Since re-listing in June with a fresh focus on the fertiliser market, Emmerson (LSE:EML) has had its share price remain stable, with shares currently sitting at 3.1p, slightly above their placing price. The business’s strategy is as simple as it is potentially effective: to take advantage of an anticipated growth in demand for fertiliser over coming decades as the global population increases and available arable land falls. Here, new CEO Hayden Locke explains Emmerson’s plans to zone in on this trend in Africa through its Khemisset potash project in Morocco before laying out where news is likely to come from over coming months.
According to the UN, the world will need to produce 70pc more food by 2050 to feed its growing population despite the amount of arable land available per capita dropping by 15pc over the same period. Alongside this, the organisation believes that the global middle class will grow by 76pc between 2015 and 2030, leading to higher calorie diets and increasing yield demand from soil. Emmerson thinks these dynamics are likely to lead to a surge in fertiliser use going forward and, as such, is aiming to get early exposure to the commodity.
Its particular emphasis will be on potash, a product mostly used as a fertiliser due to its ability to protect plants from disease, extreme temperatures and increase the efficiency of their water usage, in turn increasing crop yields. Potash prices, which are recovering from cyclical lows, typically lag the global commodities cycle, leading Emmerson to anticipate a significant rebound in coming years in response to the ongoing resources bull-run.
Locke, who joined as chief executive when the business re-entered the market, tells us he finds the potash market’s straight-forward investment dynamic attractive: ‘We like the potash and fertiliser space because there is a pretty well understood thematic- a growing population against a shrinking amount of arable land. It is pretty clear that this is going to put a strain on nutrient levels in the soil globally. Rather than being driven purely by economics, like metal markets, feeding the world’s population is non-discretionary, especially in places like China. Logically, this suggests there will be less volatility in demand as the market progresses.’
In particular, Emmerson focuses on the potash market in Africa- home to around 60pc of the world’s uncultivated arable land and occupier of one of the lowest fertiliser application rates. Emmerson will naturally access Africa via Morocco, which Locke says is perfectly situated because it is also relatively close – globally speaking – to its end markets in Africa, Brazil and Southern Europe, two important further potash markets. He also notes that the country is home to OCP Group, a globally-leading fertiliser firm that is also planning to capitalise on Africa’s potential surge in fertiliser demand. He expects to benefit as OCP invests heavily in Morocco’s fertiliser industry.
Given how expensive and difficult it is to transport potash, a bulk commodity, Locke expects Emmerson’s location to deliver superior netbacks to its peers: ‘In potash, only two things matter- capital cost to production and your location relative to your end market. When operational, we will be the closest import mine for Brazil and Africa, as well as Southern Europe. Furthermore, most potash projects have astronomically high capital costs, which means they struggle to get a return on their invested capital. As well as having superior infrastructure and being rated the lowest risk jurisdictions in Africa, Morocco offers very favourable fiscal terms because it wants to attract foreign direct investment, so Morocco is a fantastic place to be developing a mine for a number of reasons.’
Emmerson’s flagship asset is the Khemisset potash project, located in northern Morocco, where it is targeting a low capital cost development and high margins so it can build and operate even at low potash prices. The project houses a relatively shallow deposit containing a JORC resource of 311.4Mt at 10.2pc K2O, likely giving it a 20-plus year life of mine, with plenty of exploration potential on which to expand in the future.
Last month saw Emmerson announce that it had completed a seismic survey at Khemisset, which aims to delineate the project’s basin and provide information on geological structures and faulting. The results are currently being processed and interpreted and are expected to be received in Q3 this year. Importantly, these results will be used to inform an ongoing Scoping Study for Khemisset, slated for completion Q1 2019, that will be used to assess the technical and economic viability of the project. Alongside this, Emmerson will also undertake drilling works at Khemisset this year, and metallurgical testing next year, before completing a preliminary feasibility study and any necessary permitting requests in 2019/20.
Locke told us work on the scoping study has already begun: ‘We have appointed specialist consultants for all of the key technical disciplines that need to be covered. We will get people who are very experienced in the potash market to give us an independent view of the project. This will help us confirm that it is worth spending what could end up being an additional $5-$10m dollars on further engineering studies, and also allows us to wrap some economics around Khemisset to give investors an idea of the sort of prize we are playing for.’
Earlier this month, Emmerson revealed that it has also been granted15 additional research permits, which are attached to Khemisset. Desktop geological work, including a review of historical data, has indicated that the potash mineralisation at Khemisset is likely to continue in the north east of the deposit for a number of kilometres. On this basis, the Company released a JORC Exploration Target, which was signed off by competent person Golder Associates, estimating the potential additional resources within these new permits to be in the range of 264 to 616 million tonnes of potash with grades ranging from 5% to 14% K2O.
If Emmerson is right, this has the potential to more than double the current mineral resource for the project and would very likely extend the mine life significantly beyond the 20 years that the company is currently targeting.
Although Emmerson is not currently generating any revenue as Khemisset is in the development stage, Locke says all current work funded from the £6m raised by the firm when it re-listed in June. He has set out a provisional three-year timeline for development work to complete, informed by similar work carried out by himself and head of corporate Phil Cleggett during their time at ASX-listed Highfield Resources:
‘Our work at Highfield over the last three and a half years was very similar to what we are doing here. That project is largely financed and waiting for its permits to begin construction. It will be the first-ever potash mine outside the hands of a major potash company.’
With Emmerson’s shares still sitting around their 3p listing price, Locke admits that Emmerson has yet to make its story known adequately to the market. However, he expects this to change imminently, with plenty of news due from next month onwards as Khemisset continues to move down the development path: ‘There is plenty of news flow coming in the next six months as we move towards the delivery of that scoping study. That should paint the attractive picture of a low capital cost project, which is very rare in this industry.’
Locke also pointed out that the firm attracted a great deal of interest from ultra-high and high net worth individuals when it re-listed earlier this year. Indeed, one of these investors included Ann Gloag, the founder of Stagecoach and Scotland’s richest woman, who has taken numerous stakes in UK-listed resource companies. He added: ‘We have a fantastic shareholder base, which is why it didn’t really go far and wide when we re-listed. These sorts of investors do a different level of diligence so their support is really encouraging.’
Emmerson is targeting an exciting thematic with an interesting approach. Although the company is still in its early stages, Locke has a clear idea of where things are headed, and management’s previous experience in the potash sector is no doubt encouraging. Fundamentals aside, the real story here is the possibility that no one has yet to catch on to the potential on offer, with the firm very much remaining under-the-radar as it stands- reflected in the performance of its shares. This point alone will warrant a punt for some, and if you fall into this camp, then it may be worth looking at Emmerson now before it begins to deliver further newsflow.