Hayden Locke, CEO of Emmerson PLC (AIM:EML) Interview

We talk with Hayden Locke, CEO of Emmerson PLC, about the RNS released today regarding their Scoping Study for the Khemisset Potash Project.

 


Scoping Study Confirms Potential for Low Capex, High Margin Potash Mine

Emmerson Plc, the Moroccan focused potash development company, is pleased to release a summary of the results of its recently completed Scoping Study for the Company’s 100% owned Khemisset Potash Project located in northern Morocco (“Khemisset” or “the Project”). A report detailing the full findings of the Scoping Study is available to view on the Company website here: https://www.emmersonplc.com/investors/corporate-documents/.

The Scoping Study was managed by global independent mining and engineering consultant, Golder Associates (“Golder”) and designs and estimates have been prepared in line with guidelines provided by the Australasian Institute of Mining and Metallurgy (“AusIMM”). Economic metrics of the Project have been calculated by the Company using the technical outputs of the Scoping Study: such metrics have been reviewed and approved by Golder.

Emmerson will be hosting an Analyst and Shareholder conference call on Thursday 22 November at 11.00am GMT to discuss the Scoping Study results. Further information can be found below.

To view the detailed press release with the illustrative maps and diagrams please use the following link: http://www.rns-pdf.londonstockexchange.com/rns/8194H_1-2018-11-19.pdf.

Highlights

Post Tax NPV10 of US$795 million[1] and IRR of 29.8% over 20 year mine life

Assumes flat real price of US$360/tonne CFR Brazil price (today’s price in Brazilian market)

Using forecast prices from Independent Market Consultant Argus Media, NPV10 increases to US$1.14 billionover 20 year mine life

Bottom quartile projected all-in-sustaining delivered cost to all Emmerson’s target markets including Brazil, NW Europe, Morocco, South Africa

Top quartile projected cash margins according to analysis conducted by Argus FMB

Average, steady state post-tax cash margins of 50% at current potash prices

Average, steady state, EBITDA margins of nearly 64% at current potash prices

Robust cashflow generation at a broad range of potash price assumptions

Average, steady state, post-tax cashflow of US$184 million per annum assuming a flat, real, potash price of US$360/tonne CFR Brazil

Less than 3.25yr capital payback

Initial mine life of 20 years with significant potential to increase from existing in-situ resource (outside of Inferred Mineral Resource Estimate) and ongoing exploration in North East Khemisset

6Mtpa run of mine ore delivering nearly 800,000 tonnes of K60 MOP per annum on average over life of mine

Total pre-production capital cost US$405 million including US$90 million of contingency

Bottom quartile capital intensity per tonne of product produced, less than half of global peer average capital intensity

Design and estimates completed by independent engineers according to AusIMM guidelines for capital and operating cost estimates

Emmerson cash position, as at 31 October 2018, of £3.8 million

Fully funded through until at least Q1 2020 based on current planned work streams

Hayden Locke, CEO of Emmerson, commented:

“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.

“The economic sensitivity analysis we have conducted, based on the results of the Scoping Study, indicates that the Project will generate extremely robust returns, regardless of potash price, and supports our strong belief that it will be financeable in any market conditions. This is a hurdle that very few potash projects globally can clear.

“Assuming a flat US$240/tonne CFR Brazil potash price, which is close to the lowest price seen in the Brazilian market in last twelve to fifteen years – and a price which industry performance has shown is not sustainable – the Khemisset Project is still forecast to deliver average annual, post-tax, cashflows of nearly US$80 million per annum over the life of mine. 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 30%.

“Since acquiring the Project in June we have made strong progress and, thanks to the dedication of our team, I am delighted to be delivering the Scoping Study months ahead of schedule. Our team of independent experts, led by Golder and Ercosplan, have done an outstanding job moving the Project quickly forward, addressing all the key workstreams and risks associated with a Project like this. 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.

“The next steps will include the completion of drilling, a bankable metallurgical testwork programme and then commencement of more detailed option and feasibility studies. The results of the Scoping Study give our team a clear path to continue to move the Khemisset Potash Project through the various de-risking milestones ahead and our cash balance of £3.8 million, which funds us through until at least Q1 2020, puts us in an enviable position to execute on our strategy quickly.”

Key Assumptions and Results from Study

The key assumption underpinning the Scoping Study is an average annual extraction rate of 6 million tonnes of ROM ore with an average grade over the life of mine of 9.35% K2O. The Scoping Study is based entirely on the JORC compliant Inferred Mineral Resource Estimate of 311Mt at an average grade of 10.2% K2O and delivers an initial mine life of 20 years.

Processing assumes a hot leaching and crystallisation process to extract and purify the KCl in the ore into saleable grade K60 MOP. Over the life of mine, the process plant delivers an average of approximately 800,000 metric tonnes per annum of K60 product for sale.

The Scoping Study assumes all product is exported through the Port of Mohammedia, using trucks from mine site, to be sold in Brazil, NW Europe, NOLA and South Africa.

Capital cost estimates include a contingency of 30% and capital and operating cost estimates have an accuracy of Â±30-50%. Key assumptions and results are outlined in Table 1 below:

Parameter

Value

Initial Operating Life

20 years

Annual ROM Extraction Rate

6Mtpa

Average Life of Mine Grade to Mill

9.35% K2O

Average Metallurgical Recovery (LOM)

83.6%

Average Annual Steady State Production Rate

800,000 metric tonnes

Flat Real MOP Price CFR Brazil

US$360/tonne

Capital Cost (including US$90m contingency)

US$405 million

Total Cash Cost FOB Port of Mohammedia

US$115.4/tonne

All-in-Sustaining Cash FOB Port of Mohammedia

US$147.6/tonne

Average Steady State EBITDA

US$236 million

Average Steady State EBTDA Margin

63.5%

Average Steady State Annual Post-Tax Cash Flow

US$184 million

Average Steady State Cash Margin

50.0%

Post Tax NPV10 (nominal)

US$795 million

Post Tax IRR (nominal)

29.8%

Post-tax Payback Period

3.25yrs

Table 1: Key Assumptions and Results

Economic Sensitivity Analysis

Economic sensitivity analysis of Khemisset shows it to be a financially robust project that delivers very strong NPVs and cashflows through a range of potash prices. A summary of NPVs at a variety of potash prices and discount rates can be seen in Table 2 below.

MOP CFR Brazil

300

320

340

360

380

400

420

Discount Rate

5.0%

929

1,121

1,312

1,504

1,695

1,887

2,078

7.5%

641

791

940

1,090

1,240

1,389

1,539

10.0%

437

556

676

795

915

1,034

1,153

12.5%

289

386

483

580

678

775

872

15.0%

179

260

341

421

502

582

663

Table 2: NPV Sensitivity to Potash Price and Discount Rate

Strong cashflow generation at a variety of low potash prices is fundamental to the ability to finance the Project. Khemisset delivers strong, post-tax, cashflows which Management believes will be capable of delivering the requisite finance to complete the construction and ramp up of the mine. A summary of the post-tax cashflow and EBITDA at a variety of potash prices can been seen in Table 3 and Table 4 below.

Ave. Life of Mine Steady State Post-Tax Cashflow at Various Potash Prices

Flat MOP CFR Price

(US$/tonne)

300

320

340

360

380

400

420

Ave. Steady State Post-Tax Cashflow US$m/year (Nominal)

130

148

166

184

202

221

239

Table 3: Post-tax Cashflow Sensitivity to Potash Price

Ave. Life of Mine Steady State EBITDA at Various Potash Prices

Flat MOP CFR Brazil Price

(US$/tonne)

300

320

340

360

380

400

420

Ave. Steady State EBITDA

US$m/year (Nominal)

176

196

216

236

256

276

296

Table 4: EBITDA Sensitivity to Potash Price

Key Financial Assumptions for DCF Model

Flat MOP Prices over Life of Mine (Base case US$360/tonne CFR Brazil)

Nominal Discount Rate of 10%

Costs and revenues escalated at 2% per annum over life of mine

5 Yr Corporate Tax Holiday

17.5% Corporate Tax Rate on Exported Product

Two years pre-production, ramp-up 50% in year 1

Table 5: Key Assumptions Used in Financial Model

Summary of Capital and Operating Costs contained in the Study

Capital and operating costs were estimated from first principles in line with the Australian Institute of Mines and Metallurgy (“AusIMM”) guidelines for a Scoping Study and have been estimated with an accuracy of ±30-50%.

The total pre-production capital cost of US$405 million, which includes a US$90 million (30%) contingency, places Khemisset in the lowest quartile for capital intensity among its global potash development peers. A summary of pre-production capital costs can be seen in Table 6 below.

Operating costs have been estimated using key inputs including equipment lists and mechanical performance, power consumption, Moroccan electricity and gas rates, Moroccan and expatriate labour rates. Some small items have been estimated using factorisation based on the engineer’s experience and benchmarks obtained from its internal database of similar projects. A summary of operating costs can be seen in Table 7 below.

Summary of Capital Costs

Capital Cost Item

US$M

Mining

123.0

Processing Plant

138.0

Surface Infrastructure

40.2

Total

301.2

EPCM

14.3

Contingency (30%)

90.4

Total Pre-Production Capital Cost

405.9

Capital Intensity (US$/tonne product)

520.4

Table 6: Summary of Pre-Production Capital Costs

Summary of Operating Costs

Operating Cost Item

US$/t ROM

US$/t MOP

Mining

5.5

42.1

Processing

7.2

55.1

Other Site Operating Costs

0.7

5.0

Administration

0.4

3.2

Total Cash Cost to Mine Gate

13.8

105.4

Trucking to Port of Mohammedia

1.3

10.0

Sustaining Capital

4.2

32.2

All-in-Sustaining Cash Cost (FOB Mohammedia)

19.3

147.6

Freight to Brazil

2.5

15.0

All-in-Sustaining Cash Cost to Brazil

21.8

162.6

Table 7: Summary of Steady State Operating Costs

Comparison to Peers

The Scoping Study estimates that the capital intensity of the Khemisset Project, per tonne of product produced, will be less than half of the global peer average capital intensity for potash mines. Khemisset is in the bottom three projects globally in terms of both capital intensity and absolute pre-production capital cost. A comparison to other potash projects is shown in Figure 1 below.

Figure 1. Pre-Production Capital Intensity for Potash Projects Globally

Despite Khemisset having higher operating costs to mine gate, relative to its low-cost Russian and Canadian peers it is still forecast to be in the bottom quartile delivered cost to all of its target markets due to its favourable location, within 140km of a port, and its proximity to its end markets. Independent market consultants, Argus FMB, provide analysis highlighting Emmerson’s projected competitive position which can be seen below in Figure 2.

Figure 2: Industry All-in-Sustaining Delivered Cost Curve to CFR Brazil

Shareholder and Analyst Call

Emmerson will be hosting an Analyst and Shareholder conference call on Thursday 22 November at 11.00 GMT in order to discuss the Scoping Study results. The call will be hosted by Emmerson’s Chief Executive Officer Hayden Locke who will be presenting a short presentation and answering questions submitted by participants.

 

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