- LSE: EML
- Shares Outstanding: 686M
- Share price GB$0.59 (01.06.2020)
- Market Cap: GB£39M
Emmerson PLC is a potash developer that is focussed on the development of the Khemisset Potash Project in Northern Morocco: a very favourable jurisdiction for mining and business.
Does the market want or need another potash story right now? Locke believes the low initial capital cost of Khemisset is what really sets the project apart from its potash competition; he claims that most potash projects have a “very, very high CAPEX.”
Let’s start with some context: what does the potash market look like? Potash is primarily used in agriculture as a fertiliser that provides a source of potassium to crops. Potash may not be the most fashionable commodity, especially compared to soaring commodities like gold, but there is money to be made. Potash has some important, fundamental reasons propping up its demand. There is a global agricultural ambition that includes growing global populations and shrinking arable land. There is no science to solve this problem yet, short of GMOs to increase yields without using fertilisers, which renders potash “fundamental to supporting humanity over the long-term.” Potash has a “long-term demand” theme that is less subject to the lurching nature of global economic growth.
Matthew Gordon interviews Hayden Locke, 29th May 2020
The market size is c. 65Mt pa; there has been something of a tail-off caused by COVID-19 and the trading stand-off between China and the U.S. The market is growing at an “unexciting 2-3% per annum.” As a consequence, the price is relatively stable or stagnant depending on your personal investment stance. In terms of global markets, potash is very diverse. The largest total market (did you guess?) is China, who import c. 7-8Mt pa. The biggest import market, with huge tracts of agricultural land in the north of the country, is in Brazil. The U.S. market is also very large with c. 10Mt pa. The European market is very large, while the Indian and South-East Asian market is relatively large. Locke claims that everyone is realising that Africa is going to be the next focal point of fertisiler demand and food production. Africa is by far the fastest-growing market but is starting from a small base.
That’s the potash market. Now, what about Emmerson PLC?
Emmerson PLC is in the lowest-quartile for initial cost; this will always make a company competitive. However, as the potash industry is saturated with many player and is lacking the sexiness of other commodities, is there any desire for another potash story? The reality is that every single incumbent in a commodity would argue they don’t need another an additional player occupying their territory. However, for the consumers of potash, it appears to have become clear they would love some more competition: potash is regarded by Locke as an oligopoly “in the truest sense of the word.”There is currently a lot of price signalling, and there is a manipulation of supply and prices. As a rule of thumb, potash producers currently make “supernormal profits,” which is why so many mining companies want a piece of the potash pie.
As previously mentioned, Morocco is an advantageous mining jurisdiction “in an African context.” The country is generally sophisticated and well-educated, and the Moroccan government sees the country as the gateway from Europe to Africa. One of the benefits in the mining sector is that the government is acting as a driving force for the fledgling industry by providing clarity to companies on the application of certain rules. However, it’s important to stitch a caveat onto this: this is still Africa, with the same protracted permitting times, social issues and geopolitical risks that investors will have come to expect.
The quality of the team is another encouraging trait of Emmerson PLC. Locke started his career as an investment banker after studying engineering and commerce, but he transitioned over to mining and private equity. Around 9 years ago, he moved over the junior resources sector and a West African gold mining developer called Papillon Resources. The company was eventually taken out in June 2014 by Vancouver-based gold producer B2Gold Corp (TSE: BTO)(NYSE MKT: BTG) in a deal valued at US$570 million. He then moved to the Spanish potash developer, Highfield Resources, who we interviewed several months back. His experience at Highfield gave him an accelerated learning experience of the potash space and how to analyse potash assets. Locke prides himself on being the commercial stalwart of Emmerson PLC, and while he is technically proficient, the management team is full of talent that is more focussed on the technical side of things.
Emmerson Gold PLC is a small company in relation to most other potash players, so what is the business model? The long-term goal is capitalise on the difficult nature of obtaining a potash mine. Within the global multi-nutrient fertiliser space, potash is by far the most element to obtain courtesy of sky-high capital costs for production. Once the Khemisset Potash Project is in production, the goal is to build a mid-tier multi-nutrient fertisiler company. Emmerson Gold PLC is in talks with strategic partners to help get this all financed. These partners would provide the nitrogen, Emmerson Gold PLC would provide the potash (the most strategically difficult to access), and a further partner would provide the phosphorous.
In the short-term, the goal was to deliver a rigorous analysis of the company in the form of a feasibility study, which will either confirm or refute that Khemisset is a low-CAPEX, high-margin development opportunity. Now, the company has a feasibility study that proves this, and Lockew can focus on the next financing stage to get the company shovel ready.
What are the headlines from the feasibility study?
- Post-tax NPV: US$1.4B
- IRR: 38.5%
- Initial mine-life: 19 years
- Pre-production capital cost: US$387M. This is a sizeable reduction of US$19M from the scoping study.
The only project with comparable economics is within Highfield Resources’ portfolio.
Locke needs to keep getting this story out to the market, both for investment and sales purposes. The company is not going to build an internal marketing team. Emmerson PLC will go to a fertiliser trader who will build the company an internal marketing team at a cost of c. US$1/t. The company has a huge transport and logistics advantage and is focussing on markets that are closer to the company in the Atlantic corridor. The operating costs make Emmerson PLC a relatively high-cost producer, but the company’s location makes it competitive.
Looking forward, the goal for Emmerson this year is to deliver a fully permitted mine. Alongside this, the company will be focussing on its financing dicussions and is setting itself agresive onbjectives.
What did you make of Hayden Locke? Comment below and we will get back to you.
Company Website: https://www.emmersonplc.com/
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