New drilling results at Highfield Resources' (ASX:HFR) Muga potash project in Spain have set the stage for even further increases in the proposed operation's resource size, mine life and reserve life.
This opportunity for additional enhancement follows some outstanding optimisations last month, which doubled mine life to 47 years and grew reserves by 73% 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.
A large but untested exploration target of 127-255 million tonnes of sylvinite grading 12%-16% K2O has been previously set at the project.
Expectations that further increases across these metrics are possible have been piqued with a new geotechnical drill hole at the previously defined resource boundary, which intersected 31 metres of potash mineralisation with an average grade of 10.8% K2O.
The hole intersected all three seams within this area of the mine plan, with results including 4.5 metres at 15.7% K2O from 503 metres below surface, 2.4 metres at 17.3% K2O from 509 metres below surface and 3.6 metres at 16.8% K2O from 514 metres below surface.
Using the same drill collar, Highfield drilled a second geotechnical hole, which also encountered broad zones of strong potash mineralisation.
The majority of the core from this second hole will be used for geotechnical and metallurgical purposes and the Company does not expect to receive assays for this hole.
The overall mineralised unit is followed by the footwall salt (Sal de Muro), which extends from 524 metres to 621 metres and finally the Pamplona Marls from 621 metres to the end of hole.
Muga Resource remains open to the south.
Optimisation success
The newly heightened potential to increase inventory and operational metrics at Muga builds on strong optimisation study results last month at the project.
In addition to growing reserves and mine life, this work produced a more robust financial outline, including 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 marginally to €267 million (A$405.8 million) assuming a production rate of 1.1 million tonnes of K60 granular muriate of potash (MOP) per annum.
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.
Momentum realising the project's transition into a producing asset has also attracted private equity interest from Owen Hegarty's EMR Capital (which now owns now owns 33.5%) and former chief operating officer of Potash Corporation of Saskatchewan (NYSE:POT) James “Jim” Dietz.
Dietz joined Highfield last month as an independent non-executive director, adding 41 years of experience in the fertiliser, chemical and petroleum industries to the board.
Potash market strengths
Unlike other bulk commodities such as iron ore, potash benefits from diversification in supply and demand fundamentals, with more varied end-markets and known resource areas.
The largest seaborne market accounts for only 15% of the global demand for potash.
Uniquely for bulk commodities, this operational diversification establishes a sector where junior companies can thrive.
Supply-demand dynamics in this space appear favourable as market trends suggest few additional projects will be constructed in coming years despite demand tailwinds in the form of growing populations and food security issues.
Demand for potash has grown 2.8% per annum compounding over the past 10 years.
As this demand grows, potash customers are expected to embrace Muga as a diversification strategy away from reliance on the three major exporters of the commodity, Russia, Belarus and Canada.
Importantly, Highfield’s potash travels 40% less distance than Canadian potash to major markets in Brazil and the east coast of the U.S.
The company is among the lowest cost producers delivered to these markets and can confidently target any customer in any market offering both price and contract incentives.
Analysis
The new drilling results at Muga are most importantly significant because they appear likely to help deliver further increases in the size of the mineable resource and to the mine life.
This is especially supported by the interpretation that the deposit remains open to the south and the fact that broad zones of mineralisation indicates good continuity of the potash bearing evaporite as well as a significant thickening of the potash horizon.
The update is well-timed ahead of final permitting and construction planned in H1 2016, and as such, suggests positive medium-term newsflow for Highfield and potential price catalysts for company stock.
The drilling also adds weight to the additional expenditure Highfield has elected to incur in order to ensure that expansion options were built into our optimised Muga mine.
Overall, this extensional work confirms the view that Highfield is developing a world class global potash asset, which it is steadily converting into a compelling project with major geological and locational advantages over most other potash mines and producers.
The optimisation work conducted already 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.
Muga’s NPV currently stand at US$2.1 billion with a discount rate of 8%.
Macro market conditions for potash, meanwhile, are set to improve, with demand based on population growth expected to outstrip a lagging supply base.
Highfield is in a good position to take advantage of this supply-demand opportunity thanks to advantages inherent in its location in Spain and low-cost operational structure.
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