ICP is trading at 6% of the project’s value IC Potash will soon have hydrology testing completed.
ICP will demonstrate to the state engineer that the hydrogeology of the system is favorable in that there would be no expected impacts on other water-right holders. The Capitan Reef water source has contributed to industrial development in New Mexico for many years. It is located at significant depth, while the local population and business community rely on a water supply from aquifers located at far shallower depths. This, in essence, ensures a ’resource differentiation’, meaning that ICP will have its own exclusive water source, while the local population can rest assured that the planned mine will not interfere with its own source.
ICP then gets access to the water, which is a HUGE catalyst.
Once water access approval is official, one would expect upside to price targets, as analyst targets were raised when the project was de-risked through the addition of Yara International ASA as a strategic partner and the Yara off-take agreement.
ICP is well on track with recent announcements of a world-class team of experts for its Bankable Feasibility Study, ICP is achieving key milestones that will compel the Ochoa Project further towards production. ICP employs 25 full time employees and 15-20 full time consultants engaged in engineering.
ICP will also benefit from welcome support as the United States Secretary of the Interior, Ken Salazar, is encouraging the promotion of a favorable setting for the development of the oil and potash industries in New Mexico. Salazar’s input has inspired a series of local institutional and political initiatives to favor dialogue between industrial and community interests, miners’ safety concerns and resource management.
The Yara/ICP partnership is transformational and the first of its kind in the junior potash space. With Yara as a financial and commercial partner, ICP is validated as the world's leading potash development company.
Yara International ASA, the world’s largest distributor of plant nutrients, made a strategic investment of $40 million in IC Potash (ICP) and entered into an off-take agreement that guarantees the sale of 30% of ICP's production on a take or pay basis. The term of the off-take will begin upon the commencement of commercial production for a period of 15 years which substantially de-risks the Ochoa project.
Yara is a World Class and ideal partner for ICP with a strong distribution network for fertilizer minerals. Yara has a market cap of $13.5 Billion, revenues of $14 Billion, and EBITDA of $3 billion. The company has operations in 50 countries and annually distributes 20 million tons of fertilizer products into 150 countries. ICP will have access to European and South Western Asian potash market thanks to Yara’s considerable distribution access.
Yara forecasts that the water soluble fertilizer market will grow rapidly and are planning joint marketing initiatives with ICP.
IC Potash aims to produce Sulphate of Potash (SOP), which has a premium price and a robust demand growth trajectory. SOP is used by producers of vegetables, fruits, tobacco, horticultural plants due to the fact it does not contain the chloride. Regular potash contains chloride and produces less desirable fruits and vegetables. SOP is used to enhance yield and quality of high value crops. Crops that use MOP can use SOP but crops that require SOP usually do not tolerate MOP.
ICP will be producing a granular grade of product that sells for $30 more per metric ton than standard Northwest Europe SOP. 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.
ICP has 190 million tons of sulphate of potash contained within the ore. SOP current sells for over $600 per ton in the United States, which translates into a contained product value within the ore of over $110-billion.
ICP is trading at a discount versus its peers. ICP has Bullish Analyst Coverage, analysts have NAV calculations of $4.00 per share using a 12% discount rate. Sirius Minerals current market cap is $325 million. Valuing IC Potash in line with Sirius Minerals would equate to a $2.24 ICP share price, and one could argue that ICP is worth even more given its relative strengths.
Post transaction, ICP has retained 100% of the project level equity allowing ICP to enter into additional JVs at the NPV of the project closer to production (current NPV of $1.3 Billion as of the release of the prefeasibility study).
ICP’s project has a low projected capital cost of $706 million which is well below the $3 Billion plus cost of a typical large MOP potash project. The likely method of financing the mine is likely to be at least 50% debt, leaving about $350 million of equity needed. Assuming that a year from now ICP has two large shareholders willing to contribute their share of the needed equity this would leave ICP responsible for raising $175 million of new equity. Before the company gets to this point it may have to order some long lead equipment and this may require the issuance of $50 million of new shares.
Additionally, ICP has strong Institutional Sponsorship with Yara and Resource Capital Funds as strategic investors, this will empower ICP in raising this required equity capital.
In terms of debt financing ICP has immensely increased its ability to obtaining credit financing for the debt portion of the project. The banks will have to be convinced that the mine’s output will find buyers, there is no futures market for potash, so having off-take agreements in place as well as a marketing deal with a large distributor for the balance will be helpful. Yara has signed a 15 year off-take agreement for 30% of production at then market rates (assuming a price of $500, that is $1,500,000,000 over 15 years, take or pay). ICP would like to sign another off-take agreement.
Upon reaching production, ICP will generate $360 million of revenue and $275 million of EBITDA based on projected market prices. This means at an 8x EBITDA multiple, ICP could obtain a valuation of more than $2.2 billion dollars. ICP has a market cap today of $132mm with more than $50mm in cash.
The reason that ICP's industry partners are so interested in ICP is because ICP will be one of the few sources of potential supply that can come on line at low cost with a Long-Life Mine. ICP has the most advanced junior SOP development project in the world and has many advantages over existing producers.
Current annual SOP capacity is 7 million tonnes and most is Mannheim which is shrinking because it is extremely high cost.
This is an underserved market and premiums are high: therefore ICP is in a great position and will be extremely low cost, projected to be in the bottom Quartile OPEX.
ICP has a lower cost versus traditional SOP production with opex per ton of production is $147, far less (65% less) than the industry average of $ 500/ton.
IC Potash has an enterprise value of only $80 million versus the prefeasibility NPV of $1.3 billion for the base case ($2.0 billion for the expansion case), and ICP is trading at 6% of the project’s value as per the prefeasibility study.
Analysts see the potential for a $5.00 to $10.00 ICP share price in the long term.
ICP is the favourite of the junior potash names that some analysts follow. IC Potash has sufficient cash to see it through the definitive feasibility study (expected August 2013) following Yara International’s US$40 million investment in April for 19.9% of the company. IC Potash targets a niche market (SOP instead of MOP) with a low cost mining plan in a relatively politically stable location (New Mexico).