Highfield Resources (ASX:HFR) has significantly advanced its Muga potash project in Spain with completion of a community consultation process and a schedule to close financing by the end of the calendar year.
Completion of the community consultation process responses for Muga represents a critical element in progressing the project’s mining concession application.
This milestone is expected to pave the way to a positive environmental declaration by February next year, which will in turn allow for the start of construction of the low-capex, high-margin potash mine.
Importantly, Highfield believes that nothing detrimental to the project’s success has been identified through the community consultation process. Support has been received from the community and all levels of government, including local municipalities, the Spanish provinces of Aragon and Navarra, and the central administration in Madrid.
A full mining concession is expected by April 2016.
Highfield is also aiming to complete the final mine design, cost plan, timeline and production profile later this month.
Once this is completed, the company expects to conclude the financing process by the end of December.
The company and the regional electrical supply company, Iberdrola, have jointly signed an undertaking for the permanent electrical supply to be made available from the local grid substation. Works have been initiated to ensure a sufficient grid electricity supply is in place for the majority of construction activities.
This is a significant step in preparing to commence the construction and operations of Muga.
In August, Highfield agreed to a project finance mandate with four major European banks, including heavyweights: BNP Paribas S.A., ING Bank N.V., Societe Generale 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 tonnes per annum versus the global average of $930 tonnes per annum.
Highfield had cash at bank of circa $118 million at June quarter end.
Muga strengths
Muga has highly 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.
The initial mine target is the shallow mineralisation with a view to progressively moving into deeper mineralisation later in the mine life.
Mineral extraction will be carried out by conventional, underground room and pillar mining, using road headers and raised to surface via conveyors in the decline access ramps. The processed potash will be transported by road to domestic customers and by road to port for export. It is expected that, at full production, around 1 million tonnes of potash per year will be produced.
Resources total 302.4 million tonnes at 11.5% K2O, with thorough exploration having confirmed a high level of confidence with respect to continuity of the evaporite horizon, decline access and mineralisation grade across the ore body.
Growing the portfolio
Approvals and financing progress for Muga has coincided with substantial groundwork in further developing the size and scope of the project.
Last month, Highfield defined an Exploration Target of 1.04 billion tonnes at 11.5% K2O for the Pintanos Project, interpreted as the eastern extension of the flagship.
This covers about 60 square kilometres and is supported by extensive drilling and geophysical exploration work.
It is further supported by extensive seismic work completed by independent consultants RPS Boyd PetroSearch and includes the previous JORC Inferred Resource of 187 million tonnes.
Notably, Pintanos is potentially twice the size of Muga, which currently supports a 24 year mine at 1.1 million tonnes of potash per annum.
Highfield has also added to its Spanish pipeline with an exploration target at the Vipasca project (contiguous to Muga) of 483 million tonnes at 11.4% K20 to 1.8 billion tonnes at 15.2% K20.
Analysis
Community and government support for Muga has boded well for timely delivery of the project as planned.
Financing and infrastructure momentum such as the recently signed arrangement with Iberdrola also indicate that Muga is systematically realising concrete steps toward construction and a high-margin potash production business.
Highfield assets, including Muga’s Pintanos extension, are considered among the best undeveloped potash projects globally, with near-surface mineralization, low-capex, and competitive costs.
Earlier this year, Highfield was the subject of an initiation research report by Canadian investment bank RBC Capital Markets placing a share price target of A$2.70 with an "upside scenario" target of $5.30.
Proactive said recently the current pullback in the Highfield share price to $1.26 was as a compelling entry point.
Highfield’s expectation to complete financing in December also offers a potential price catalyst for the company, since financing is the company’s last major hurdle on the road to production apart from final mine design.
Highfield’s ambitious regional exploration targets suggest important potential to realise the company’s goal of becoming a significant global potash producer.
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