Highfield Resources Ltd (ASX:HFR) has signed non-binding offtake agreements with fertiliser traders covering more than 100% of expected phase one production from its flagship Muga potash mine in northern Spain.
The traders include three globally recognised fertiliser trading companies Keytrade AG, Ameropa AG and Trammo Inc.
The offtake agreement will cover up to 600,000 metric tonnes of K60 Muriate of Potash (MOP) per annum produced from Muga.
Upon signing of formal documentation, Highfield will have achieved a key condition precedent proposed by the mandated lead arrangers for the project finance facility.
This facility is now in the final stages of negotiation.
Anthony Hall, managing director, commented: “These trading groups have excellent track records in the global fertiliser market including our target markets within Europe.
“We look forward to formalising these agreements as we move towards production at Muga.”
Muga Project
Muga is one of five 100%-owned projects, covering 550 square kilometres, in the potash and halite producing Ebro Basin in northern Spain.
The company completed a definitive feasibility study (DFS) for Muga in March 2015, which was optimised in November 2015.
Highfield is progressing towards construction of Muga subject to the receipt of a positive environmental declaration and the granting of the mining concession.
The project hosts Reserves of 253 million tonnes at 11.5% potash and has capex costs of €412.7 million for a 1.02 million tonnes per annum MOP producing mine.
The funding of Muga's phase 1 capex of €267 million was secured following a $A101 million share placement in July 2015 and indicative non-binding €222 million project financing facility in August 2015.
Offtake agreements
Highfield has now withdrawn from the recently announced non-binding agreements signed with other fertiliser companies in Europe for 320,000 tonnes per annum of K60 MOP.
Discussions are ongoing with European fertiliser companies and the company expects to execute offtake contracts with these entities as Muga approaches first production.
European mine closures and expansions are expected to remove a net 1.0 million tonnes of MOP production from these markets by 2020.
Highfield has focused on markets that deliver it a maximum possible margin and where it has clear logistical and margin advantages over its peers.
Analysis
These non-binding agreements for 100% of first phase production with traders demonstrates the strong project economics of the Muga project, which is underpinned by location, infrastructure and cost advantages, as well as de-risk the road to path to production at Muga.
The interest from offtake partners further validates a recent independent report by Argus FMB confirming that Muga would have been the highest margin potash producer globally in 2015.
The approvals process is nearing completion for the mine and commencing construction 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.
Highfield maintains broker coverage from 10 research analysts with share price targets ranging from $1.75 per share to $3.47 per share. The stock is currently trading at $1.44 per share.
Muga represents only 10% of wider tenement portfolio, leaving ample opportunity for further development.
Highfield had A$98.8 million cash at bank as at 31 March, 2016.
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