How do you value a potash company? It sounds like a simple question, but actually the answer comes in many parts.
For a start, there’s more than one type of potash.
There’s the standard muriate of potash (MOP), as produced by global giants like Uralkali (LON:URKA) and Mosaic (TSX:MOS).
There’s a lower quality polyhalite of the kind that the UK’s Sirius Minerals (LON:SXX) is planning to sell into a market that isn’t yet fully quantified, but which it is nonetheless confident that it can capitalise on.
And then there’s the premium sulphate of potash (SOP) product that the likes of Crystal Peak Minerals (CVE:CPM) are bringing to the fore from projects in Utah and elsewhere.
Bearing all this in mind, and lingering negative sentiment from the breakup of the old Canadian and Russian cartels, it’s perhaps not surprising that some investors have hesitated to commit to the sector in a big way.
But not all.
EMR Capital, a private equity group run out of Australia with deep linkages into Asian markets, has lately been moving into potash in a pretty big way.
Back in May it acted as a cornerstone investor in an A$101 mln placement by Highfield Resources (ASX:HFR), providing money that will be used to fund the equity component of construction costs at the Muga potash mine in northern Spain.
And then, just one day later, it announced a C$10 mln investment into Crystal Peak Minerals, the first part of a financing package that’s likely to see its total commitment to Crystal Peak rise to a total of C$85 mln.
What is it about these two companies that has attracted EMR in particular?
Highfield is slated to produce around 1.1 mln tonnes of granular MOP per year over a 24 year mine life, and according to analysis by Australian broker Bell Potter, will deliver maiden profits of A$48mln on sales of A$208mln in 2018.
That’s not bad for starters.
Crystal Peak offers a different kind of opportunity, which in its own specialised way looks just as attractive.
The company is planning a US$378mln SOP project at Sevier Playa in Millard County, Utah.
That’s prime potash country, not far from the Ogden project run by one of the world’s major players in SOP, Compass Minerals.
But just as important as the location is the scale.
Compass’s other major SOP project, at Great Salt Lake, is the world’s second largest producer of SOP, turning out around 330,000 tonnes per year.
Crystal Peak’s planned output of 300,000 tonnes per year from 2020 puts it right up there with the world’s largest.
Assuming an SOP price of US$721 per tonne, as estimated by respected industry consultants CRU, producing at that rate should generate EBITDA (underlying earnings) of US$143mln, with total cash costs running at a mere US$181 per tonne.
The margins on offer are therefore highly attractive, and the reason for EMR’s interest becomes immediately apparent.
There is more work to be done, of course.
The project at this stage has only formally been modelled to pre-feasibility levels.
But a full-blown feasibility study is well underway, and D’Ambrosio is hopeful that when it comes it will show significant improvements on the pre-feasibility numbers.
It’s an eye-watering thought, especially considering that the capital costs at Sevier Playa are, by comparison with the likes of Sirius, or IC Potash, or Potash Ridge, so low.
These are projects with multi-billion dollar price tags.
Sevier Playa’s up-front costs come in at less than US$400mln.
In an equity market where finance is hard to come by, that looks set to make a real difference.
Sevier Playa will get built, and it will generate significant returns, probably even more attractive ones than are currently in the public domain.
Anyone who doubts it should look to EMR. Its C$85mln commitment tells its own story.