IC Potash: The World’s Most Advanced Junior SOP Pr The World’s Most Advanced Junior SOP Project
IC Potash aims to produce premium priced sulphate of potash (SOP).
The 100% owned Ochoa Project is located in New Mexico and hosts a large polyhalite deposit to be converted into SOP (typically priced at a 35% to 50% premium versus the more standard MOP). The project is the most advanced junior SOP project today and has many advantages over existing producers (mainly lower cost versus traditional SOP production).
The project is past prefeasibility showing positive economics.
Production is targeted for a 2015 start-up with a project life of 40 years beginning at a production rate of 568,000 short tons per annum of SOP plus 275,000 short tons per annum of potassium magnesium sulphate (SOPM). Opex per ton of production is $147, which is well below the industry norm (near $400 per ton) and even the lower cost producers (above $200 per ton). The prefeasibility computes a $1.3 billion after-tax NPV and a 26% IRR.
The capital requirement is low relative to most junior potash projects.
Development capex totals $706 million (similar to the $1,000 per annual tonne benchmark targeted by the better greenfield MOP projects). Notably, the project does not require the same large scale of production as many of the other leading junior potash projects (i.e. Western Potash requires $2.8 billion for its project).
We recommend ICP with a STRONG BUY rating and a C$2.00 target price.
We base our target on a 0.5x multiple against our $4.16 per share NAV calculation using a 12% discount rate. We expect upside to our target as the project is de-risked through the completion of feasibility and through the addition of a strategic and/or financial partner.
IC POTASH CORP. ICP – TSX C
.97 December 19, 2011
Rating: STRONG BUY
Target Price: C$2.00 (106.2% Potential ROR)
Market Capitalization: C$117.6 million
METALS & MINES
Peter Prattas, CA, CFA – Analyst
416.682.4243
pprattas@frasermackenzie.com
Mona Nazir – Associate
IC Potash (ICP-TSX; IPTF-OTCQX) is a junior potash exploration company founded by way of a reverse takeover (RTO) of Intercontinental Potash Corp. (ICP) on November 30, 2009. The company’s activities are primarily focused in the southeast area of New Mexico (southeast of a historic potash area). The company intends to become a primary producer of SOP (Sulphate of Potash) and SOPM (Sulphate of Potash Magnesia) via its 100% owned Ochoa property (over 100,000 acres). ICP intends to capitalize on premium SOPM pricing given that it is regarded as a specialty potash product for both the European and SW Asian end markets (magnesium deficient soils). With total proven and probable reserves of more than 400 million tonnes of ore, the company’s asset package can be characterized as continuous thickness and grade and low dip; giving way to long life and a low cost operation.
The company aims to be one of the lowest costing SOP producers globally via its mining methodology, Polyhalite Leaching, which is estimated to cost 25%-70% less than current processing methods. The project has extremely positive economics, as concluded by a prefeasibility study (SOP and SOPM production of 511,000 and 248,000 tonnes respectively, CAPEX of $700M, NPV of $1.3 billion, 26%-after-tax IRR). Production is targeted to commence by late 2015.
The project is well located in a safe mining jurisdiction and close to good infrastructure. The Carlsbad New Mexico area has had an abundance of potash mining activity dating back to the 1930’s. Industry majors Mosaic and Intrepid operate a number of mines within 20 to 30 kilometres north and west of Ochoa. The community is supportive of mining and has an abundance of skilled labour. The local infrastructure is strong with modern rail, roads, power and water. The Port of Houston is roughly 600 miles away, providing a gateway to international markets (Asia and Europe represent more than two-thirds of global consumption). The US market is also quite sizeable with major markets including Florida, Kentucky, North Carolina, South Carolina, Washington, Ohio and California.
IC Potash aims to produce SOP, which has a premium price and a robust demand growth trajectory. SOP is a premium fertilizer that contains no chloride (build-up of chloride in soils causes low quality crops). It is used to enhance yield and quality of high value crops including many fruits, vegetables and tobacco. SOP represents about a tenth of the overall potash market (~6 million tonnes versus the overall market of around 60 million tonnes) and has historically achieved a price premium in the range of 35% to 50% over the more standard potash product MOP. Worthy of mention, crops that use MOP can use SOP but crops that require SOP usually do not tolerate MOP. Also of note, ICP will be producing a granular grade of product that sells for $30 more per metric ton than standard Northwest Europe SOP.
ICP has the world’s most advanced SOP junior project and has the resource to be a sizeable player. Total proven and probable reserves are 414.5 million tonnes of ore (344.3 million tonnes of recovered ore) at a diluted grade of 77.33% polyhalite. This resource is sufficient for over 90 years of production although the current mine plan only assumes a 40-year mine plan. The plan is for 568,000 short tons of SOP production per annum, which equates to less than one tenth of current global production of SOP. The Ochoa Project is the most advanced junior SOP play at this moment with two notable others lagging. The first is EPM Mining with a project in Utah (EPK-TSXV) and Sirius Minerals (SXX-AIM) with a project in the UK.
The Ochoa Project falls below the low end of the cost spectrum among existing producers. Roughly 60% of the world’s SOP is produced using the Mannheim process with KCl and sulphuric acid inputs and an estimated cost per metric tonne of US$500. Companies deploying this method include Tessenderlo, Qingshang, Yara and Migao. A quarter of production uses KCL plus sulphates as inputs and has an estimated cost of US$350 per metric tonne. K+S Kali deploys this technique. Almost 15% is produced from salt lake brines, the lower cost method at US$220 per metric tonne. The Ochoa project compares very favourably at US$162 per metric tonne produced although this is slightly skewed by the inclusion of SOPM production, which has a lower realized price.
Capital costs are also quite low without the requirement for a larger scale operation. The prefeasibility study shows a total capital cost of $706 million for the Ochoa project. This equates to $923 per annual metric tonne of combined SOP and SOPM production. This is in-line with the better junior potash plays (most of which are included in this report) that target a capital cost of about $1,000 per metric tonne. However, this is even more impressive considering that the Ochoa project will be producing a premium priced product. The other important point is that the project does not require the large scale that some of the other potash projects do. We reference Western Potash’s Milestone Project that requires $2.8 billion in capital, a massive feat to finance, particularly in the current market environment.
Prefeasibility confirms that the project is economically viable with very favourable economics. On November 15th of this year the company released the results of its prefeasibility study, which was positive. In essence, the authors concluded that the Ochoa SOP project is economically viable and recommended continued development of the project including the completion of a bankable feasibility study. The study computes a US$1.3 billion NPV using a 10% discount rate. Notably, this is more than ten times the company’s current enterprise value.
The company’s roadmap to production suggests the mine will commence production in Q4 2015. ICP aims to complete feasibility in early 2013 and environmental permitting by the end of that year. Accordingly a production decision will likely be made immediately thereafter. Assuming the project goes ahead, the construction phase will likely take about 24 months which implies production before the end of 2015. The ramp-up period is estimated at about 18 months, which implies that the project will be at full production near the beginning of 2017.
Technical Risk
Perhaps the most notable risk is that IC Potash will be the first to produce SOP from polyhalite. The mining technique is rather conventional with room and pillar techniques being planned (5 foot polyhalite thickness). However, processing has yet to be done at commercial scale and involves crushing, grinding, calcination, leaching and crystallization. This process underwent extensive studies by the United States Bureau of Mines dating back more than 50 years and of course more recently by independent engineers (details included within the prefeasibility study) and have concluded that the process is viable.
Exhibit D-4: Ochoa Process Flow
Source: IC Potash
Environmental Risk
The project permitting process has commenced and will likely continue through until the end of 2013. While this will remain a risk until all permits are in hand there is a high degree of confidence considering the abundance of mining activity in the area. Also note that the recent choice to go with thermal and mechanical evaporation and crystallization technologies (rather than solar evaporation) significantly lowers water requirements and surface area disturbance that should greatly ease the process.
Technical Risk
Perhaps the most notable risk is that IC Potash will be the first to produce SOP from polyhalite. The mining technique is rather conventional with room and pillar techniques being planned (5 foot polyhalite thickness). However, processing has yet to be done at commercial scale and involves crushing, grinding, calcination, leaching and crystallization. This process underwent extensive studies by the United States Bureau of Mines dating back more than 50 years and of course more recently by independent engineers (details included within the prefeasibility study) and have concluded that the process is viable.
Exhibit D-4: Ochoa Process Flow
Source: IC Potash
Environmental Risk
The project permitting process has commenced and will likely continue through until the end of 2013. While this will remain a risk until all permits are in hand there is a high degree of confidence considering the abundance of mining activity in the area. Also note that the recent choice to go with thermal and mechanical evaporation and crystallization technologies (rather than solar evaporation) significantly lowers water requirements and surface area disturbance that should greatly ease the process.
Valuation
Using our forecast from above and applying a 12.0% discount rate after-tax to cash flows, we compute a net asset value (NAV) of C$4.16 per fully diluted share. We note that the project continues to be economic even under a US$400 per short ton SOP price (note that the majority of global production has a marginal cost higher than that) and has the potential to double in value assuming a similar price adjustment the other way (US$920 per tonne). Using our US$660 per ton potash price assumption along with a more aggressive 8% discount rate produces a NAV more than double in value while a more conservative 16% discount rate continues to yield a C$1.93 per share value. Our valuation assumes a US$/C$ exchange rate of 1.00.
In the following exhibit, we compare the company’s fully diluted market-cap against the most comparable SOP peers. We believe ICP is trading at an astonishing discount versus its peers considering it has already advanced through prefeasibility, which the others have yet to do. Notably, if IC Potash were to trade in-line with Sirius, shares of ICP would be around C$2.24.
Financing
As discussed, we believe ICP has sufficient capital to fund a feasibility study. However, the estimated
US$750 million capex requirement will need to be financed via a combination of debt and equity.
Normally a junior potash company will aim to achieve a debt to equity ratio of 60/40 implying $450 million
of debt and $300 million of equity. The company will most certainly pursue several financing alternatives
including garnering interest from a strategic investor possibly including an off-take agreement. The
parties, which we assess as most likely to have interest in an SOP project like this, include the following:
Indian Farmers Fertiliser Co-operative (IFFCO)
Sinofert (China)
Compass Minerals (CMP:NYSE)
Sociedad Química y Minera de Chile (SQM:NYSE)
K+S KALI (Germany)
Yara International (Norway)
The management team at IC Potash possess the traits required to advance the project including the critical financial and technical expertise. CEO Sid Himmel is a Chartered Accountant and has spent 20 years in the investment industry (Merrill Lynch and TD Securities). COO Randy Foote is a mining engineer with 27 years in the potash industry including work in the Carlsbad area where he was responsible for two mines and three surface operations, mining over 5 million tons of ore per year. Patrick Okita is Chief of Exploration and Development. Mr. Okita is an internationally renowned geologist and has held senior technical and management positions with BHP and the U.S. Geological Survey. His areas of expertise include potash and polyhalite.
In our opinion, IC Potash possesses the world’s leading junior SOP project and has the benefit of a safe jurisdiction. The project economics are very attractive and investors in the company have an opportunity for big upside considering the current Enterprise Value is now less than one-tenth of the net present value shown in the recently released prefeasibility study. Hence, we initiate coverage with a STRONG BUY rating and C$2.00 target price, offering potential upside of 106.2% to our target. Our target values the company at a 0.5x P/NAV multiple. We foresee upside to our target as the company 1) de-risks the project by advancing through feasibility and arranging financing and 2) through a possible takeout. We see the potential of a $5.00+ share price with advancement to production assuming SOP pricing stays around current levels and even more upside with a further strengthening of prices.