Emmerson - On track to start construction by the end of 2021

Emmerson Plc recently move to the AIM section of the London Stock Exchange and has a market cap of £46m. The company is developing the Khemisset Potash Project located in Northern Morocco. CEO Graham Clarke presented the investment opportunity at a Yellowstone Advisory webinar. A recording of the webinar is available here.

The backdrop is strong global demand for potash as a fertiliser to improve crop yields to feed a growing global population. There is a need for new supplies and Emmerson has the rights to operate the Khemisset project which the company believes has very attractive economics. An accomplished team is in place and the company is in the process of securing the financing and gaining the necessary approvals to start construction of the mine.

Opening slides showed the demand for potash is forecast to grow 2.13% CAGR over the next 12 years, and farmers incentives to increased crop yields increasing as prices of wheat, soybeans and corn are all forecast to rise. There is a requirement for 1 or 2 new projects the size of Khemisset per year to meet this growing demand.

The location of the mine in Northern Morocco on the African continent is very important and gives the project a strategic advantage as the mine is close to its potential customers. Imports of MOP have increased significantly over recent years to meet the growing investment in production from local farmers. Total internal demand is approximately 800k tonnes and annual production from Khemisset is expected to be 735k tonnes so a lot of production could be consumed within Morocco. Currently no potash is being produced in Africa so Khemisset would be well placed to meet the demand emanating from the African continent alone.

Already agriculture accounts for 20% of the Moroccan economy and is very important to the country employing 4m people. Exports of vegetables have risen 26% over the last 5 years and fruit exports have grown 54%. The country is becoming a major food producer supplying a plethora of overseas markets. The government of Morocco recently introduced the “Green Morocco” plan to invest in farming and this too, will support continued demand for fertilisers.

One aspect of the project that Graham highlighted was the focus on sustainability and the aim is to use 100% renewable energy on site. Morocco has 3,000 hours of sunshine p.a. and 42% of all electricity is generated from renewable sources including wind and solar.

After giving the backdrop to the project Graham went on to explain why the economics of the project are so attractive. Principally this is driven by the mine location and its geology. The ore body is only just below the surface and will require the relatively small 500m declines to access them. There are no aquifers to go through further reducing costs and the total cost to access the deposit will be $35. There is already a good road to the port and so additional work required is forecast to cost only $12.6m which is much less than competitors’ costs. The port itself is well established and will require no additional costs to meet the demand. On a theoretical shipment to Brazil the logistics costs would be $24/tonne, significantly lower than competitors in Canada who would charge at closer to $105/tonne. So, for a host of reasons the costs compared to competition will be significantly lower and place the mine at the bottom of the cost curve. This means that the mine will be profitable almost whatever the potash price. The combination of geology and location translate to a low cost and low risk project.

Graham also talked though a 4-phased development that the company has model as an alternative. Under this scenario the capex would be reduced to $254.6m vs $424m in total and the cash flows from the project would be used to pay for the later stages of the development. Under this scenario the forecast EBITDA in the first full year of phase 4 production would be US$ 491.4m and the estimated NPV would be US$2.37bn. A number of charts were then shown which displayed cash flow, capex, EBTIDA and valuation assumptions for each of the 4 phases. Based on the current share price the EV/EBITDA multiple at the end of phase 1 would be c5x falling to c1.5x in phase 4. EBITDA during the period would grow from US$63.9m to US$491m.

Drawing towards the end of the presentation Graham outline the milestones that have been achieved and the milestones targeted for the remainder of 2021. Key accomplishments are the completion of the scoping study showing the potential of the asset, completion of the power and gas supply and receiving the mining permit in February 2021.

The next near-term targets are the ESIA approval which they are hoping to receive in the first half of this year. Discussions are ongoing with potential strategic partners, either as equity investors or as a stakeholder which has interest in the product and can help with the project. Funding of the venture needs to be completed and they have been working with debt advisors for a number of months to put in the structure for the debt funding. In response to a later question Graham clarified they are looking to fund the project with 70% debt and 30% equity. If everything goes well the plan is to have funding in place in Q3 and commence construction by the end of 2021.

Ongoing work currently includes further site investigation to feed into the construction planning, further drilling to improve data on the geology to feed into the mine plan and a detailed feasibility study for SOP production once MOP production has started.

Following the presentation there were a number of questions from the audience which were well answered by Graham.

To fund the full-size project, Emmerson will require just over $400m of capex and the debt advisor believes that 70% debt/30% equity split is possible. It is the intention to bring in a strategic partner who will also participate in the equity component. They are working with a number of banks and 3 Export Credit Agencies to put the right structure in place.

The environmental approvals are expected in the next month or two and are likely to be in place before the funding can be completed. As part of the funding requirements an offtake agreement is typically also in place and they are in discussions with a number of parties and strategics about offtake potential.

OCP have assets near the Khemisset mine and they import potash for their fertiliser production so they would be a natural partner but there has been no pressure from the Moroccan government to partner with them.

Emmerson is still focussing on developing through phase 2 of the project but if they built out the smaller phase 1 of the project first then phase 2 would follow 2/3 years after this. Once phase 2 is in operation they would be generating the cash to make the SOP and an additional salt plant, and they can move pretty quickly into Phase 3. Phase 4, with the additional production, would be a further 2 years after this. The preference of the company and the board is to develop the full scale of the project, but it was important to look at the phased approach to have the option available.

Despite the economic attractions of the project no one has tried to buy the asset from them. Management however believes the project could be of interest to a number of parties.

Board and management hold c20% of the company.

For any future raises the company are open to including retail investors as part of the funding raising process.

The next time we here from Emmerson is likely to be an update on the EISA which will hopefully be before the end of June.

A recording of the webinar is available here. If you would like further information on other webinars organised by Yellowstone Advisory, please contact info@yellowstoneadvisory.com