Potash firm Emmerson (LSE:EML) rose to 3p yesterday after revealing that the cost of mine access at its flagship Khemisset project in Morocco is expected to be c.95pc cheaper than that of many of its peers. Here, chief executive Hayden Locke talks ValueTheMarkets through the significance of this lower budget and how it can allow Emmerson to gradually build up its position in Africa’s un-tapped potash market.
Khemisset is Emmerson’s flagship asset in northern Morocco, where it is targeting a low capital cost development and high margins so it can build and operate at all potash prices. The project houses a relatively shallow deposit containing a JORC resource of 311.4Mt at 10.2pc K20, likely giving it a 20-plus year life of mine, with plenty of exploration potential on the horizon. This was evidenced by the publication of an exploration target, covering an area of approximately 87km2that sits within the recently-granted research permit area. With a range of 264-616MMts this target could house more than double the current JORC Resource.
Yesterday saw the business announce that Golder, which it has hired to manage the delivery of a scoping study for Khemisset, has proposed accessing the site’s main potash seam via twin declines. These will be constructed using continuous mining machines that will eventually be responsible for mine production. The decline would drive through four principal lithologies.
What grabbed the market the most, however, was Emmerson’s claim that the direct capital costs of mine access are expected to come in at c.$35m, including 30pc contingency. According to the business, this represents an estimated capital cost saving of more than 95pc, or over $1bn, relative to average Canadian potash mine development. Indeed, this cost would place Khemisset’s mine access costs among the lowest 10pc for potash developments globally. A chart comparing this figure to several other potash developments can be seen below.
Speaking to ValueTheMarkets, Locke explained that high fixed mining access capital costs often force potash developers into producing vast quantities of fertiliser to ensure economic viability:
‘Effectively the cost of accessing the mine horizon is fixed at more than $1.1bn for a typical Canadian potash mine regardless of whether they produce 100,000 tonnes or 10 million tonnes of resource a year. Because of this, capital intensity increases as output decreases meaning that by trying to start with a smaller project they actually negatively impact their economics. As a result, most of these projects have to try to produce huge amounts of fertiliser to make their economics work.’
As a result of this, he said low mining access costs will give Emmerson a much higher degree of flexibility:
‘In any commodity environment, you do not necessarily want to be bringing in massive amounts of supply, especially for something like potash. Aside from significantly reducing our total capex, our lower costs mean Khemisset does not have to be a massive project to justify its economics. We can work our way into the market gradually, building up production, rather than having to frontload billions of dollars of capital raising. As we expect to have less than half the capital intensity of the rest of the market, we also think we will be better suited to making a profit in both low and high potash price environments.’
Finally, he said that lower capex costs will boost Emmerson’s competitive edge in the African potash market, where it is already enjoying a significant geographic advantage:
‘Today’s projected capex savings back up our major transport and logistics advantage that stems from Morocco’s ease-of-access to Africa, Brazil and Southern Europe. For a traditional Canadian potash miner, transport, logistics and royalties make up over 60pc of total delivered cost because potash is such a bulk commodity. We believe our transport, logistics and royalties will make up just 20pc of total costs.’
Yesterday’s update marked the first deliverable in terms of projected economics for the project in the lead up to the scoping study of Khemisset, set for delivery in the first quarter of next year. The scoping study, which will be used to assess the project’s economic viability, follows the release of a seismic survey last month that found no signs of significant faulting. Emmerson now plans to release several updates to the market ahead of the scoping study’s completion, as seen below.
Locke believes this pipeline of newsflow and the scoping study itself will give the market a better picture of Khemisset’s potential:
‘All this news will give us the opportunity to look at Khemisset’s technical merit to really assess the economic viability and run stress tests. Hopefully, this will reveal what we currently believe to be on offer, which is the opportunity for hundreds of millions of dollars of NPV10for investors in a company that currently has an enterprise value of less than $20m.’
Author: Daniel Flynn
Disclosure: The author does not own shares in the company mentioned above