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Carbon Energy Ltd Commercialises Chinese Joint Venture

Carbon Energy Ltd (ASX:CNX) has received a Speculative Buy and a $0.09 target price from APP Securities, an Asia Pacific focused broker.

The company last traded at $0.013. The following is an extract from the report.

CNX commercialises Chinese joint venture ....

Carbon Energy Limited (ASX:CNX) is a QLD based energy technology company focussed on the development and commercialisation of underground coal gasification (UCG) projects, primarily overseas.

China Jinhong JV Registered/Ratified

As mentioned in our February initiation report, CNX entered into a joint venture with the Beijing JinHong Investment Co Ltd (JinHong) in November 2015.

The strategic rationale for the JV was to license and commercialise the company's keyseam technology for use within China.

The establishment of the partnership was subject to both Chinese Government approvals and receipt of US$10M (being the first tranche of a total US$30M in capital contributions).

On 17/06/2016 CNX announced the formal ratification of the JV hence triggering Jinhong's initial capital contribution of US$10M into the JV. Under the agreement, Jinhong is to contribute a further US$20M towards developing a commercial UCG Demonstration Project (within 3 years) upon meeting certain milestones (total commitment US$30M).

The registration has also triggered the formal signing of the Technology Licensing and Technical Services Agreements.

Other agreed terms of the JV include:

- CNX to initially contribute a non-exclusive license (Technology License Agreement) to the JV for development of a UCG demonstration facility;

- Upon successful commissioning of the demonstration facility, CNX to grant an exclusive license for the use/sub- licensing of keyseam in China;

- CNX to be entitled to 90% of license fees before the JV is allocated an exclusive license and

- Post exclusivity, JV profit distributions to be allocated in the ratio CNX (30%), JinHong (70%);

- CNX to be engaged directly to provide the technical services to all licencing and sub-licencing of the technology.

CEO Morne Englebrecht departs

On 8/06/2016, CNX announced that CEO Morne Englebrecht would be leaving the company on 12/08/2016 after 5 years of service with the company.

CNX announced it was seeking a replacement for his position.

We believe the successful candidate is likely to be someone with extensive previous Asian markets experience given the company's focus on the roll out of its Asian development strategy.

Recommendation

The registration of the Jinhong China JV is a further concrete step in the development of CNX's China technology license roll out strategy and provides further impetus to our positive stance on the stock.

Given our revised valuation and price target still significantly exceeds current share price our Speculative Buy recommendation remains.

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