b88649af4c6c433d65a461868f2c7cab_x2Shares in Petro Matad edged higher last week after the Government of Mongolia formally approved the farm-out of a portion of Petro Matad’s Blocks IV and V in Central Mongolia to BG Group. This satisfies one of the key conditions of the BG Group farm-in, which was announced in April 2015.

There is now just one remaining condition to closing a deal that will ensure cash-short Petro Matad’s financial survival for the coming years and ensure work gets started on these frontier blocks in an untested part of Mongolia.

Under the terms of the deal, BG will take on 78 per cent of the equity in the virgin blocks in return for funding Petro Matad’s share of a mutually agreed US$28 million work programme that will fulfil the minimum work obligations before the next licence expiry date of July 2017.

Most of this work, which will include airborne FTG gravity and magnetics surveys, 2D seismic, core holes and exploration wells, is expected to take place this year and next, promising some much-needed newsflow to drive the share price.

Dr Oyungerel Janchiv, Petro Matad acting chairperson after the previous chair George Watkins resigned in November 2014, said in April that BG’s decision to enter Mongolia was “an endorsement of the potential within the acreage and Petro Matad’s technical work to date”. She said Petro Matad would now be fully funded for its remaining commitments on Blocks IV & V.

The transaction will also ensure Petro Matad has the cash to fund ongoing operations. The AIM company will receive a phased cash injection that will add up to US$4.55 million, with US$2.75 million payable upon completion of the farm-out and a further US$1.8 million via payments of US$50,000 per month over 36 months.

Petro Matad will retain operatorship until such a time as there is an extension to the Block IV or Block V contract term, at which point BG Group will assume operatorship. BG Group will, however, provide technical support and provide a secondee to the AIM company over the next three years; this will ensure essential insight during well planning and drilling operations.

The key now is to close this deal – and the clock is certainly ticking for the AIM small cap. It acknowledged on Thursday that is current cash reserves are low but said the Board was “highly confident” that the remaining condition to the farm-out would be resolved before these reserves are depleted.

Worryingly for investors, the Isle of Man-based company did signal there could be a potentially dilutive short-term fix to the funding gap, with the company saying that should the farm-out not complete within the next few weeks the company is in talks with a potential provider of short term funding to ensure that the company will have access to the necessary cash resources to be able to continue to operate until the farmout is completed.

As seasoned AIM investors will be appear, short-term funding solutions can often be expensive and leave small caps with little room for manoeuvre when events don’t go as planned. The swift completion of the BG deal will be a key event for the company.