By Dr. Michael Green

There was more compelling evidence announced yesterday by Emmerson (EML) which clearly shows that the ore body at the company’s flagship Khemisset Potash Project is more than likely to be mined by simple and totally conventional underground mining methods. This translates into low capital expenditure to develop a mine. The latest news comes from the results of a recently completed seismic study which showed that the area of the Khemisset Project was nicely free of major faulting. which is a major positive factor.

For those not yet in the know, Emmerson is currently focused on the development of its Khemisset Potash Project near Rabat in northern Morocco which bears all the hall marks of being a low capex and high margin potash project. Read more in our recent initiation note HERE. Khemisset has a large JORC resource of Muriate of Potash (MOP), which is the most widely used and cheapest form of potassium.

The presence of no big faults at Khemisset is a big plus. This means that additional heavy development costs will not be needed to get from on area of the mine to another. This factor helps to suggest that the potash can be mined by simple conventional underground mining methods, which all means low capex.

Currently, the project is in the midst of the Scoping Study which will answer a lot of questions, including the size of the prize. This latest announcement also contained an Operations Update which reported that strong progress had been made on the Scoping Study, which is expected to be completed in Q1 2019. Rather neatly, the Scoping Study has been broken down into a number of discrete sections, which will be reported as they are completed.

This looks likely to generate a healthy news flow, which could reinforce at every stage the scope for Khemisset being a low capex mine compared with real world examples. Every 2-3 weeks, the plan seems to be the announcement of results on a discrete section of the Scoping Study, which looks as though it will run like this:

Mid-September 2018 – Decline costs and design.

Early October 2018 – Road construction to connect plant site to main motorway

Late-October 2018 – Electrical infrastructure connection to either main power line or local substation

November 2018 – Gas infrastructure of either onsite LNG or pipeline to site

November 2018 – Port facilities

Q1 2019 – Completed Scoping Study expected to be announced.

So, each and every stage could serve to reinforce the message that this is low capex, high margin operation. These announcements look likely to include some real-world headline-grabbing peer comparisons. First up is the access to mineralisation announcement, expected in mid-September 2018, which is expected to show that decline costs are a fraction of shaft sinking costs that are required elsewhere.

Well-known international consultant Golder Associates is in charge of delivering the Scoping Study and each of these elements will be handled by one of its separate specialist engineering team. Essentially, pretty well each section of the Scoping Study will be worked on in parallel fashion, which gives confidence in the delivery of such a rapid timeline.

This project could be coming on stream as early as 2022, with good timing to meet the dramatically rising need for fertilisers around the world. There are strong agricultural investment drivers as the UN believes that the world will need to produce 70% more food by 2050. This is not just to feed a growing population, which is forecast to climb by 34% to 9.1 billion in 2050, but also for a burgeoning middle class that is seeking a higher protein diet. Fertilisers led by MOP are seen to be vital in improving the efficiency of farming.

In addition to good timing, there is little doubt that this project lies in an outstanding location. The company is blessed not just with a strong local market, but also well-placed to export potash to the major world markets of NW Europe, South Africa and Brazil which are the highest payers per tonne.

There is a huge unrealised market for fertiliser in Africa which remains the most under-fertilised continent in the world. Khemisset has big local MOP demand on its doorstep in the form of the giant Moroccan fertiliser producer OCP Group which is pursuing an aggressive African NPK strategy and has launched initiatives to boost agriculture in the continent and help the African countries reach their food safety goals.

Setting out such a news flow is a brave move for a management team, but obviously, the board has confidence that all these announcements can all be delivered in a timely fashion. This could really provide the spark to get Emmerson’s “low capex high margin” message across and really begin to capture the imagination of investors over the coming months. We retain our stance of Conviction Buy and a target price of 12.05p.

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