Development work ahead of construction at Highfield Resources’ (ASX:HFR) Muga potash project in Spain has optimised operational efficiencies, sales, marketing, reserves and overall value, resulting in a doubled mine life with initial production to start in October 2017.
Muga has increased its mine life from 24 years to 47 years at a production rate of 1.1 million tonnes of K60 granular muriate of potash (MOP) per annum.
The optimisation has produced robust financial metrics including a post-tax, unlevered internal rate of return of 38.9% and a net present value (NPV) with a discount rate of 8% of US$2.1 billion.
Pre-production capex increased only marginally to €267 million (A$402 million) while proven and probable reserves grew 73% from Definitive Feasibility Study (DFS) estimates to 253 million tonnes with an average grade of 11.5% K2O and an average metallurgical recovery rate of 88% of KCl contained in sylvinite.
Highfield also has contracts ready to be executed for over 25% of the direct costs of the mine, with pricing below budget and without any contingency.
Marketing activity has included encouraging discussions held for sales of by-product salt into U.S. markets.
Three parallel infrastructure drifts are to be built upfront to ensure smoother ramp-up and enhanced operational efficiency whilst allowing for future mine expansion.
This expansion potential is underscored by a large but untested exploration target for the project of 127 million to 255 million tonnes of sylvinite grading 12% to 16% K2O.
Optimisations in detail
The improvements to Highfield's Muga start-up plan build on a strong DFS scenario established earlier this year, which demonstrated the project’s potential to be the highest margin potash mine globally in production.
As the company moves into a construction phase at the site with anticipation of increased marketing activity, the optimisation efforts are focusing on production readiness, underground design and equipment selection to improve operational efficiencies.
Initiatives and outcomes include:
- Altering the mine plan to include an additional sylvinite seam. This new mine plan results in a doubled mine life and excludes any potential upside from the substantial exploration target.
- Electing to use a combination of continuous miners and road headers to increase productivity in production and infrastructure development;
- Increasing the number of main infrastructure galleries in the mine plan from one to three to reduce ramp-up risk and increase likely operational efficiency;
- Increasing the size of the underground conveyor belt system to cater for an increase in underground tonnage and to enable better expansion options;
- Increasing the size of underground storage to enable more flexibility in smoothing grade profile to the processing plant;
- Increasing the size of the conveyor belt to surface in one decline to 1,500 tonnes per hour of material;
- Increasing the size and flexibility of the processing plant to deal with higher throughput of material;
- Altering mine and process plant design to deliver a constant 90,000 tonnes of granular K60 per month for the balance of the revised 47 year mine life; and
- Factoring in potential mine expansion into design to allow seamless expansion of production in the future.
Highfield has engaged two Canadian headquartered, globally recognised, independent specialist consultants to develop and supervise the completion of a series of detailed metallurgical test work programs.
Both are world leaders in the processing of sylvinite ores and have been involved in the design process for many plants globally.
Other milestones
The optimisation work also builds on a string of project development milestones set to underpin the planned start of production in 2017.
This includes completion last month 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.
It 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 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.
Also, Highfield signed a finance mandate in August with a syndicate of four major European banks including 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 (A$334.6 million), subject to final due diligence.
Analysis
The optimisations to Muga’s DFS results represent and hugely advantageous step forward as the project streamlines various operational metrics and advances marketing efforts ahead of construction.
Critically, the work has maintained a level of capex below budget which suggests Highfield remains well on track to delivering the mine within its capex estimate and on time for production in October 2017.
Sales of by-product salt into US markets would also enhance project metrics and would lift today's NPV even higher.
A very productive six-month period for Highfield thanks to more than 50 professionals directly employed by Muga has accelerated the project and coincided with significant share price momentum for the company.
Highfield stock last closed at A$1.45, which represents a 34% improvement from just three month ago.
The stage has been set for more advanced development activities to offer further price catalysts for the company, with some of the more outstanding recent progress including the readying of contracts for 25% of direct project delivery costs and a doubled mine life to 47 years at 1.1 million tonnes of MOP production per annum.
Even further upside for the project is evident in the untested exploration target of 127 million to 255 million tonnes of sylvinite grading 12% to 16% K2O, which covers just two of the five possible seams identified within the total project area.
Financing and infrastructure momentum such as a recently signed arrangement with Spanish public multinational electric utility company Iberdrola (BME:IBE) also indicates that Muga is systematically realising concrete steps toward construction and a high-margin potash production business.
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