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Emmerson moves on to financing and permitting, after delivering robust feasibility for Khemisset

Emmerson's project will be in the lowest cost quartile

Emmerson PLC -

There are several attractive aspects to the feasibility study that was just put out by Emmerson PLC (LON:EML) for its Khemisset potash project in Morocco.

There’s the sheer size of the project – based around a resource of 537mln tonnes, Khemisset’s net present value, discounted by 8%, rings in at US$1.4bn.

There’s the potential return, with the IRR set at nearly 40%, and average steady-state post-cash margins set to come in at more than 47%.

And there’s the projected steady state EBITDA of US$307mln per year, which would look healthy enough in any line of business.

But to the mind of Hayden Locke, the man tasked with putting Khemisset into production, the aspect of the study that stands out above all others is the reduction in pre-production capital cost.

Pre-production capital cost has fallen to US$387mln, down from the over US$400mln envisaged in the earlier scoping study. And it’s a number that Locke invests with huge significance.

“It places us in the bottom quartile of capital costs for potash projects globally,” he says.

“It means this project is financeable, even in a difficult financing environment.”

The potash space has not been an easy one for newcomers to thrive in in recent years, as cartels have come and gone and the price has not been as strong as it once was.

But Khemisset’s favourable economics, as outlined in the feasibility study, ought to be enough to withstand even the toughest of environments.

That’s why Emmerson PLC has already had interest from a major bank in providing up to US$230mln in debt finance, and why Locke thinks Khemisset could be the next major potash project to be able to bring product to market.

“Low capital cost to production is key,” he says.

“If you can’t get that number down you won’t be able to get an economic return for the investor.”

That, of course, is the nub of the matter. And it’s worth noting in this context that at the lower end of the recent potash pricing range, say US$220 per tonne, almost all other new projects would be offering negative returns.

So Khemisset really does stand out.

But now that the feasibility study is in the bag, what does Locke intend to do about it?

“The goal now,” says Locke, “is to get the mine permitted as quickly as possible. We’d hope to have it fully permitted by the end of this year or early next year. And ideally, we’d run all the financing discussions concurrently.”

Precisely how the necessary finance gets raised remains an open question.

“We have no preferred route,” says Locke.

“We know a lot of groups.” And indeed, the strength in depth of Emmerson’s management when it comes to knowledge of the mining industry is impressive. Locke and chairman Mark Connelly were both heavily involved in the A$650mln sale of Papillon Resources in 2014, and Locke has served his time in potash too, in a senior position at Highfield Resources.

So they know their way around.

They know too that the mining finance world has changed over the past couple of decades, and that innovation is also useful in this day and age.

“We’ve no preconceived ideas,” says Locke.

“There could be a 60:40 debt to equity split, but a more realistic route for us would be to bring in a strategic equity investor at the project level. A lot of big fertiliser industry participants need supply.”

On the plus side, the markets seem to be recovering their poise from the coronavirus shock that was experienced by all earlier in the year.

“There’s a lot of money flowing back into the equity markets,” reckons Locke. “And a lot of interest from a debt perspective in our project. The next phase is for us to go out and find a partner.”

So the second half of 2020 will likely be busy year for Emmerson.

There’ll be newsflow about the financing, the permitting and stakeholder engagement, as well as possible upside from additional revenue streams involving the production of salt and sulphate of potash.

The shares hit a five year high after the feasibility study was released, although they’ve drifted back a little now. It’ll be interesting to see where they go from here.

Quick facts: Emmerson PLC

Price: 4.75 GBX

Market: LSE
Market Cap: £34.51 m

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