A completed scoping study by Highfield Resources Ltd (ASX:HFR) for "downstream" options for enhancing profit margins at Muga Potash mine found that a Sulphate of Potash fertiliser (SOP) operation would materially enhance profit margins of the overall project.
The approvals process is nearing completion for Highfield’s Muga Potash Mine in Spain, providing a window to evaluate downstream processing that would boost profit margins and diversify its product offering.
The study assumed a staged 500,000 tonnes per annum SOP operation using the technically proven Mannheim process to convert 430,000 tonnes per annum of Muriate of Potash (MOP) from the Muga Potash Mine into SOP.
The Mannheim process combines sulphuric acid and MOP with heat to produce SOP.
SOP sells at a premium price relative to MOP.
The economics of converting around 40% of MOP from the Muga Potash Mine to SOP were found in the study to be exceptional adding to the profit margin as SOP.
So while commencing construction of the Muga Potash Mine remains the clear focus, the downstream option appears very attractive for Highfield.
Viewed from an operating cost perspective, estimated at US$370 per tonne FOB Spanish Atlantic Port assumes an MOP input price of US$287 per tonne preserving the Muga Mine´s robust financial metrics.
Total capital expenditure (Capex) for the operation was estimated at US$147 million with pre-production Capex estimated at less than US$100 million for the first phase of 250,000 tonnes per annum produced.
The business case was modelled on a long term SOP premium to MOP of US$250 per tonne, below the current 1Q16 U.S. market SOP premium of over US$400 per tonne as reported on a delivered basis.
An All in sustaining cash cost (AISC) of US$370 per tonne of SOP produced, assuming MOP is purchased from the Muga Mine at US$287 per tonne FOB (spot price).
Muga's location provides a strategic advantage to sell product into high-priced U.S. markets where there would be a significant cost advantage to customers over the current dominant supplier.
The Study was reviewed by an independent expert with experience commissioning and running a Mannheim SOP plant.
Highfield managing director, Anthony Hall said:
“The study we have completed presents highly compelling metrics for an SOP project that benefits significantly from the controlled supply of MOP from our Muga Potash Mine once in production.
"Importantly it is complementary to the Muga Potash Mine and is a mechanism to extract substantial additional margin on a portion of our MOP production.
"The project will have low capex for an SOP operation and competitive opex delivered into major SOP markets. More importantly, there is minimal technical risk given the use of the proven Mannheim furnace technology.
"Based on our current analysis, the Muga Potash Mine will receive a higher than budgeted sales price for its MOP production through sales to the SOP project.”
Analysis
The approvals process is nearing completion for Highfield’s Muga Potash Mine and commencing construction of the Muga Potash Mine remains the clear focus.
The technical risk is judged as minimal given use of Mannheim furnace technology with the time to production being quick relative to a majority of the alternate SOP development stage projects in the market.
MOU's are in place covering every element of the project including port space, sulphuric acid supply, limestone supply, HCl and calcium chloride sales.
Also to be remembered, Highfield has four additional MOP projects that appear to exhibit similar characteristics to the Muga Potash Mine.
All told, the downstream SOP initiative and metrics alone are enough to re-cast the valuation case (market cap.) case for Highfield.
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