Highfield Resources (ASX:HFR) has moved a step closer to becoming a significant global potash producer, agreeing a project finance mandate with four major European banks for the Muga Potash Mine in northern Spain.
Highfield has a number of compelling potash assets including the Muga, Sierra del Perdón and Pintano projects in the Navarra Basin.
The Muga project has robust Definitive Feasibility Study project economics including: a Net Present Value of $1.42 billion and Internal Rate of Return of 52% based on production of 1.12 million tonnes per annum over 24 years.
Reflecting the robust projected income from Muga, the banking syndicate consists of heavyweights: BNP Paribas S.A., ING Bank N.V., Société Générale Corporate & Investment Banking and Banco Santander S.A.
The banks have all received initial internal approvals based on a term sheet to participate in long term project finance facilities of up to €222 million, subject to final due diligence.
Which neatly fits the Muga capital expenditure profile of US$354 million (pre-production US$254m), which is in the bottom quartile capital intensity of $315/tpa vs. global average of $930/tpa.
Highfield had cash at bank of circa $118 million at June quarter end.
The long term project financing facility is based on a debt to equity ratio of up to 65% for Muga, where commencement of construction of the Muga Mine is expected in the December quarter of 2015.
The Mandated Lead Arrangers will use best efforts to arrange the eight year term facility and cost overrun facility totalling up to €222 million.
Due diligence is expected to be completed in October 2015 enabling execution of definitive legal documentation prior to the commencement of construction of the Muga Mine.
Highfield managing director, Anthony Hall, commented:
“The mandate with the four European commercial banks provides a high level of confidence that the funding process will be completed prior to the commencement of construction at our flagship Muga Mine which we continue to target in the December quarter of 2015.
“The four banks have signed the mandate after receiving initial internal approvals to participate in a project finance syndicate.”
Analysis
This is another big step in Highfield's construction plans and longer term aspirations to become a significant global potash producer.
Controlling all of the potential potash bearing evaporite in the Navarra Province provides it with capacity to bring on stream its other projects over time.
The current terms of the project finance mandate are commercial in confidence but are likely to highly compelling to Highfield especially where Euribor rates currently sit.
The announcement of and completion of the project financing is a key price catalyst for Highfield given the flagship Muga Project will then be fully funded (given pre-production capex of US$250m and existing cash position of A$118m).
Permitting is the next catalyst which we believe is likely to be received later this year as it would derisk the project with mining permit in hand.
Muga is likely to be a large employer of over 1,000 people in a country with chronic (+25%) unemployment.
Highfield's projects are low-risk, shallow potash projects that can utilise low-capital entry, conventional extraction plus strong local infrastructure and in-country expertise to fast track development in close proximity to end markets.
We also would not discount Highfield being on the radar of large potash companies given its potash assets portfolio and control of the Navarra basin.
Additionally potash producers tend to trade at substantial premiums to typical mining companies.
The recent pullback in the Highfield share price to $1.24 provides a compelling entry point.
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