Fertiliser firm Emmerson (LSE:EML) dipped to 3.5p this morning despite confirming that its flagship Khemisset potash project in Morocco has the potential to be a low capital cost, high-margin potash mine.
A highly-anticipated scoping study delivered months ahead of schedule gave the project a post-tax NPV(10) of $795m and an internal rate of return of 29.8pc over a 20-year mine life. This value, which assumes that potash prices will remain at their current $360/t over the mine’s duration, moves up to $1.14bn when using forecast potash prices from independent market consultant Argus Media.
At current potash prices, Khemisset also boasts a 50pc cash margin, a 64pc EBITDA margin, and post-tax cash flow of $184m a year, equating to a payback period of fewer than three-and-a-half years. The study is based around an average annual extraction rate of 6MMts of ore with an average grade of 9.35pc potassium oxide on inferred mineral resource estimate of 311Mt at an average grade of 10.2pc potassium oxide.
Elsewhere, Emmerson said the project is in the bottom quartile of potash projects globally when it comes to capital intensity per tonne of product produced, based on pre-production capital costs of $405m. This is less than half of the global peer average for capital intensity. Finally, the firm said it has the opportunity to significantly increase Khemisset’s initial 20-year mine life through the use of its existing in-situ resource and ongoing exploration to the northeast of the site.
Emmerson will now complete drilling and a bankable metallurgical testwork programme at the site before moving on to more detailed option and feasibility studies. It will fund these steps from its £3.8m cash balance – correct as at 31 October 2018 – which it expects to last until at least Q1 2020 based on current planned work streams.
CEO Hayden Locke, said the scoping study results indicate the project will ‘generate extremely robust returns regardless of potash prices’, supporting the firm’s belief that it will be financeable in any market condition.
Locke added: ‘The scoping study has confirmed our belief as a team that Khemisset has the potential to be a low capital cost, high margin potash mine, which is a very rare asset in the industry. Potash is controlled by a small handful of companies and is an industry with high barriers to entry, predominantly in the form of extremely high capital cost. This means that few new players, if any, can ever enter the market. Khemisset, which has an estimated capital intensity less than half of the global peer average, and less than a third of the average Canadian development, gives Emmerson a clear opportunity to be one of the few junior companies in the space.
‘At today’s potash price, which is still too low to incentivise the financing and construction of any of the mega potash projects, including BHP’s Jansen Project, Khemisset is forecast to deliver post-tax cashflows of over US$180 million per annum and deliver unlevered IRRs of nearly 30pc.
‘We believe there is further upside to the economics for Khemisset and we have already identified a number of areas where improvements can be made and where conservative assumptions have been used, which we will seek to refine in the coming studies.
Emmerson re-listed in June with a fresh focus on the fertiliser market. 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. The firm 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.