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PPL diversifying into new mining avenues.

Pakistan Petroleum Ltd (PPL) has strategically entered into a joint venture agreement as a 49% partner with Degan Exploration Works (DEW), which is owned by the Frontier Work Organization (FWO). This move is part of PPL’s proactive business diversification efforts to expand its mining portfolio amid depleting hydrocarbon reserves. As per the agreement, the JV will explore and develop mineral resources in Exploration License EL-207 located in Chagai, Baluchistan where the country’s largest copper/gold reserves (Reko Diq) are already located.

Key Highlights

This marks the company’s new foray into non-hydrocarbon minerals after its subsidiary to extract barytes (BME), the Baryte, Lead and Zinc (BLZ) project and the investment in Reko Diq.The announcement shows PPL’s intent to diversify its operations beyond hydrocarbons amid natural decline in its major oil and gas fields (which presently have 455 mnboe of reserves and a reserve life of 8 years).

The block is strategically located in the Chagai Metallogenic Belt in the Baluchistan province, renowned for its world-class copper and gold reserves. Pakistan’s largest copper and gold mine, Reko Diq, is also located in this belt, which, in our view, significantly enhances the potential for a substantial discovery for the JV, promising a bright future for PPL.

PPL has committed to invest US$11.5mn over three years (only about PKR1.0bn p.a.) for the exploration phase, which should not impact its liquidity position. However, upon a major discovery, the development stage might require significant capex. By that time, PPL’s liquidity situation will be more crucial.

The government has also engaged Saudi Arabia to sell the 15% stake in Reko Diq, owned by the SOEs.Out of the 8.33% stake held by PPL, we think the company will sell 5%, which should result in an after-tax cash inflow of PKR47.6bn (PKR17.5/sh). The company might use the cash proceeds of Reko Diq to finance the development stage of the above project.

The notice depicts PPL’s commitment to diversify its revenue from hydrocarbons to mineral mining during the rapid natural decline in its major oil and gas fields. Simultaneously, reforms in the gas sector are expected to improve its liquidity position, which should help the company to support capex requirements for new projects. We maintain a Buy rating on PPL with a TP of PKR164/sh.

Courtesy – IMS Research

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