Emmerson has a potash project in Morocco that could be worth many times the company’s current market capitalisation. There is demand for the potash, so that more grain crops can be grown, and financing the mine is the key to the company’s prosperity. Sirius Minerals should be kept in mind when considering the potential downside as well as the upside.
Management believes that AIM is more suited to a company the size of Emmerson than the standard list and that it will provide greater flexibility in terms of transactions and funding.
The construction of the Khemisset potash mine requires a substantial amount of cash. Even if debt provides the majority of the funding, a large share issue will be needed if Emmerson is going to retain its 100% ownership of the project, which will lead to dilution of existing shareholders. A strategic partner in the company or the project is likely.
As with any mining project, the way it is financed will determine the underlying value of the shares. Even if the value of the project does not change the number of shares in issue will increase thereby diluting the value per share. However, Khemisset is undoubtedly a highly valuable project and there will be plenty of upside in the shares if management, which includes experience of getting mines up and running, can get the financing right. Buy.
Emmerson (LON: EML)
Potash project developer
Introduction from standard list / placing
Flotation date: 27 April 2021
Start price: 5.75p
Amount raised: £5.5m
Market capitalisation: £47.5m
Nominated adviser: Shore
Brokers: Shore / Shard
What does it do?
Emmerson owns 100% of the mining licence for the Khemisset potash project in northern Morocco. The mining permit has been received and the mine has an initial life of 19 years, although this only covers part of the resource. The mine life could be as much as 50 years.
Shell company Emmerson joined the standard list on 15 February 2017, when it raised just over £913,000 at 3p a share. It was readmitted to the standard list in June 2018, when it bought Moroccan Salts, the owner of the Khemisset project, for £10m in shares and raised £6m at 3p a share.
There is already infrastructure in northern Morocco and the potash mining and processing will use established methods. Morocco has established mining laws and royalties and it is a less risky jurisdiction than many other African countries.
Khemisset would initially produce muriate of potash (MOP) and then also produce sulphate of potash (SOP) at a later stage. De-icing salt will also be produced. The mining permit has been received and heads of agreement for the offtake have been signed.
Grain prices are rising and that is leading to higher demand for potash, which is pushing up its price. Emmerson can produce at lower prices than most of its rivals in other parts of the world, so it will be highly profitable even at relatively low potash prices.
All in sustainable costs are estimated to be $158/tonne and that does not take account the potential income from de-icing salt.
Construction of the mine is expected to start before the end of this year. That will require substantial investment. When the mine is up and running it should be one of the lowest cost producers of potash in the world.
The long-term MOP price is estimated to be $412/tonne in the feasibility study undertaken by Emmerson.
There was £793,000 of cash in the balance sheet at the end of June 2020 and soon after that £1.72m was raised at 4.25p. In February, £5.5m was raised at 5.75p a share.
The cash raised in the latest placing is being used to fund the design of the mine and the technical work, as well as ongoing project development. It will take much more cash to fully development the mine, although some of the finance can come from debt.
The latest project development plan suggests upfront capital investment of $254.6m, or $287m including contingencies, is required for the initial phase. Additional phases could be financed by the cash generated from potash production, although that would take a few years. Once phase 2 is fully up and running it should be easier to generate the cash for the next two phases.
The first phase should be able to produce 350,000 tonnes of MOP a year and that is estimated to generate annual EBITDA of $63.9m.
If all four phases are undertaken, then the total cost will be $701m and annual EBITDA would be $491.4m. The NPV (at an 8% discount) of the full project is $2.37bn and even the first phase could be worth more than $500m.
James Kelly (Chairman)
Dr Robert Wrixon (Finance director)
Graham Clarke (Chief executive)
Edward McDermott (Non-exec)
Hayden Locke (Executive)
The shareholder register is dominated by small investors. Jarvis clients own 15%, Hargreaves Lansdown 5%, Interactive Investor 4.05% and Binckbank 3.52%. Mohamed Aghmir owns 3.71%.
The directors own 5.76%, including a 5.73% stake held by Robert Wrixon. James Kelly bought 600,000 shares earlier this year.