Anglo American PLC (LSE:AAL)’s adventures in the North York National Park could be the definition of a company digging itself into a hole – both figuratively and literally.
Anglo is the owner of the Woodsmith Mine, just south and inland from the picturesque holiday resort of Whitby.
The operation, such as it is today, is host to a massive accumulation of polyhalite - sulphate, potassium, calcium, magnesium, and water mix that has been earmarked for use as a fertiliser.
New product, no market?
The word ‘earmarked’ is used deliberately in this context, for currently there is no little or no market for what is essentially a new product discovered by the deposit’s former owner, Sirius Minerals.
Then there is the whole engineering and construction effort, including a 23-mile tunnel to Teesport to the north. In total, this and the 4,900 feet mine shaft, the conveyors, site buildings and port equipment are expected to cost at least US$6.1bn.
That would put it second in the list of current UK civil engineering undertakings - ahead of the Thames Tideway and Stonehenge tunnels, though well behind the shockingly expensive HS2 super-fast train line.
Big write-down
So the project, on which Anglo last week took a US$1.4bn write-down, is big.
And this scale may explain why investment banks following the mining sector are starting to sit back and ponder whether Anglo made a massive mistake.
RBC Capital, for example, is conflicted. At the moment, some five years from first production, it points out that on certain metrics the Yorkshire mine is worth just US$1.1bn at a 9% internal rate of return.
In a chilling passage from a note on Anglo issued, RBC tells readers: “There is limited polyhalite sold currently and we believe it will take until first production and actually achieved pricing before the market gets comfortable with providing fair value.
“In addition, should the project not be able to scale from 5mtpa [five million tonnes per year] because of a lack of demand, the project would have a negative $1bn NPV [net present value]. We think this risk profile will likely remain unattractive for most investors for the foreseeable future.”
CEO enthusiastic
Yet the Canadian investment bank can at the same time see why chief executive Duncan Wanblad is enthusiastic about the project.
Anglo could, if plays its cards right and identifies a customer base, could become the monopolist owner of a high-quality crop nutrient that has the potential to sell for far more than current fertilisers.
RBC estimates that if Anglo is able to achieve a premium of US$100 a tonne for its polyhalite, the numbers would look far, far better than they do currently. Indeed, on that basis, it believes that Woodsmith would generate underlying earnings (EBITDA) of US$2.5bn a year.
“We would calculate a US$8.2bn current NPV [net present value] growing to US$22.9bn in 2033,” RBC said in its note.
“Even on our base case, this project redomiciles around 16% of the group's capital to the UK, improving risk profile and ESG credentials.
“We think CEO Duncan Wanblad's enthusiasm for the project, even if long-dated, likely has merit.”