By Dr. Michael Green

Rapid progress looks to be continuing at Kore Potash as the company has just signed a Construction Heads of Agreement (HoA), with SEPCO Electric Power Construction Corporation, for the construction of its flagship Kola Potash Project.

Kore is a potash development company which owns a 97% stake in both the big Kola and the smaller DX Potash Projects in the Sintoukola Basin in the Republic of Congo (RoC). This agreement was signed in the presence of RoC’s Minister of State and Minister of Mining, Industry and Geology, Mr Pierre Oba.

The HoA recognises the results of the recent Kola optimisation study – where we believe the project came out with flying colours – and confirmed the following. Kola is designed with capability to produce 2.2 Mtpa of granular Muriate of Potash (MoP) over an initial 31-year life. The construction period will be 40 months with a capital cost of US$1.83 billion. Capex for the underground works component of Kola may be reviewed following completion of additional investigations by SEPCO during the pre-construction engineering design phase – but that only accounts for 9% of the total budget so we don’t expect much change to the headline number.

The Engineering, Procurement and Construction (EPC) contract will be based on the internationally-respected Fédération Internationale Des Ingénieurs-Conseils (FIDIC) silver book 2017. SEPCO does not look to be hanging around as the plan is to present the completed EPC construction proposal to Kore in August 2022, which is the next key milestone in the financing process.

In this latest announcement, Kore highlighted that Summit Consortium have reaffirmed their commitment to provide a financing proposal for the full construction cost of Kola. The financing proposal will be provided after Kore has received the EPC proposal and has agreed with SEPCO on the key EPC terms. This looks to us to be the makings of an amazing deal as from the outset it has been made clear that all the financing negotiations have been based on the understanding that Kore will be fully funded for the construction of the project and suffer no dilution.

This news comes hot on the heels of the unveiling of the results of the Kola optimisation study yesterday which really demonstrates the value that is being created here. At a potash price of US$1,000/t MoP CFR Brazil (less than current potash price of c.US$1,100/t MOP CFR Brazil) the Kola financial metrics came out at a post-tax NPV(10) of US$9.354 billion and an IRR of 49% on ungeared post tax basis.

At the time Brad Sampson, Kore’s CEO commented that “The development of Kola is of global importance. The security of the world’s food supply is at risk as a result of disruptions to the supply of fertiliser globally.  Recent geopolitical events highlight the risks inherent with potash production concentrated within a small number of companies and locations with operations situated long distances inland far from ports and global customers. New potash producers are required in locations closer to customers.  With low capital intensity and low production costs, Kola is ideally situated to supply high quality potash to meet growing global demand……The successful completion of the Kola optimisation study moves us closer to production and we eagerly await delivery of the construction contract and financing proposals.”

This lower capex figure is little surprise to Kore, which at the DFS stage felt that there were some US$600 – 800 million of potential cost savings. The 40-month construction period might sound a long time compared with small copper and gold projects that can be up and running in 18 months to 2 years. But at Kola, access roads need to be built, marine infrastructure including a jetty needs to be constructed and two short shafts 250m deep need to be sunk as this potash mineralisation is shallow. By comparison, just look at BHP in Canada which has embarked on what is likely to be a 10-year construction period to access potash at a far greater depth.

The potash price has seen a dramatic rise over recent times. A growing population will require more food. At the same time, declining arable land means that greater yields are necessary and more fertiliser would need to be applied. This situation has been exacerbated by global warming. So, a 2-3% growth in potash demand per annum has been forecast over a long period of time which requires new potash projects to be brought online.

Historically, there was very little slack capacity in the supply and demand of potash. Sanctions against Belarus in 2020-21 took out a large chunk of the world’s potash supply. The war in Ukraine and Russian sanctions have also taken out another large chunk of potash supply. Depending on who you talk to, between 10-20% of potash is now unavailable and effectively off the market. As long as sanctions continue against Russia, high potash prices look like they are going to prevail.

With green issues at the fore, it does look demonstrably wrong for potash to be transported large distances halfway around the world. All of this means that dependency on a single source of supply a long distance away from the market looks increasingly problematic. Moving ahead, potash consumers will be seeking to lower the risk and look for a secure supply, probably from multiple sources of supply which are closer.

The potash market looks to be playing into Kore’s hands as the company is positioned to replace potash supply from the northern hemisphere. Not only are the company’s production costs enviably low, but Kore is also blessed with having the shortest shipping route to the giant Brazilian market and the fast-growing African market. As we can see now, all the pieces are now almost in place to allow Kore to commence a dramatic growth trajectory.

In May 2021, we updated our analysis on Kore Potash with a conservative price target of 11.2p and a Conviction Buy stance when the stock was trading at 1.175p. Now with the shares standing at 1.375p, we are more than happy to reiterate our Conviction Buy stance.

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