A recent report published by the Cohen Independent Research Group, called Wall Street’s #1 Independent Research Firm, rated Pacific Asia China Energy (TSX: PCE: Other OTC: PCEEF) a Buy. The 68-page research report set three wide-ranging valuation levels as price targets for PCE shares for the company’s coalbed methane concessions in China. Considerations such as the wide range of the Guizhou’s abundant gas reserves, expected prices of natural gas during the research firm’s forecast period, and discounting factors, such as the stock price’s high volatility, were included in their price targets.

PCE shares, which closed at C$1.16/share on nearly 131,000 shares trading hands on June 19th, were given long-term fair market pricing of C$1.96/share by Cohen Research. This pricing was under the most pessimistic scenario. The low-case scenario included a natural gas price as low as $275 per 1000 cubic meters, and included a discount rate of 25 percent on the stock price. Cohen also reported, in the report, that at the current market price, PCE is “grossly undervalued.”

Cohen Research wrote, “As per our Base Case scenario estimates, the NAV of PACE’s resources falls in the range of C$5.31 – 7.83 per share (with a discounting factor of 20 percent).” Under the most optimistic pricing, assuming natural gas at $375 per 1000 cubic meters, Cohen targeted PCE shares at C$11.56/share. Cohen Research used the Net Asset Value (NAV) based method, which is one of the most accepted methods to value mining companies.

PACE, the acronym for Pacific Asia China Energy and not the stock’s ticker symbol (which is PCE, trading on the Toronto Venture Exchange, or TSX), is fortunate that one of its concessions is in the Guizhou province of China. Estimates describe this Chinese province as hosting more than 20 percent of China’s coalbed methane (CBM) reserves. The country’s total CBM reserves have been independently estimated to exceed 31 trillion cubic feet.

PACE was the first Canadian publicly traded company to participate in China’s granting of CBM concessions. PACE is participating in the Baotian-Qingshan CBM project through its wholly owned subsidiary Asia Canada Energy (ACE). China’s state-owned CBM company, China United Coalbed Methane (CUCBM), granted the 970-square kilometer CBM concession in September 2005 to ACE. The Baotian-Qingshan concession is located in the CBM-rich Guizhou province.
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According to a U.S. Congressional – Executive Commission on China, which held a series of Issues Roundtables in late 2004, it was estimated that 12 Chinese mine workers die for every million tons of coal produced. Most are killed by methane gas explosions while inside the coal mines. China Business Weekly reported in July 2000, “To prevent gas explosions, China emits 6 billion cubic meters of methane from mines annually, seriously polluting the environment…” Last year, instruments on the world’s largest environment-monitoring satellite, the European Space Agency’s Envisat, revealed the world’s largest amount of nitrogen dioxide was hanging over Beijing and northeastern China. Because the country emits more methane from its coal mining than any other coal producing country, China pollutes the earth’s atmosphere with about one-third of the total annual emissions of methane. According to the US Environmental Protection Agency, methane traps heat twenty times more than carbon dioxide, which impacts global warming.

On March 6th, People’s Daily reported, “Shanxi, China’s largest coal-producing province, plans to put the brakes on the further expansion of coal mining in the next five years.” Shanxi Governor Yu Youjun at a recent press conference announced, “We can not continue the rough way of development any more and must limit coal production strictly with the guidance of scientific concept of development.” While only slightly reducing the country’s aggressive GDP growth, China has instituted reforms to maximize its energy efficiency and minimize the environmental damage and loss of human life. Not only is the country stamping down on the causes of these problems, it wants western technology to help become more efficient.

Since September 2005, Shanxi shut down nearly 5,000 illegal mines and fined or imprisoned more than 1,200 operators, including 60 local officials. Coal produced about 70 percent of China’s energy supply in 2005. The Chinese government worries China’s dependence upon coal could rise above 80 percent over the next five years. The country is second only to the U.S. as a net importer of petroleum. Nontraditional sources are being encouraged to clean up the environment and reduce China’s dependence upon foreign oil. StockInterview.com has widely discussed China’s scramble for uranium as the country has embarked upon the most aggressive nuclear power program since the United States in the 1970s. Along with nuclear energy, China hopes to exponentially expand its natural gas program as a means of lowering its astronomical levels of air pollution.

Chinese Premier Wen Jiabao told the National People’s Congress earlier this month that the country’s growth rate would be reduced to 7.5 percent over the country’s next five year plan. Economic growth reached nearly 10 percent in 2005. The strain imposed on China’s natural resources and labor has been taking its toll. According to the next five-year plan, China’s government policy will concentrate on building a resource-efficient and environment-friendly society. Their idea is to sustain the high output while reducing waste.

That may not be so simple. On February 20th, China Daily reported, “The bulk of China’s gas-fired power plants are on the verge of closure due to a shortage of natural gas.” Wang Yonggan, secretary general of China Electricity Council, said nearly 40 percent of China’s power plant capacity remained unused because of the lack of gas supplies. Wang warned a plan drafted the National Development and Reform Commission to increase China’s gas power capacity to 30 gigawatts by 2010 (up from 10.7 now) would make “such targets impossible to reach,” because of the gas shortfalls.

China’s Ambitious Coal Bed Methane Gas Development

One of the more serious reforms being addressed is the energy crisis within the context of the environmental stigma now attached to China. Coal is a problem because, as toxic as it is known to be, it helps fuel China’s growth, literally. But the dark rock has its bright side. Following the examples of the U.S. coal industry, predominantly in New Mexico’s San Juan Basin, Wyoming’s Powder River Basin, and Alabama’s Black Warrior Basin, and the more recent rise of Alberta’s Horseshoe Canyon, China has aggressively moved into the development of its coal bed methane gas industry. The degasification of coal can not only increase mining safety, but it can be an economic method of natural gas production.

In a 2005 report issued by the Federal Reserve Bank of Dallas, coal bed methane is being taken very seriously as an alternative energy source with strong growth potential in the U.S. energy mix,
“Geologists call it continuous gas, but it is also called unconventional gas or even weird gas. Whatever you choose to call it, you must give it due respect for its growing importance. The Department of Energy reports the share of unconventional gas doubled from 17 percent of Lower 48 natural gas supplies in 1990 to 35 percent in 2003. By 2025 it is projected to be 44 percent— matching the role of conventional gas—with the remaining 12 percent of domestic supplies imported.”

By 2010, China hopes to increase its dependence upon cleaner burning fuels, such as nuclear and natural gas. However, the greatest immediate growth, for instance over the next five years, is likely to come from natural gas. Recent statistics show natural gas to be about 3 percent of China’s energy mix. Numerous announcements over the past two years have been made that the country wants gas in its energy mix to reach 8 percent or more. For those who have traveled to China, it is no secret the country is in dire need of cleaner burning fuels.

Official statistics show that China uses 2.45 tons of water to produce a ton of coal. Coal bed methane, a byproduct, is often wasted. In 1996, China established China United Coalbed Methane (CUCBM) to harness that byproduct and to help reduce the toxic pollution and alarming fatalities, generated by coal mining. CUCBM is a sole professional company with the exclusive right to explore and develop coalbed methane resources in joint ventures with foreign companies. It is controlled jointly by PetroChina Energy Company and the China Coal Energy Group Corporation.

CUCBM has been actively developing China’s coal bed methane industry by drawing upon the expertise, technology and capital of its foreign partners. “More high level technologies need to be deployed to ensure reliable power supplies,” Ma Songde, China’s vice minister of science and technology told Associated Press in late February. “By developing these technologies, we can resolve issues restricting growth and enhance growth.” China is actively seeking foreign investment and cooperation in power generation, particularly in clean energy.

As a light hydrocarbon, coal bed methane is among the cleanest sources of energy. Published reports show that China’s coal bed methane (CBM) resources, buried within a recoverable depth of 2000 meters, are estimated at approximately 36.81 trillion cubic meters. China has the world’s third largest CBM resource. Following behind the United States, it is the second country to have conducted large-scale field exploration of coal bed methane.

According to a March 9th article in People’s Daily, “China’s coal bed methane industry made important headway in 2005.” About 340 CBM wells were drilled across the country. That may not sound astonishing compared to the number of wells drilled in Canada, during the same year, which surpassed the 3,000 level for the first time. In that context, China remains nearly a virgin territory for CBM. CUCBM has been actively partnering with the world’s giant oil companies and others to explore their vast CMB reserves. In 1998, Texaco (now Chevron-Texaco) was the first to partner with CUCBM and resulted in geological studies, exploratory wells and development contracts.

Since then, CUCBM has been extremely selective in choosing its joint venture partners to develop the ultra-valuable Production Sharing Contracts (PSCs). After attracting oil majors such as Texaco and Conoco-Phillips, only a total of 26 Production Sharing Contracts have been awarded to foreign-owned companies. Total coverage of those contracts now extends about 34,000 square kilometers of China’s below surface coal basins. Foreign companies have investment more than $150 million in the contracted blocks. CUCBM hopes to ramp up coal bed methane output by 2010 to help meet the national gas growth target of 10 billion cubic meters.

Pacific Asia Energy Corporation’s CBM Contracts in China

The first Canadian publicly traded company awarded a Production Sharing Contract was Pacific Asia China Energy Inc (PACE), which holds the PSC through its wholly owned subsidiary, Asia Canada Energy Corp. Pacific Asia China Energy, which trades on Toronto’s Venture Exchange under the ticker symbol of PCE, also holds a second PSC through another wholly owned subsidiary China Canada Energy Corporation. It was the former which interested us, the company’s Guizhou Project in southern China.

In talking with Dr. David Marchioni, one of Canada’s leading CBM geologists, he said of CUCBM, “The Chinese government doesn’t want to hand out resources to people who don’t do anything with them. They want them developed. They want to have gas. They want to have energy.” Dr. Marchioni helped co-author “An Assessment of Coalbed Methane Exploration Projects in Canada,” published by the Geological Survey of Canada. He is also president of Petro-Logic Services in Calgary, whose clients have included the Canadian divisions of Apache, BP, BHP, Burlington, Devon, El Paso Energy, and Phillips Petroleum, among others. He is also a director of Pacific Asia China Energy and is overseeing the company’s CBM exploration program in China.

But what is the strategy here? If Alberta is now turning the corner and putting itself on the map as a serious CBM contender, why would one of Canada’s top CBM geologists get excited and pursue a property in southern China. “We got access to a huge resource for little money,” said Dr. Marchioni. “Instead of paying hundreds of millions for a concession this size, we paid a small fraction of that. Comparably, the project at Guizhou would have cost up to $200 million to acquire in Alberta.”
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We discussed with the Ux Consulting president from which countries future uranium supplies may come, and who is going after those supplies more aggressively. He warns about the risks and rewards of Kazakhstan and Mongolia, looks to Africa for supplies, and talks about Russia’s expansion.

StockInterview: How do domestic uranium prospects rate in the eyes of U.S. and foreign utilities?

Jeff Combs: I don’t think that utilities expect the U.S. to be a major supplier of uranium. What you’re seeing with China and other countries, where nuclear power is growing, is that they’re definitely looking to secure supplies. The Chinese are going to Kazakhstan and also Australia, where there are a lot of uranium reserves, a lot of potential for growth. I think there’s some potential for growth in the U.S. But if you had a fast growing nuclear power program, I don’t think the U.S. is the first place I’d look. I believe that you can look for some opportunities in the U.S. But in general, the U.S. utilities are basically in competition with some of these newer entrants into the market for available supplies. Those are primarily outside of the U.S., as U.S. utilities also depend on imports for most of their supplies.

StockInterview: It appears many countries are racing to secure uranium supplies outside their borders.

Jeff Combs: Even Russia, which was a major exporter of uranium in the 1990s, is looking to secure additional supply sources, first to Kazakhstan, Kyrgyzstan, and Uzbekistan, former republics of the of Soviet Union, but also to Africa. Russia has an extremely ambitious reactor expansion program, as well as a desire to greatly increase its exports of reactors to countries like China and India. As it stands now, most of the growth in nuclear power is expected to take place in China, India, Russia, as well as Korea and Japan to a certain extent. All these countries are really looking outside their borders for uranium supplies that are going to sustain them for quite a long period in the future. None of them are blessed with very rich and extensive uranium deposits.

StockInterview: Is Russian President Vladimir Putin trying to create something on the order of a Wal-Mart Super Center for the nuclear fuel cycle?

Jeff Combs: Well, you see them doing a joint venture in Kazakhstan. They’re trying to do something with Kyrgyzstan. They’re definitely looking at how they can shore up their supply through imports, in addition to investing a billion dollars in their own internal production. In this respect, they are trying to draw from their old supply chain arrangements. This is to meet their internal needs, as well as the needs of countries to which they have traditionally supplied reactors and the fuel to run these reactors. As Russia looks to expand its reactor sales to countries that don’t have established fuel cycles, they want to be able to supply them with fuel – possibly even lease them the fuel. This means that they have to be prepared to take back the spent fuel. This is due at least in some measure to nonproliferation concerns, in that you don’t want these new entrants building enrichment or reprocessing plants. While Russia has enrichment capacity and the ability to expand this capacity, they also need uranium to be able to supply these countries with enriched uranium. This is why they’re currently focusing on the uranium side of the equation.

StockInterview: Let’s talk about some of the target countries, where those with the more ambitious nuclear energy programs will want to secure uranium.

Jeff Combs: We have recently done a series of reports, looking at countries where major production is taking place, or could take place. Of course we’ve done them on Canada, Australia, Namibia, South Africa, Kazakhstan, and Uzbekistan. I think the next country might be Mongolia because of the exploration and development activity that is taking place there. Mongolia’s mining laws are very favorable to foreign companies. Mongolia is also located in that part of the world where the bulk of nuclear power expansion is taking place. The problem in Mongolia now is the lack of infrastructure – the location of the exploration sites relative to roads and rail lines, and the ability to connect to the electricity grid and water lines.

StockInterview: There has been so much press and chatter about Kazakhstan. Is there substance in these commentaries, or is it mainly hype?

Jeff Combs: They’ve got a lot of uranium resources and reserves. They’ve also got a commitment to expanding production there and a pretty big customer in China. The hype might be related more as to whether they can do it as quickly as they say, as opposed to whether they can eventually get to the levels they’re talking about. One of the things that will slow them down is the infrastructure, including the skilled work force, needed to expand at that rate. They have increased production. They definitely will continue to increase production, but perhaps not at the rates they are advertising. They’ve produced a lot in the past, in the old Soviet Union days. I think they can get back up to those production levels, but it’s going to take some time.

StockInterview: What will be required to get things going in Kazakhstan?

Jeff Combs: It appears they’ve been able to attract capital. A large part of it is just the time is takes to build the infrastructure, including training workers. You can have all of the investment in the world, but it still takes time to get things done, especially if the infrastructure isn’t well developed in the first place. If you look at Kazakhstan on the map, it is very close or adjacent to Russia, China, and India, where the major part of nuclear growth is occurring. I don’t think there will be any shortage of demand for their output.

StockInterview: Where does Japan fit into the current uranium bull market?

Jeff Combs: Japan is definitely a factor in the market. Their growth might not be as rapid as it once was, or once was expected to be. With Japan you have a country that does not really have any indigenous uranium resources to speak of. They really need to import uranium. To facilitate this and to secure future supplies, Japan has historically developed different supply relationships around the world, both by taking positions in uranium mines and by nurturing long-term relationships with producers. I think that it’s likely the case that this recent price rise caught them somewhat off guard, but recently Japanese utilities have put more effort into shoring up their supply options.

StockInterview: There are countries, which get little media coverage, such as Namibia. How does this country rate?

Jeff Combs: I think Namibia will definitely have an important role in supplying uranium. I don’t think it’s going to have the expansion potential of Canada, Australia, or Kazakhstan, but I think South Africa, Niger and Namibia are going to be an important component for uranium supply in the future.
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More investors are now inquiring about Coalbed Methane exploration companies. Just as uranium miners were flying well below the radar screen in early 2004, coalbed methane exploration may very well be the next very hot sector later this year and next. Historically, coalbed methane gas endangered coal miners, resulting in alarming fatalities early in the previous century. This is the fate suffered today by many Chinese coal miners in the smaller, private coal mines. Typically, the methane gas trapped in coal seams was flared out, before underground mining began, in order to prevent those explosions. Rising natural gas prices have long since ended that practice.

Today, coalbed methane companies are turning a centuries-long nuisance and byproduct into a valuable resource. About 9 percent of total US natural gas production comes from the natural gas found in coal seams. Because natural gas prices have soared, along with the bull markets found in uranium, oil, and precious and base metals, coalbed methane has come into play. It is after all a natural gas. But because it is outside the realm of the petroleum industry, coalbed methane, or CBM as many industry insiders call it, is called the unconventional gas. It may be unconventional today, but as the industry continue to grow by leaps and bounds, on a global scale, CBM may soon achieve some respect. Please remember that a few years ago, there was very little cheerleading about nuclear energy. Today, positive news items are running far better than ten to one in favor of that power source.

CBM is the natural gas contained in coal. It consists primarily of methane, the gas we use for home heating, gas-fired electrical generation, and industrial fuel. The energy source within natural gas is methane (chemically, it is CH4), whether it comes from the oil industry or from coal beds.
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