By Dr. Michael Green

It looks as though matters are beginning to hot up quite nicely at Emmerson. The latest news is that the company has signed a Heads of Agreement with a global fertiliser group covering an offtake for 100% of production from Emmerson’s world class Khemisset Potash Project.

The agreement sets out a commitment for both Emmerson and the global fertiliser giant to work towards a long-term sales agreement for up to 800,000tpa of K60 Muriate of Potash (MOP), focusing on the Brazilian, African and North West European markets. There is an exclusivity period which runs until 30th September 2019, and so over the coming months the two parties will be negotiating commercial terms for a binding supply and off-take agreement.

At this stage no names are being mentioned, but Emmerson has pointed out that counterparty is a leading global fertiliser trading, distribution and marketing company with a significant footprint in the Brazilian market. There is little doubt that this counterparty understands the Brazilian market as the big group has infrastructure, blending facilities and existing customers in that country.

This is good news as Brazil represents an enormous market for potash due to the country’s vast agriculture sector. Brazil is the world’s largest importer potash where MOP prices seem to be highest on a global basis. Apparently, as well as Brazil, the counterparty also has a geographical focus on the African and North Western European markets. From the sketchy details we have at present, this major does look like an ideal long-term partner for the Khemisset.

As with Brazil, these two other major markets for MOP are just where Khemisset boasts strong transport and logistics advantages. Once in production, Khemisset would be the closest producing potash mine to each of these key markets. All of which really serves to underpin the project’s forecast industry leading operating margins. It is due the project’s highly advantageous location, that Emmerson looks set to become one of the highest margin potash producers in the world.

Emmerson is now in a really good position ahead of negotiating with potential debt financing partners. There are probably four or five different ways of financing the project into production. Importantly, Emmerson has a board which are no stranger to raising such finance. In all, management has raised more than US$600 million for junior mining companies, of which more than US$400 million has been raised for potash projects.

The past experience of Hayden Locke (Executive Director & CEO) and Phil Cleggett (Head of Corporate Development) at ASX-listed Highfield Resources in raising project finance for a potash mine in Spain was that the biggest stumbling block to successfully financing was getting an offtake agreement. Well not just getting an offtake agreement but making sure that the deal was with a large, established and reputable partner which could meet with the bank’s approval. Ok, no names may have been mentioned at this stage as is the norm, but it is clear that the counterparty is just the sort of entity that the banks are looking for.

The big benefits of the location are something that came out of the Scoping Study, which pointed out that Khemisset has the potential to be among the lowest capital cost, highest margin potash projects globally. The Scoping Study was published in late-2018 when investors learnt that Khemisset had forecast EBITDA margins of more than 60% and a post-tax NPV10 in excess of US$1.14 billion based on industry expert price forecasts. Reading between the lines from the announcement about the move towards the feasibility stage following the appointment of a potash processing expert (20th February 2019), it does seem as though there could a decent improvement in this NPV figure over the coming months.

All this is happening at a time when potash prices are buoyant as a number of majors are expecting good year-on-year growth in demand of something like 5%. In fact, two of the world’s leading potash producers, Nutrien and Mosaic, have both suggested that 2019 could be a record year for potash demand. Once again, this year, Mosaic is talking about a 500,000t supply deficit which last year was enough to push potash prices 20% higher. It seems to be that Khemisset could come into production with impressive timing.

We remain positive that that Khemisset has the potential to become a highly profitable project, which the Scoping Study has well and truly shown. We updated coverage on Emmerson in late-November 2019 when the shares were standing at 3.45p, confirming our Conviction Buy stance and an increased target price of 13.48p.

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