Emmerson gets set to capitalise on high margin Khemmiset project in growing potash market


How big is the opportunity in the potash market likely to be in the coming years?

The basic dynamic is simple enough – the world’s population continues to increase exponentially, so more food will be needed to feed it, and more fertiliser will in turn be needed to make it grow.

Potash is one of the world’s most widely used fertiliser – albeit that it comes in more than one form -and is set to be a major beneficiary of this trend to population growth.

Analysts across the world are forecasting an annual 2-3% increase in consumption per year, as part of a pattern that’s already well underway.

last year, global demand pushed through an annual 71mln tonnes for the first time, and the market is very much alive to the effects this growth is having on the supply demand dynamic.

Currently, potash prices are running at between US$600 and US$800 per tonne depending on product, the highest they’ve been since the boom years of 2008 and 2009.

In Emmerson PLC (AIM:EML)‘s target markets, though, prices are nearer the US$800 mark.

And the pressure on supply has been exacerbated because very few new projects have come on stream over the past few years.

What better time then, to be ready to finance and build a new potash mines, as Emmerson is now doing with the Khemmiset project in Morocco?

The company has just attracted in a handsome US$46.75mln financing package from a Singaporean investment vehicle and it’s not hard to see why.

Khemmiset has several things going for it, not least its strategic location on the Atlantic coast, which allows for easy shipping to one of the world’s major markets in Brazil. Brazil takes over 10mln tonnes per annum.

The project survived the rigour of a full-blown feasibility study, was granted a mining licence earlier this year and is now only awaiting the final environmental permit from the Moroccan government.

“The target is next year for construction,” says Graham Clarke, Emmerson’s chief executive.

“And we’re aiming for first production in 2024.”

The plan is to produce an average of 735,000 tonnes of potash per year over a 19 year mine life, which in turn should generate annual revenues before interest, tax and amortisation of US$294mln and post-tax cashflow of US$235mln.

In that context the project’s US$400mln construction price tag seems fairly modest, which is partly why Graham Clarke sounds pretty confident when he talks of the ongoing financing negotiations that will need to finalise before work can really begin.

“We’re talking to various banks,” he says.

“We’re working on bringing in a potential strategic cornerstone investor. We’re in very positive discussions.”

Exactly what form any such financing will take remains to be seen, but expect a standard type of debt-equity split with an off-take agreement on the side, and no other frills.

After all, if any project can afford to be straightforward in terms of its funding, Khemmiset can – a quick look at the sensitivity analysis in the feasibility study shows it to be more than capable of making money for all stakeholders.

According to the study, the project has an estimated payback period of just over 2.5 years and is likely to generate margins of over 60% pre-tax and financing costs.

But remember, all those calculations assume a potash price of just over US$400, which is several orders of magnitude lower than current prices in Brazil and elsewhere.

To put it another way, the feasibility study put a net present value on Khemmiset of just over US$1.4bn using an 8% discount and assuming a US$412 potash price. Ratchet that potash price up to today’s levels and the NPV goes to US$3.2bn and annual revenues before interest, tax and amortisation to more than US$550mln.

True, the long-term price may correct back to somewhere nearer US$400 in time, but the point is that this is a project with huge room for manoeuvre which in turn will ensure that allow Emmerson doesn’t get pushed around in financing negotiations.

“We’re in the bottom quartile in terms of costs,” adds Clarke.

Indeed, with costs at Khemmiset likely to run at around US$160 per tonne, Emmerson is protected from price weakness twice over. First, because it’s unlikely ever to tip into outright loss. And second because there are plenty of other major producers who produce at much higher prices who will be driven out of business before Emmerson even begins to feel the squeeze.

“It’s perfect timing for our project to get financed,” says Clarke simply.

With potash where it is, and doing what it’s doing, it’s hard to disagree.


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