operator Paying 2 for 1
Recent activity
Blocks VIa and VIb were subject to significant exploration activity during the era of Soviet control. However, since the early 1990s activity was very limited until Range and Strait began exploration activities in earnest in early 2010. Range and Strait completed the acquisition of 410km of 2D seismic in March 2010 and commissioned an independent CPR by consultant petroleum engineers, RPS Energy. Upon analysis of recent acquired data combined with existing archives, RPS published a best estimate of 2.05bn barrels of oil across 68 individual drillable prospects in November 2010. On 8 Feb 2011, the partners in Georgia received the results of a helium survey on selected areas of its Georgian exploration licences. This study was commissioned in November 2010 and was conducted by Actual Geology International (AGI). In particular, it has indicated an active oil and gas presence in the partners first two drill targets. The survey also identified priority zones most likely to contain potentially productive hydrocarbon systems. On 16 February, the partners announced that they had secured a drilling rig from Edeco Petroleum Services Limited in the UK for the upcoming drilling programme and First Drill Limited had been engaged as project manager for the drilling programme.
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Our ascribed valuation of $6.60 per barrel of discovered oil in the ground is based on a NPV of a notional development of approximately 20mmbbls of recoverable oil reserves. Our assumptions factor in a US$30m exploration and appraisal programme and a US$80m development plan with first production in late 2014. We have assumed the terms and conditions of the PSA regarding state take and cost recovery and our forward oil price assumption is US$80 flat over the life of the development.
Blocks VIA & VIB 2,045mmbbls 20% 409mmbbls 30% 123mmbbls 8.33% (1 in 12) 10mmbbls US$6.60/bbl US$67m 50% US$2.8m US$31m 157.1m A$0.20
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Original well data The Soviets drilled approximately 200 wells on the acreage during the 1980s and 1990s although most of these wells were drilled to shallow depths in order to define structural features for the location of water reservoirs rather than actively probe for oil and gas. The well database on the acreage consists of 61 of these wells which were drilled for mineral exploration or water. However, there is no digital log data available and stratigraphic information is limited to diagrams. Nevertheless, many communist era wells encountered oil shows and deeper wells provided detailed stratigraphic information on the region. As such, the partners have been able to collate much of this data for their own interpretation of the prospectivity of the acreage. Initial analysis identified several structures suitable as key future oil drilling targets. These are mostly shallow features in the 600-2,500m range. The acreage has strong potential for oil. However, there are numerous potential gas and coal bed methane targets identifiable on the original seismic data. There is also substantial evidence of oil and gas seeps on both blocks and clear indications of coal seams define the geological conditions ideal for hydrocarbon production.
Historic Soviet ear gas well and indications of coal seams on Red Emperors acreage
New seismic survey data In March 2010, Range commissioned the Geophysical Institute of Israel (GII) to complete a 410km 2D and 3D seismic study and well selection programme on both licences. This work exceeded significantly the requirements of the PSA which stipulated a survey of at least 350km. The seismic lines were focused on the central and southern parts of Block VIa and the west central section of Block VIb. In the more undulating central areas of the blocks, the lines tended to follow the locals roads for ease of access. Range and Strait had access to vintage seismic data acquired in the 1980s over the southwest portion of Block VIa, although these were only available as paper sections, some of which had the original interpretations on them. The data quality was poor to fair, according to RPS and only 201km was available at the time.
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Satellite imagery and surface geology NPA-Fugro also conducted a detailed satellite mapping survey in order to produce an accurate depiction of the geological structures across the acreage. The first phase of this produced a structural and stratigraphical map of the areas topography on a scale of 1:100,000. The second phase of this survey refined the satellite imagery with aerial mapping and photography in greater detail, concentrating on key areas of interest to produce clearer images at a significantly larger scale of 1:25,000. This work was augmented by in-field measurements which were used to note structures of particular interest and refine and re-map areas which were unclear from the satellite imagery. The map below depicts the results of the satellite imagery of the geology on both blocks overlain by the recent seismic acquisition programme. This data is augmented by the locations of historical wells drilled on the acreage in previous decades.
Combined map of new seismic lines (in yellow) and satellite imagery
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Map of sub-blocks
Vani
Following interpretation of the survey data, 68 leads and prospects were identified on both blocks. If all reservoir horizons in each potential target were successful, RPS estimates that total possible oil in place would amount to 2,045 million barrels. The map below outlines the location of the major leads and prospects, many containing evidence of stacked reservoirs.
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From its report, RPS has identified six key drillable prospects, of which there are three each on Kursebi and Vani on Block VIa. At the pre-drill stage, RPS believes that each drillable prospect could be a stacked reservoir with up to three structures at various intervals in each of the Vani prospects in particular. Outlined below is the oil in place estimates for the six structures that RPS has identified as viable prospects for exploration drilling. Together, these six prospects have the potential to contain 728mmbbls of oil on an unrisked basis.
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Key Production Sharing Agreement terms In the event of the commencement of commercial production, the PSA is a 50:50 production split with the Georgian government with no taxes or royalties during the cost recovery period. The partners are entitled to recover petroleum costs out of a maximum of 50% of all petroleum available (cost recovery petroleum) at the end of each quarter. Unrecovered costs in any period can be carried forward until fully recovered. The remaining petroleum including any portion of unused cost recovery petroleum is deemed profit oil. This is allocated 50:50 between the government and the partners as long as cumulative expenses exceed the value of the cumulative cost recovery petroleum and cumulative profit oil due to the partners. When the value of the cumulative cost recovery petroleum and cumulative profit oil due to the partners exceeds the cumulative costs incurred, the profit split reverts to 65:35 in the governments favour.
IMPORTANT NOTE: Please refer to the Appendices for additional background on the Republic of Georgia.
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Other assets
Jillewarra Project (copper and gold), Western Australia
During Red Emperors half year ended December 2010, the farmin to the Jillewarra Project was extended to 30 September 2011. In addition, the company farmed down its interest in the project from 51% to a 25% free carried interest to bankable feasibility. Subsequent to the period end, Metal Bank Limited satisfied its condition to list on the Australian Securities Exchange on 2 March 2011. As stated earlier in this report, Jillewarra has the potential to provide longer term upside to the company. However, we are focusing on Red Emperor as a pure frontier oil and gas exploration play and for the purposes of this report, we have assigned no formal valuation to the companys mining interest which we believe to be a non core asset.
Background to the Jillewarra Project Jillewarra covers an area of 322.6km2 with two Exploration Licences (ELs) and a Prospecting Licence Application (PLA). The tenements cover part of the Mingah Range Greenstone Belt and are located between 50-75km WNW of Meekatharra within the Meekatharra Mineral Field in the Murchison Province of Western Australia. High-grade gold mineralisation has been identified by previous mining and exploration activities along the south-western limb of the structure. The Jillewarra Project covers the southern half of the NW trending Archaean Mingah Range Greenstone Belt that extends for a strike distance of approximately 50km and averages 9.5km in width. The Mingah Range Greenstone Belt is unusual in that it trends EW-WNW while most other belts in the Murchison Province have a NE-NS orientation. In the northern part of Mingah Range succession the stratigraphy passes from quartzites to finegrained felsic, epiclastic sedimentary lithologies, ultramafic komatiite units and high Mg basalts that have been intruded by broad differentiated gabbroic sills. These layered sills form prominent ridges and have an outcrop width of 0.1 - 0.3km. Towards the southern part of the Mingah Range succession, a sequence of sediment-hosted, banded iron formations have been partially stoped out by granitic intrusions. Known mineralisation within the area comprises a number of small high-grade epigenetic gold deposits, Pb-Ba vein deposits and layered ultramafic and mafic sills containing anomalous Ni and Cu values. Several significant structural features, historic Gold Mines, Ni-Cu bearing ultramafic units, and more recently identified targets in the Zapata region and the Jillewarra Shear Zone occur within the project area. Recent exploration by Cazaly Resources Limited highlighted the prospective ultramafic-basalt horizon between Rafters Run and Hewitt's Find. The prospective contact zone strikes for over 6km within the project area but has only received limited drill testing. Exploration in the Rafters Run area previously focused on nickel mineralisation but underplayed copper or gold potential. The IP anomalies require further investigation and the gold mineralisation at Hewitt's Find also warrants additional drilling.
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Conflict with Russia In August 2008, Georgia was involved in a short period of armed conflict with Russia over two separatist Georgian regions, namely South Ossetia and Abkhazia. There were a number of clashes between Georgian and Russian troops in the early part of August unt the negotiation of until a ceasefire under EU mediation.
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Russian troops were withdrawn from uncontested Georgian areas by the beginning of October 2008. However, a significant Russian presence is maintained in the two separatist regions which are recognised by Russia as independent.
International standing is improving rapidly Although Georgia has excellent relationships with its close neighbours Turkey, Azerbaijan and Armenia, we consider current relations between Georgia and Russia to be strained. Nevertheless, Georgia has excellent relationships with the US and the EU and has been a member of the World Trade Organisation (WTO) since 2000. The country has received a positive assessment from the International Monetary Fund (IMF) and in a 2007 study of economic performance and fiscal position, titled "Doing Business Survey," the World Bank named Georgia the number one reformer in the world, improving its global ranking from 112th to 37th. In Georgia, foreign investors rights and guarantees are equal to those granted to Georgians and profit and property repatriation is allowed. It should be noted that Georgia is a socially stable, liberal democracy with a rapidly maturing financial sector and a very positive attitude to foreign investment.
Economy is in recovery Economic growth was very strong in 2006 and 2007 with rates in excess of 10% per annum. GDP growth slowed to 2.1% in 2008 as a result of the short conflict with Russia coupled with the beginning of the global financial crisis. Economic growth contracted by approximately 3.9% in 2009 as foreign direct investment and overseas remittances reduced sharply in the wake of global recession. Nevertheless, the economy recovered in 2010, with year on year GDP growth estimated to be a robust 5.5% according to CIA World Factbook estimates. This demonstrates that the economy is performing ahead of expectations given that the official government forecast was 4.5% and BG Capital; one of Georgias leading investment banks, published a survey forecasting growth of 4.9% at the end of 2010. Georgia had a fiscal deficit of 5.4% of GDP in 2010, reduced from 6.6% in 2009. This is expected to reduce further to 3.9% in the current year according to Global Finance Magazine estimates. Central government debt was estimated to be 46.3% of GDP at the end of 2010 and is forecast to peak at 47.8% at the end of 2011 before reducing thereafter. The Georgian currency, the Lari (GEL), is down 22% versus the US dollar since 2008. However, we believe that further currency shocks are unlikely given the comparative stability of the Georgian economy. As such, the government anticipates a slightly weakened rate of approximately GEL1.85: $1.00 by the end of 2011 as foreign capital inflows increase.
Source: National Statistics Office of Georgia, Global Finance, CIA World Factbook
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The Kura Basin In the Kura Basin, which extends across much of Georgia, the most prolific source rocks are located in the Upper Jurassic, Upper Eocene and Oligocene horizons. The basin is triangular shaped and subdivided into the Upper, Middle and Lower Kura, the latter two being located in Azerbaijan and the Upper Kura Basin occupying a significant part of Georgia. The basin was created from Alpine and Himalayan compression which began in the early Eocene period and peaked 22 million years later in Late Pliocene. The basin has been shaped by the collision, accretion and rotation that took place between the Eastern European Platform, the Arabian Plate and several micro plates. This activity resulted in the development of several structural elements that have provided the basis for oil and gas migration and trapping.
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The map below depicts the routes of the three major pipelines traversing Georgia, all of whic which run close to the southern extremity of Ranges acreage. In particular, there is significant spare capacity in the major Baku-Tbilisi Tbilisi-Ceyhan pipeline which has a total capacity of 10mm 10mmbpd.
Source: Ay Deezy
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Local gas pipeline network Georgia also has a comprehensive local gas pipeline network which extends across the country and crucially extends directly through Ranges acreage and connects major population centres in Kutaisi and the Black Sea ports.
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DISCLOSURES AND RISK WARNING The recommendation system used for this research is as follows. We expect the indicated target price relative to the FT All Share Index to be achieved with 12 months on the date of this publication. A Hold indicates expected performance relative to this index of +/-10%, a Buy indicates expected outperformance of >10% and a Sell indicates underperformance of >10%. This Marketing Communication is provided for information purposes only. It does not constitute a personal recommendation and should not be construed as an offer or solicitation for investment. This publication is not intended to be an offer to buy or sell any securities of any of the companies referred to herein and any opinions expressed are subject to change without notice. Recommendations may not be suitable for all recipients of this publication and if you have any doubt you should seek advice from a financial adviser. Except for any liability owed under FSMA 200 or the regulatory system, Old Park Lane Capital plc (OPL) accepts no liability for any losses which may be incurred by the client acting on such recommendation. Companies mentioned in this research/document may be corporate finance clients of OPL. The analyst(s) responsible for this document may receive compensation based either directly or indirectly on profits derived from fund management activities. OPL its directors and employees may have a position or holding in any of the above investments or in a related investment, therefore OPL is not holding out this research as being impartial or objective as defined by the FSA Conduct of Business Rule 7.16.5, as set out in our conflicts of interest policy and procedures. This document has been prepared, approved and issued by OPL on the basis of publicly available information, internally developed data and other sources believed to be reliable. All reasonable care has been taken to ensure the facts stated and opinions given are fair and not knowingly misleading in whole or part. Prices and factual details are deemed to be correct at the time of publication. However, OPL offers no guarantee as to the accuracy or completeness of any such information or data. The views expressed are as at the date stated and are subject to change at any time There is an extra risk of losing money when shares are bought in some smaller companies including aim, sometimes alternatively known as penny shares. There can be a big difference between the buying price and the selling price of these shares. If they have to be sold immediately, you may get back much less than you paid for them. The price may change quickly and it may go down as well as up. Past performance of investments referred to above is not necessarily a guide to future performance and the value of the investment may go down as well as up. Some investments are not readily realisable and investors may have difficulty in selling or realising the investment or obtaining reliable information on the value or risks associated with the investment. This publication may not be reproduced or copies circulated without authority. Old Park Lane Capital plc is a member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority. (FSA no. 477870). Registered address: 49 Berkeley Square, Mayfair, London, W1J 4AZ.
A marketing communication from OPLC, broker to Red Emperor Resources NL upon admission to AIM
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