Project

Historical Background

The Deposit was originally discovered by reconnaissance core drilling by BHP during a regional search for oil-shale following the rapid increase in world oil prices during the 1970s. In 1983, the Deposit was acquired by the O’Sullivans Group, an independent group of Western Australian mining investors and prospectors. The O’Sullivans Group further evaluated a range of possible uses for the Deposit. Under an agreement with Trans Global Resources Limited (“Trans Global”) during the period 1992-95, ten 6 inch core samples, totalling approximately 2 tonnes of lignite, were extracted from the Deposit. Detailed research was conducted, principally aimed at exploring the possibility of using the lignite for thermal power generation. Trans Global also drilled 30 resource definition drill holes before withdrawing from the project following the Western Australian government’s announcement that North West Shelf natural gas was to be piped to the major mining district of Kalgoorlie, thereby reducing the potential market into which power could be delivered.

During 1998-99, Australian Power and Energy Corporation Holdings Limited (“APEC”) and Hillcrest NL (an ASX listed exploration company) entered into an agreement with the O’Sullivans Group. Under that arrangement, a further 16 holes were drilled, which extended the resource boundaries as defined by Trans Global. APEC carried out an analysis to investigate the oil production potential of the resource. While results indicated the resource exhibited potential, no further work was carried out due to the low prevailing oil price and a lack of funds.

In October 2001, ASX listed iron ore mining company Portman Mining Limited (“Portman”) entered into a joint venture with the O’Sullivans Group. Portman’s objective was to investigate the potential for use of the lignite as a reductant to upgrade the quality of iron ore fines which did not meet customer quality specifications from its Koolyanobbing Mine (275km north-west of the Deposit), through the production of iron-char. During Portman’s exploration programme, 110 air-core holes were drilled on a one kilometre grid to better define the extent of the resource. In addition, 10 diamond core holes were drilled to sample for coal quality assessment as well as obtaining two separate 1.5 tonne bulk drill samples of lignite. Portman funded research into a suitable process for the iron-char project described above, although only a small proportion of the samples were used.

Selected lignite cores were also tested for organic characterisation and conversion of kerogen to hydrocarbons. The results confirmed the potential of lignite to generate hydrocarbons through a pyrolysis process. However, Portman withdrew from the  project in late 2002 after deciding to focus on its core iron ore production business.

During 2004 the O’Sullivans Group relinquished the exploration licences over the Deposit. Peregrine Securities Limited (“Peregrine”) pegged the ground encompassing the Deposit and applied for the grant of six new exploration licences from the Department of Industry and Resources in Western Australia. Peregrine then incorporated Hurricane Fuels and raised its first round of seed capital. Hurricane Fuels acquired the rights to the new tenements and the Deposit from Peregrine in December 2004 under the terms of a tenement acquisition agreement. Hurricane Fuels approached the O’Sullivans Group in the knowledge that the O’Sullivans Group retained a significant library of mining information relevant to the Deposit, acquisition of which would be valuable to Hurricane Fuels. An agreement was reached whereby the O’Sullivans Group received seed capital in Hurricane Fuels in exchange for full access to its extensive database.

Prior to Admission to AIM, the Group’s test work was limited to preliminary laboratory test work on a limited number of samples of Salmon Gums lignite, conducted under the supervision of academics at Curtin University of Technology in Perth, Western Australia. Under pyrolysis test conditions designed to broadly simulate the L2V process, several lignite-to-liquids conversions were successfully achieved under variable temperature conditions and retention times. The reaction water created was analysed to assess its thermal and chemical properties and to calculate a predicted oil yield from lignite for L2V. That work was reviewed by GHD acting as the Competent Person, who reported that an average oil yield of 0.43 barrels per tonne (in-situ lignite) is feasible.

The majority of the key data produced by the various programmes described above, including the remaining Portman core and bulk samples stored in sealed conditions, are stored by the Company and are available for further test work.

Upon admission of Spitfire Oil Limited to AIM, the Australian 100% subsidiary company’s name was changed from Hurricane Fuels to Spitfire Oil Pty Ltd.

Location

The Deposit is located in Western Australia near Salmon Gums, approximately 600km south east of Perth, 250km south of Kalgoorlie and the surrounding Goldfields region and 100km north of the deep water port at Esperance.

The Deposit is located adjacent to both the north-south highway and the heavy-duty, standard gauge railway which run between Kalgoorlie and the bulk handling, deep-water port of Esperance. This line is presently used to transfer 330 million litres of distillate per year to fuel storage depots in Kalgoorlie from tanker storage at Esperance.

The Directors therefore believe that the location of the Deposit is strategically advantageous for any future commercialisation of the Project.

The Group’s Licences

Six exploration licences covering the Deposit (ELs 63/934, 935, 947, 959, 960 and 961) were granted to what was then Hurricane Fuels by the Western Australia Department of Industry and Resources during the period March to October 2005. These licences  covered an area of approximately 519 sq km.

Drilling activities for the purpose of resource definition and in order to achieve JORC indicated status have been ongoing since early 2007 on these exploration tenements. By the Autumn of 2011, following mandatory relinquishments, Spitfire Oil Pty Ltd held exploration licenses over 310 square kilometres as follows:

Lease Status Area Km2 Applied Grant Expiry Date
E63/934 Granted 43.23 27/01/2005 7/07/2005 6/07/2012
E63/935 Granted 60.61 27/01/2005 7/07/2005 6/07/2012
E63/947 Granted 146.3 20/10/2005 7/07/2005 6/07/2012
E63/961 Granted 60.63 29/12/2005 6/10/2005 5/10/2012

With the licences due to expire in 2012, Spitfire lodged an application to obtain a Retention Licence over the area of the resource, (see map) which was granted on 4th  September 2012. This licence is for a five year term and has been extended to 3rd September 2019. There are no annual exploration licence expenditure commitments under this licence apart from prescribed licence fees. This Retention Licence allows Spitfire to hold the rights to the Salmon Gums deposits in the longer term whilst minimising expenditure. Retention licences are designed specifically for those deposits where the technology does not yet exist or is not fully developed to process the contained deposits commercially.

The Deposits

Three resource areas were defined by exploration activity undertaken prior to Hurricane Fuels securing tenure of the exploration licences. These are the Northern, Central and Southern resource areas.

Estimates of the lignite resource had been calculated in accordance with the JORC Code. In a study completed in 2002, geological consultants CSA Australia Pty Ltd (“CSA”) defined the three main resource areas. CSA estimated the total resource, based on all the previous work undertaken to be:

  • at a minimum 10 metre seam thickness cut-off, a total of 229 million tonnes of Indicated Resource plus a further 61 million tonnes of Inferred Resource, on
    an in-situ moisture basis; or
  • at a minimum 5 metre seam thickness cut-off, a total of 428 million tonnes of Indicated Resource plus a further 80 million tonnes of Inferred Resource, also
    on an in-situ moisture basis.

The 2002 resource estimates were compiled for the purpose, at the time, of using the lignite as a metallurgical reductant for up-grading iron ore fines, a process which was not expected to be sensitive to oil-yield characteristics or variations in ash content.

As the Group intends to use the lignite deposit for a different purpose, namely conversion to oil, and given the complexity of defining the actual boundaries of the lignite deposits, the Group accepted classification of the Deposit as an Inferred Resource according to the JORC Code, pending further resource definition drilling, sampling and data collation.

In July 2009 Spitfire published a new JORC resource estimate (at a 4m coal thickness and 45% ashdb cut-off) of:

  • Indicated: 406 million tonnes.
  • Inferred: 470 million tonnes.
  • Total: 876 million tonnes.

This new resource represented a 69% increase over the 519 million tonnes (at 5m thickness and 30% ashdb cut-off) Inferred Resource of lignite which supported the Company’s admission on AIM in July 2007. This substantial resource was the result of a one and a half year drilling campaign involving 420 new drilled and cored holes for a total of 12,624 metres. The estimate in accordance with the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’ (The JORC Code, 2004) was generated through a thorough definition, audit and verification process managed by independent geological consultants G&S Resources.

If the oil yields achieved with the test reactors in the Curtin University laboratory could be maintained at an industrial scale, then the reported Resource of lignite would correspond to an in-situ pyrolysis oil resource in the range of 330 to 420 million barrels, an increase in the range of 65% to 110% over the 200 million barrels in-situ oil volumes which supported the company’s admission onto AIM.

Summary of Resources, Salmon Gums Lignite Project as prepared by G&S Resources: Summary of Coal Resources, Salmon Gums Lignite Project.

Resource Block Seam Interval Seam Resource Class Average Seam Thickness (m) Average Density gm/cc Average Ash (%db) Average Oil Yield (l/t) LTOM15C Average Total Moisture (% ar) Average Volatile Matter (% db) Area (m2 *103) Indicated Resource (Million tonnes) Inferred Resource (Million tonnes)
Far North Cumulative coal thickness >4m GL4 Inferred 7.3 1.20 26.1 107 58.4 41.5 19173.5 168.2
GL2 Inferred 0.6 1.23 30.6 102 58.6 38.3 2354.2 1.8
Minshull Cumulative coal thickness >4m GL4 Indicated 7.7 1.21 27.6 123 57.4 42.0 18472.2 171.6
GL4 Indicated 2.6 1.21 26.9 121 57.2 42.1 14268.2 45.0
GL4 Inferred 6.5 1.20 26.7 114 57.6 41.9 7443.5 58.1
GL2 Inferred 1.8 1.20 25.2 126 57.6 42.6 2156.1 4.6
GL1 Inferred 1.0 1.21 1452.0 1.7
Collison Cumulative coal thickness >4m GL4 Indicated 8.5 1.22 29.2 107 53.5 39.6 16349.1 169.4
GL2 Indicated 2.0 1.22 29.8 119 50.6 40.2 8310.8 20.1
GL4 Inferred 6.3 1.22 29.1 111 55.0 40.0 4227.9 32.8
GL2 Inferred 1.3 1.23 31.2 124 51.7 40.3 1721.5 2.8
GL1 Inferred 1.0 1.21 940.6 1.2
Pixie Cumulative coal thickness >4m GL4 Inferred 7.1 1.20 25.2 128 53.3 42.4 21616.1 183.2
GL2 Inferred 1.3 1.23 31.2 115 52.3 39.6 9146.4 14.9
Total 406.1 470

Notes:

  1. This table forms part of the G&S Resources July 2009 – Statement of Coal Resources for the Salmon Gums Lignite Project. Tenement status, the status of
    geological data (type, reliability, relevance and density), geological data evaluation procedures (databases, management, correlation and modelling) and the resource estimation criteria and procedures, are presented in detail in the resource statement. The contents of the above table should be considered with respect to the entire resource statement.
  2. Inferred Resources are estimated from the geological model and are presented “as estimated” for individual resource block / seam combinations, then rounded for reporting within the total (of all resource blocks) row. Inferred Resources reflect a lower level of confident than Indicated Resources and use of similar significant figures for reporting individual resource block / seam combinations in the above table, should not be taken to imply a similar confidence with respect to resource estimates.

Resource estimation of the Salmon Gums Lignite Project was limited by the various geological considerations and boundary criteria referred to in the July 2009, statement of coal resources.

Within the Salmon Gums Lignite Project area (limited by the currently inferred Eocene palaeochannel boundary and the extent of exploration drilling) the deposit is estimated to contain Indicated Resources for the GL4 and GL2 Seams of 406.1 million tonnes (Mt). A further 470 Mt of Inferred Resources have been estimated to be present in the GL4, GL2 and GL1 Seams.

The July 2009 resource estimate for the Indicated and Inferred Resources are not directly compatible with those of the 2002 estimation because of changed cut-off criteria (i.e. ash content, coal thickness) and differing regional extents. However, as a gross comparison within the Collison, Minshull and Pixie areas, the 2002 estimate of 519 Mt, has been increased to approximately 705 Mt. Increased resources can be attributed largely to extensive exploration drilling in 2007-2008, leading to considerable extension of the resource area, in combination with other unquantified factors including changes in cut-off criteria and varying density estimation and modelling methodologies.

The Company’s Low Temperature Pyrolysis Coal to Liquids Process

The Group’s proprietary low temperature pyrolysis technology for conversion of low-rank coal and biomass into oil has been termed Lignite-to-Value or L2V. L2V converts a low-rank coal (subject to its specific chemical characteristics) to a liquid hydrocarbon which can then be fractionated and upgraded to produce a combination of liquid fuels, synthetic crude and specialty chemicals.

The use of a pyrolysis process to generate oil from coal is not novel. It has been adapted from traditional coal coking and coal-tar producing technologies. A number of pyrolysis coal-to-liquids pilot or demonstration plants operated in the 1960s, 70s and 90s in Germany, the United Kingdom and the United States. However, none achieved full-scale commercial application due to the low prevailing oil price at that time. The pyrolysis process is essentially the same as the retorting process used to generate oil from oil shale. Spitfire Oil’s proprietary L2V version of the process was conceived by academics at Curtin University of Technology in Perth, Western Australia. Under the terms of an IP assignment agreement, Spitfire Oil will hold all rights, title to and interests in the L2V process with effect from Admission to AIM.

The L2V process is designed to thermally decompose (pyrolysise) lignite and to convert its kerogen content into oil at low temperature, avoiding the release of large greenhouse gas volumes normally associated with high temperature coal combustion or conversion. Compared with the more conventional gasification followed by Fisher-Tropsch coal-to-liquid process, best known for its application in South Africa, L2V offers a much cleaner and less energy intensive processing methodology. Based upon the Company’s expert’s estimates, a barrel of useable fuel produced by the conventional gasification plus Fisher-Tropsch process would generate emissions four times higher than Spitfire Oil’s low temperature pyrolysis process.

Water is an important consideration in the semi arid area around Salmon Gums with hyper-saline aquifers. The pyrolysis process requires no fresh water inputs and actually generates fresh water. In contrast, the more conventional gasification plus Fisher Tropsch process requires large amounts of fresh water.

In summary, testing prior to Admission to AIM indicated an average oil yield from the Deposit to be approximately 0.43 barrels of oil (or 69 litres) per tonne of lignite (in-situ, wet basis). Prior to Admission it was also noted that optimisation of the L2V method could serve to improve the actual oil yield. Test work at Curtin University of Technology has confirmed the potential for generating substantial oil volumes by subjecting Salmon Gums lignite to low temperature pyrolysis.

The potential advantages of the L2V process are:

  • it will allow exploitation of a low-value lignite resource which, due to its chemical properties, is not suitable for conventional applications, such as thermal power generation or conventional coal-to-liquids methods by gasification and Fisher-Tropsch process;
  • it will produce high-value, high-demand liquid hydrocarbon products that replace expensive, imported energy products or that can be exported internationally;
  • it will require lower capital and operating costs compared to conventional coal-to-liquids methods;
  • it will have a low environmental impact (emission levels of greenhouse gases are predicted to be of the same order of magnitude as those generated by the production and refining of heavy oils);
  • its produced pyrolysis oil can be fractionated and upgraded on-site to generate a mixture of liquid fuels, synthetic crude and speciality chemicals; and the project’s
    liquid fuels could service the growing local market in the region; and
  • its char is a valuable by-product of the pyrolysis which, once stabilised and cleaned, can be exported and sold overseas either as a high grade thermal coal or as a metallurgical coke substitute.

Spitfire Oil Pty Ltd holds all rights to the commercial application, development and marketing of the L2V technology.

Development Programme

Following admission to AIM the Group implemented a multi-level strategy to advance the commercial development of the Deposit, with most elements being conducted in parallel. The most significant components of the development programme were the intensive exploration of the Deposit and technical development of the L2V process which, if successful, would allow the Company to proceed to pilot testing and full feasibility assessment of the Project’s financial and commercial objectives.

a) Resource Definition & Exploration Programme

The Group’s exploration programme has been focused primarily on extending the geophysical, hydrological and geological knowledge of the Deposit. An extensive Electro-Magnetic geophysical survey to map the resource boundaries was successfully completed prior to implementation of an extensive drilling and bulk sampling programme and has been very valuable in determining limits of the paleo-valley in which the resource is contained.

OLD: Collection of a representative set of core samples for laboratory analysis is nearly completed and will provide an understanding of variances in material quality and characteristics across the Deposit. This work was also designed to improve the geological confidence level across the Deposit such that selected sections have been evaluated to Indicated Resource classification under the JORC Code.

NEW: A representative set of core samples for laboratory analysis was collected to provide an understanding of variances in material quality and characteristics across the Deposit. This work was also designed to improve the geological confidence level across the Deposit such that selected sections have been evaluated to Indicated Resource classification under the JORC Code.

Improved understanding of the resource distribution, kerogen concentrations and physical characteristics of the material so as to permit development of a ‘life of mine’ mining schedule.

Investigations have also been conducted into the hydrological criteria relevant to mine design whilst geotechnical information can be derived from the numerous cores. These results will collectively permit quantification of economic reserves under JORC Code guidelines, estimation of mining costs and long-term mine planning schedules.

The Group has also undertaken a limited step-out exploration drilling programme across some untested parts of the exploration licences with emphasis on the areas contiguous to the already identified resource so that the resource model may be expanded and optimised for selection of the most economic scale mine and oil production plant. This work could eventually yield incremental Inferred Status JORC resource volumes.

b) Process Optimisation Programme and Technology Realisation

As explained above, the basic technology required to convert coal into oil using low temperature pyrolysis has been proven by prior technology development activities in the US, Germany and UK in the 1960s, 70s and 90s. However, the Group’s proprietary conversion technology, L2V, requires further technical development and process optimisation in order to adapt it to suit the differing material characteristics that exist throughout the Deposit, in particular its highly variable levels of salt, moisture and ash. Work is also warranted to minimise greenhouse gas emissions from the process. This was never an issue in prior technology development efforts. Finally, optimisation and equipment selection for the entire process scheme, including de-watering before and oil upgrading after pyrolysis, are required before large scale industrial application.

The Process Optimisation Programme had been led by the Group’s Chief Scientist and  Technical Adviser, Professor Chun-Zhu Li. The programme has sought to determine a  technically viable lignite-to-oil conversion process suited to the specific chemical and thermal properties of the Deposit, such that oil yield, oil quality, greenhouse gas emissions and processing cost variables can be optimised. Spitfire Oil commissioned the Curtin Centre for Advanced Energy Science and Engineering (“CAESE”) at Curtin University of Technology in Perth, Western Australia, to manage the L2V research. CAESE has been providing the resources and infrastructure needed to implement the L2V work programme.

Since Admission, a new laboratory and advanced research facility was constructed at Curtin’s CAESE and a laboratory scale test reactor built and commissioned. Extensive material characterisation, drying and materials handling tests were completed. Oil has been produced from the test reactor. Additional small scale parametric optimisation pyrolysis tests have been undertaken whilst tests using different reactor technologies considered. Optimum process technology, equipment and parameters for de-watering, pyrolysis, and product upgrade (oil and char) as well as reliable estimates of oil and char yield from the lignite, quality and characteristics of products and greenhouse gas emissions are critical issues.

Test work and other investigations at Spitfire’s research and development  laboratories at Curtin University of Technology have highlighted the expanding complexity and growth in the scope of research required in refining and finalising the Company’s proprietary L2VTM lignite to liquids process. Consequently, in September 2009 the directors ordered a complete financial and technical reappraisal of the project including an analysis of other competing coal-to-liquids and coal to gas to liquids technologies. Spitfire continues to evaluate competing technologies in the processing of lignite into synthetic oil and gas. Technological progress has still not proceeded fast enough in attaining a proven alternative processing methodology, particularly in dealing with the salt content in the lignite, which meets the economic criteria set by the Company. Interest has been forthcoming by third parties in working with Spitfire in joint venture to apply certain technologies to the Salmon Gums lignite but, to date, no process has been demonstrated which provides the economic returns expected by Spitfire. Discussions remain ongoing on this subject.

c) Environment and Community

Spitfire Oil intends for its whole operation to be environmentally responsible. This commitment begins with the choice of technology to convert the Salmon Gums lignite to liquids. As explained above, the pyrolysis process operates at lower temperatures, resulting in a much lower carbon footprint. The technology will be compact, with an environmental footprint much smaller than that of more complex, conventional conversion processes.

The Salmon Gums lignite deposit is set in a semi arid part of Western Australia, dotted with mostly dry salt lakes, and containing old growth eucalypt woodlands, samphire shrublands and cleared agricultural land. To address the environmental challenges, the company has invested heavily in environmental studies. Baseline studies commenced in 2006 whilst extensive site investigations followed during 2008. These include extensive fauna and flora surveys, hydrology, salt lake ecology, waste characterisation and cultural heritage investigations.

In 2007, the Company commenced the environmental approval process with referrals to State and Federal Government authorities. By May 2008, the Western Australian Environmental Protection Authority determined that the project will be assessed by at ERMP level (Environmental Review and Management Program). The Australian Government’s assessment will be at the level of Controlled Action.

Community and stakeholder consultation has been undertaken since 2007. Key  stakeholders include the Salmon Gums community, the Esperance community and  government and non-government stakeholders.

d) Definitive Feasibility Study

Conclusion of the resource definition work and the successful parallel demonstration of L2V technology will position the Project’s technical aspects to Definitive Feasibility Study standard. Other equally vital components to be progressed in the same timeframe are:

  • product market identification;
  • environmental assessment and permitting;
  • land owner access agreements;
  • native title clearances; and
  • receipt of mining licences and permits to work and clear ground.

Satisfactory conclusion of a Definitive Feasibility Study (DFS) will position the company to proceed with the next phase which would include a Pilot Test and Front End Engineering and Design (FEED) phase. The DFS is intended to increase the Project knowledge base to the stage where funding can be sought from the market to support the subsequent Pilot and FEED phase.

The Market

The main product from L2V is a combination of liquid fuels, synthetic crude and specialty chemicals. The principal by-product is char which is a high grade, essentially moisture-free coke-like coal product.

The main liquid fuel product will be a low cost diesel alternative which will find a ready market with mining industries in the nearby Goldfields region, centred on Kalgoorlie. That area presently consumes approximately 860 million litres of diesel per year. Of that, approximately 330 million litres is shipped into the port of Esperance, transferred to bunker storage, and transported by rail via the standard gauge rail network passing through Salmon Gums to distribution depots at Kalgoorlie. The balance is presently transported by rail 700km from Perth to Kalgoorlie.

All other products including the synthetic crude, the specialty chemicals and the char will be exported through the standard gauge rail network for shipping out of the deepwater port of Esperance. The synthetic crude will be exported by small (Panamax) size tankers either to Australian (West or East Coast) or Asian (Singapore) refiners. Specialty chemicals will be shipped, most likely packed in large tanks, to buyers in the Australia-Asia region. Finally, the char by-product will be exported in dust free briquettes, shipped in bulk, most likely for metallurgical purposes but possibly for thermal use to buyers in East Asia.

In addition to these main liquid hydrocarbon and char products, the L2V process may potentially produce a number of additional saleable by-products including:

  • activated carbon, a high value imported product, which is used extensively in the gold industry throughout the world for winning dissolved gold from solution;
  • hydrochloric acid, into which the salt contained within the lignite will be transformed during the process and which also has a ready market for minerals leaching in the goldfields region; and
  • char as fertiliser, as recent agricultural technology development has shown carbon char products to have significant soil enhancement characteristics.

Financing

A mixture of project finance and equity finance is expected to be required to meet the substantial capital investment needed to implement a project of the scale envisaged.

Salmon Gums Lignite Project Map

A map of the Salmon Gums Lignite Project Resource Outline and Retention Licence areas can be download in Adobe Acrobat format: