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Monday 01 June, 2020

Emmerson PLC

FS Confirms Low Capex, High Margin Potash Mine

RNS Number : 4533O
Emmerson PLC
01 June 2020
 

Emmerson Plc / Ticker: EML / Index: LSE / Sector: Mining

1 June 2020

Emmerson Plc ("Emmerson" or the "Company")  

Feasibility Study Confirms Low Capex, High Margin Potash Mine
with Outstanding Economic Metrics

Emmerson Plc, the Moroccan focused potash development company, is pleased to release a summary of the results of its recently completed Feasibility Study ("FS") for the Company's 100% owned Khemisset Potash Project located in northern Morocco ("Khemisset" or "the Project"). 

To view the full Feasibility Study please use the following link: 
http://www.rns-pdf.londonstockexchange.com/rns/4533O_1-2020-5-31.pdf

Highlights

· Post Tax NPV8 of US$1.4 billion₁ and IRR of 38.5% over an initial 19 year mine life

· Total pre-production capital cost (potash only) US$387 million including contingency

o Represents a reduction of US$19 million or 4.7% from Scoping Study

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

· Additional capital cost of US$24 million (incl. contingency) for a salt plant designed to produce de-icing specification salt for sale into the east coast US de-icing salt market

· Peak production of approximately:

o 810,000 tonnes per annum of K60 MOP

o 1,000,000 tonnes per annum of de-icing salt

· Average steady state production of:

o 735,000 tonnes per annum of K60 MOP

o 1,000,000 tonnes per annum of de-icing salt

· Improved metallurgical recoveries based on detailed metallurgical test work programme results

o Weighted average LOM recovery 85.2% up from 83.6% in Scoping Study

· 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

o Average, steady state post-tax cash margins of 47.1%

o Average, steady state, EBITDA margins of 61.5%

· Robust cashflow generation at a broad range of potash price assumptions

o Average steady state EBITDA of US$307 million per annum

o Less than 2.6yr capital payback

· Initial mine life of 19 years with significant potential to increase from existing JORC compliant mineral resources

o Current mine plan includes only 43% of the total mineral resource estimate of 537 million tonnes with an average grade of 9.24% K2O

· Design and estimates completed by independent engineers according to AusIMM guidelines

· Emmerson cash position, as of 31 April 2020, of £1.2 million

o Fully funded to deliver key permitting workstreams including Environmental and Social Impact Assessment

[1] Nominal NPV8, 3.0% escalation applied to both operating costs and revenues

  Using industry expert Argus FMB price forecasts

 

Hayden Locke, CEO of Emmerson, commented:  

"The Feasibility Study has confirmed the findings from the Scoping Study, which showed that Khemisset has the potential to be a world class, low capital cost, high margin potash mine, which is a very rare asset in the global fertiliser industry. The strong agricultural investment thematic remains firmly in place driven by ever increasing global population and shrinking arable land, which necessitates the need for fertiliser and, in particular, potash.

"We are particularly pleased that the total pre-production capital cost has come down by approximately US$19 million from the Scoping Study, which is unusual when moving to higher levels of engineering, and is a testament to the focus of our engineering team on delivering fit for purpose, disciplined designs for the Project.

"As expected, the forecast all-in-sustaining cash costs, delivered to customer, place this project in the bottom quartile of all potash projects to Emmerson's target markets. When we include the offsetting salt by-product credits, as is the typical convention in the mining industry, Khemisset becomes one of the lowest cost producers to these markets. This is a powerful competitive position and that will continue to attract interest from numerous potential strategic partners.

"It follows that the economics of this project would be highly compelling, and with an IRR of nearly 39% and a post-tax NPV8 of US$1.4 billion, this is clearly an extremely robust project in normal potash market conditions, generating average revenue of over US$480 million and EBITDA of over US$300m for the life of the mine. It is outstanding that, in a downside market price scenario, assuming a potash price of around US$225/tonne, this project will still generate a very robust average life of mine post-tax free cash flow of nearly US$90 million per annum and an IRR of nearly 15%. This is more than enough to pay the interest and principal on a significant amount of debt and ensure that we, as equity investors in Emmerson, make a solid downside case return on our capital. It is one of the very few potash projects globally that would achieve these metrics in the downside price scenario.

"I would like to thank our project engineering team, and in particular the team from Golder and Barr, who have undertaken an extremely rigorous engineering and de-risking programme and have delivered a thorough assessment of the project and a clear plan for its future development.

"The objectives for Emmerson for the rest of 2020 are to move the Project through the various permitting requirements, including an Environmental and Social Impact Assessment which incorporates a formal stakeholder engagement programme, while concurrently moving forward our financing discussions for the next phase of development at Khemisset."

Key Assumptions and Results from Study

The key assumption underpinning the Feasibility Study is an average annual extraction rate of approximately 6 million tonnes of ROM ore with an average grade (undiluted) over the life of mine of 9.12% K2O. The Feasibility Study is based on 43% of the JORC compliant Mineral Resource Estimate of 537Mt at an average grade of 9.24% K2O, delivering an initial mine life of 19 years. Significant potential remains to increase the mine life by including additional resources, notably in the south west of the project area, and through further exploration work.

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 735,000 metric tonnes per annum of K60 product and 1 million metric tonnes of de-icing salt for sale.

The Feasibility Study assumes all MOP and salt product is exported through the Port of Casablanca, using trucks from mine site, to be sold in Emmerson's target markets in the Atlantic corridor.

Capital cost estimates include a contingency of 16% and capital and operating cost estimates have an accuracy of ±20-25%. Key assumptions and results are outlined in Table 1 below:

Parameter

Value

Initial Operating Life

19 years

Annual ROM Extraction Rate

6Mtpa

Average Life of Mine Grade to Mill

8.6% K2O

Average Metallurgical Recovery (LOM)

85.2%

Average Annual MOP Production Rate

~735,000 metric tonnes

Average Annual Salt Production Rate

1 million metric tonnes

Average Flat Real MOP Price CFR Brazil

US$412/tonne

Average Flat Real Salt Price CFR East Coast US

US$60/tonne

Capital Cost (including US$45.5m contingency)

US$387 million

Total Cash Cost FOB Port of Casablanca

US$125.3/tonne

All-in-Sustaining Cash FOB Port of Casablanca

US$158.0/tonne

Average Steady State EBITDA

US$307 million

Average Steady State EBTDA Margin

61.5%

Average Steady State Annual Post-Tax Cash Flow

US$235 million

Average Steady State Post Tax Cash Margin

47.1%

Post Tax NPV8 (nominal)

US$1.4 billion

Post Tax IRR (nominal)

38.5%

Post-tax Payback Period

2.6yrs

Table 1: Key Assumptions and Results

Economic Sensitivity Analysis

Economic sensitivity analyses of Khemisset shows it to be a financially robust project that delivers strong NPVs and healthy 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.

NPV - US$ millions

Flat Real MOP Price - US$/tonne

Discount Rate

 

288

(-30%)

350

(-15%)

412

(Base)

473

(15%)

536

(30%)

4%

1,151.0

1,719.6

2,288.3

2,857.0

3,425.7

6%

855.5

1,316.0

1,776.5

2,237.0

2,697.5

8%

634.9

1,012.9

1,390.9

1,768.9

2,146.9

10%

468.1

782.4

1,096.7

1,410.9

1,725.2

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 EBITDA, post-tax cashflow and IRR at a variety of potash prices can been seen in Table 3, Table 4 and Table 5 below.

EBITDA - US$ millions

Flat Real MOP Price - US$/tonne

 

227

(-45%)

288

(-30%)

350

(-15%)

412

(Base)

474

(15%)

536

(30%)

130.4

189.3

248.3

307.2

366.1

425.0

Table 3: EBITDA Sensitivity to Potash Price

 

Post Tax FCF - US$ millions

Flat Real MOP Price - US$/tonne

 

227

(-45%)

288

(-30%)

350

(-15%)

412

(Base)

474

(15%)

536

(30%)

87.5

136.8

186.0

235.2

284.5

333.7

Table 4: Post-Tax Free Cash Flow Sensitivity to Potash Price

 

IRR

Flat Real MOP Price - US$/tonne

 

227

(-45%)

288

(-30%)

350

(-15%)

412

(Base)

474

(15%)

536

(30%)

14.7%

23.3%

31.1%

38.5%

45.5%

52.3%

Table 5: IRR Sensitivity to Potash Price

 

Key Financial Assumptions for DCF Model

Industry Expert Argus FMB Price Forecasts over Life of Mine (approx. average US$412/tonne real flat)

Nominal Discount Rate of 8%

Costs and revenues escalated at 3.0% per annum over life of mine (average UK inflation since 1998)

5 Yr Corporate Tax Holiday

20.0% Corporate Tax Rate on Exported Product

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

Table 6: 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 Feasibility Study and have been estimated with an accuracy of ±20-25%.

The total pre-production capital cost for the potash mine and salt plant together is US$411 million, which includes a US$45 million (16%) contingency. Pre-production capital cost, even when including the salt plant, places Khemisset in the lowest decile for capital intensity among its global potash development peers. A summary of pre-production capital costs can be seen in Table 7 below.

Summary of Capital Costs (Potash and Salt)

Capital Cost Item

US$M

Mining

89.6

Processing Plant

146.6

Surface Infrastructure

17.9

Tailings Storage

30.5

Total Direct

284.6

EPCM

32.8

Indirects

47.9

Contingency (16%)

45.5

Total Pre-Production Capital Cost

410.9

Capital Intensity (US$/tonne product)

507.4

Table 7: Summary of Pre-Production Capital Costs

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. All costs have been built from first principles to provide a deterministic estimate of operating costs over the life of the mine. A summary of steady state operating costs can be seen in Table 8 below.

Summary of Operating Costs in First Year of Full Production (Potash Only)

Operating Cost Item

US$/t ROM

US$/t MOP

Mining (incl. Contract Mining)

7.8

6 0 .2

Processing

5.5

4 2.7

Other Site Operating Costs

0.7

5 .6

Administration

0.4

2.8

Total Cash Cost to Mine Gate

14.4

1 11.2

Trucking to Port of Casablanca and Port Charges

2.0

14.1

Sustaining Capital

4.2

3 2.7

All-in-Sustaining Cash Cost (FOB Casablanca)

20.6

15 8 .0

Freight to Brazil

1.4

10.0

All-in-Sustaining Cash Cost to Brazil

22.0

16 8 .0

Table 8: Summary of Operating Costs in First Year of Full Production

Comparison to Peers

The Feasibility 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 remains 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 - See PDF

 

Despite Khemisset having higher operating costs to mine gate, relative to low-cost Russian and Canadian peers, it is still forecast to be in the bottom quartile in terms of delivered cost to all of its target markets due to its favourable location, within 200km of a port (with the potential for this to reduce to 100km upon the opening of the planned port of Kenitra Atlantique), and its proximity to its end markets. When salt by-product credits are included, as is the convention in the mining industry, Khemisset is projected to be among the bottom two or three projects globally on an all-in-sustaining delivered cost to Brazil basis.

Independent market consultants, Argus FMB, provided 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 - See PDF

 

**ENDS**

 

 Notes to Editors

Emmerson's primary focus is on developing the Khemisset Potash Project located in Northern Morocco.  The Project has a large JORC Resource Estimate (2012) of 537Mt @ 9.24% K2O and significant exploration potential with an accelerated development pathway targeting a low capex, high margin mine.  Khemisset is perfectly located to capitalise on the expected growth of African fertiliser consumption whilst also being located on the doorstep of European markets. This unique positioning means the Project will receive a premium netback price compared to existing potash producers. The need to feed the world's rapidly increasing population is driving demand for potash and Emmerson is well placed to benefit from the opportunities this presents.

 

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014.


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