By Dr. Michael Green

Emmerson (EML), the Moroccan focused potash company, has kicked the week off with more compelling evidence showing that its Khemisset Potash Project has all the makings of being a low capex and high margin asset. The latest news concerns the logistics solution for the project, where the preliminary design and cost estimates for the road connection component of the Scoping Study have shown that there are significant capital cost savings, all due to the project’s proximity to excellent infrastructure.

The announcement pointed out that the total budgeted cost for construction of the required access roads to transport the product to the port via the A2 toll road comes in at around just US$1.3 million, including a 30% contingency. This figure represents something like a 99%+ or US$130 million estimated capital cost saving compared to estimates for similar work packages for average Canadian potash mine developments. Even for the hard of hearing, the message is coming over loud and clear that Emmerson’s Khemisset Project continues to shape up as being low capex and high margin.

This sort of saving on logistics comes because the proposed site location only requires the construction of some 1.2 kilometres of paved roads to connect the project to existing high-quality highway (A2 toll road). Also included in the US$1.3 million cost is the estimate for constructing 3 kilometres of gravel internal roads. In addition, there is no requirement to construct expensive rail spur connections. So that is it, an estimated US$1.3 million, which represents a very low capital cost logistics solution.

In our view, what these numbers are showing is how Emmerson is benefitting from the billions of dollars that the Moroccan government has invested in infrastructure over the past decade. A low estimated required spend to cover logistics is just another example of the potential cost savings available to the company relative to its peers and serves to give management confidence that the project will have low capex.

We expect that the same effect will be seen in the estimates for other aspects such as the capital spend required to connect electrical power to the project and the port investment. Low capex spend once again is expected as the port is already in place.  All these design and cost estimates have been completed by independent engineering group, Golder Associates, which have prepared this information based on AusIMM guidelines for capital cost estimates.

At the time of the announcement, CEO Hayden Locke was quick to point out that: “In the development of a potash mine, low capital cost to production is integral in demonstrating economic viability in any commodity price environment. The Khemisset Project benefits from its proximity to outstanding infrastructure including existing, high quality, highways and ports.  Access to this infrastructure results in significant capital cost savings in construction, especially when compared to other development stage potash projects globally, which typically require significant investment in roads and rail connections to transport their product to an export port…….”.

The story so far is that Khemisset is in the midst of the Scoping Study, which will outline the scale of the potential MOP project. The Scoping Study will have economics wrapped around it and so will provide a NPV for a 700,000 – 800,000 tpa operation as well as possibly a larger 1.5 Mtpa project. This will allow investors to appreciate the size of the prize.

It does look as though the cracking announcements just keep on coming from Emmerson. Management has made no secret that it is proposing to make a series of regular announcements concerning discrete component parts of the Scoping Study. As these important elements are ticked off, the results will be announced. So far, investors have been briefed on the design and cost estimates for access to mineralisation, via decline, highlighted significant cost savings already available to the Khemisset Project and now the ultra-low logistics costs. This leaves announcements to come at regular intervals over the next couple of months on electrical infrastructure, gas supply infrastructure and port facilities.

So, every few weeks, a decent announcement looks to be on the cards. These will build together to create the completed Scoping Study, which the board is now confident in delivering to the market by early Q1 2019.

From what we have seen so far, we wholly back the management’s view that the Scoping Study for Khemisset will present a low capital cost, high margin proposition which should result in compelling economic metrics. All this is happening against a backdrop of the potash market continuing to tighten.

We have little doubt that the Khemisset is shaping up to be highly profitable, a view which the Scoping Study looks on course to demonstrate. We recently http://www.alignresearch.co.uk/cpt-company/emmerson/on Emmerson with a Conviction Buy stance and a target price of 12.05p and retain that view.

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