Proactive Investors: Frontier Energy initiated with buy rating and price target of A$0.55/share: Petra Capital


Frontier Energy is aiming to become an integrated producer of key fuels required to meet aggressive government emissions targets.

Frontier Energy Ltd (ASX:FHE) has been initiated by Petra Capital with a buy rating and a fully diluted price target of A$0.55/share underpinned by risked integrated renewables and green hydrogen developments.

Petra’s estimate includes a stage 1 and an expanded stage 2 development of the Bristol Springs renewable energy and green hydrogen project in Western Australia.

The following is an extract from the initiation report:

FHE’s 100% owned Bristol Springs Development is a phased renewable energy and green hydrogen development in Western Australia. Initial production will commence from a 114MWdc Solar and likely 36MW green hydrogen electrolyser in 2024. Additional expansion opportunities exist to grow renewable energy production beyond 500MWdc and electrolyser capacity beyond 150MW. This places FHE as an integrated producer of key fuels required to meet aggressive government emissions targets. With these tailwinds, the execution of this strategy will unlock significant value. We initiate with a BUY and PT A$0.55/sh, underpinned by integrated renewables and hydrogen developments.

Renewable energy to green hydrogen

  • Bristol Springs is located close to existing infrastructure – roads, water, ports, labour, pipeline, transmission, and potential offtake customers.
  • Development approval from the WA Government has been granted. An application for Electricity Access Transfer Contract (ETAC) is expected shortly from Western Power, a state government run entity committed to achieving net zero emissions by 2050.
  • Initial solar power generation of 114MWdc from Stage 1, with Stage 2 expansion opportunities beyond 500MWdc, makes FHE a significant producer. At present, WA’s annual industrial solar generation is 200MW.
  • A feasibility study, led by Xodus Group, is underway for an integrated expansion project, due mid 2022. • Estimated EBITDA of A$128m p.a. from a fully expanded renewables & green hydrogen development from 2027.
  • FHE holds 128.9M shares (43% interest) in TSX-listed Metallum Resources, owner of the highest-grade zinc development project in Canada, worth $7.7M at 6cps

Aggressive targets point to improved economics

  • WA currently imports 6.7BL p.a. of diesel.
  • An all-in diesel cost of A$2.5/L (incl. taxes) is equivalent on an energy basis to $10/kg hydrogen, significantly above our modelled farm-gate cost of ~A$3.5/kg, indicating the potential for FHE to displace diesel.
  • The WA Government is targeting equivalent green hydrogen exports to LNG by 2030. Sales of LNG in 2021 were worth A$15.8bn.
  • Comparative hydrogen breakeven economics for heating are improving with a rising gas price – Asian LNG prices are up 540% since 2020 with WA domestic spot gas prices up 135% over the same period.

Key Dates Ahead

  • Green hydrogen & renewables expansion feasibility studies (mid 2022)
  • ETAC from Western Power for access to grid (2H 2022)

Source: Proactive Investors