Industry Fundamental Strength Fueling Renewed Interest
EPM Mining (
TSX: V.EPK,
Stock Forum) (26 cents)
https://epmmining.com/cms/
https://epmmining.com/cms/pdf/financials/2014/EPM-Investor-Presentation-2014-10-31.pdf
One year ago I did a large research report on EPK (see link at the bottom of this update) and while the gains have been flat, I believe now is the time to be taking another close look at this company.
In the report you will see insight into drought and problems in California in particular – and how this applies to EPM Mining and the significant potential for their Sulphate of Potash (SOP) project in Utah.
California is currently in the midst of its worst drought in 1200 years! More than 40 percent of the state is in its highest drought category and recently water restrictions were placed across the entire state – something that has never been done before.
California is a very large grower of specialty crops that under drought conditions do NOT do well with traditional potash. One of the only ways to put nutrients back into drought impacted soil is with SOP.
EPK has been VERY low on investor radar because there has been a news vacuum all winter
. I believe the recent interest is being fueled by new industry fundamentals that include the following:
1) In late February
Potash Corp. of Saskatchewan (
TSX: T.POT,
Stock Forum) hit a three year high and
Agrium Inc. (
TSX: T.AGU,
Stock Forum)
($135) hit a ten year high. This is a substantial recovery over the mid 2013 potash industry collapse that occurred when the leading potash cartel broke up and took prices with it.
EPM chart
But while POT and AGU are International industry giants, their focus is traditional potash. EPM Mining is sitting on one of the world's largest specialty fertilizer deposits - Sulphate of Potash or SOP.
1a)
SOP continues to trade at prices more than double the selling price of regular potash ($680 per tonne versus $320 per tonne).
1b) Both POT and AGU are based in Saskatchewan and recently their government announced big tax changes that for Potash Corp alone, will shave almost $100 million from their 2015 pre-tax earnings. That means potash mining in Saskatchewan now has a black eye and
mining friendly states like Utah become more attractive.
2) The current and future strength of SOP was further evidenced by financials that were released in February by
Compass Minerals International Inc. (
NYSE: CMP,
Stock Forum) ($91) -
the only SOP producer in North America (and in the same state as EPM Mining). www.compassminerals.com
In their recent financials, Compass reported a Q4 net income increase of 38% to $80M. A large portion of this percentage gain was driven off a 23% surge in their plant nutrition (SOP) sales - both selling price and sales volume.
SOP / Plant Nutrient Average Selling Price (per ton) $750 to $780
SOP only price up 9% year-over year to $681 from $626
This occurred while traditional potash prices remained stagnant near $320 per tonne
Compass also said: "Additional use of sourced potassium likely to increase per unit costs approximately $100 per ton for FY15"
Does this indicate that Compass may soon start looking for lower cost supplier alternatives of high quality SOP ? EPM Mining in my opinion being one of the most attractive given quality, size, and close proximity to their existing facilities.
3) According to a February article in the Financial Post,
potash imports by India may jump as much as 22 per cent to five million metric tonnes in the year beginning April 1, according to P.S. Gahlaut, managing director of Indian Potash Ltd. A Bloomberg dispatch to the Post says that would be the highest since 2010-11.
India has no local supplier source of SOP yet the demand would definitely be there. EPM Mining as I emphasized in my 2014 reports has a strategic partnership with Tata Chemicals of India - Tata (www.tata.com) is one of the largest conglomerates in the world.
4)
Strength of the U.S. Dollar – Producing a commodity in the United States and selling it internationally is akin to producing U.S. dollars. And when the U.S. dollar remains incredibly strong against most foreign currencies, an American produced commodity becomes very valuable. It also becomes expensive, but most countries do not have economic supplies of SOP (or it’s consumed locally) – that is why the price of SOP has remained so strong.
To someone like Tata Chemicals of India, Potash Corp of Saskatchewan, or even Agrium, that American based sulphate of potash is taking on more and more importance (and value).Compass Minerals also knows that the EPM Mining’s resources are sitting in their back yard (Utah). How much longer are they willing to wait while the value of the SOP keeps going up –
knowing that at any point some foreign company could just as easily take a run at EPM Mining.
EPM Mining VALUATION
The current market cap of EPM is in the range of $28 million.
Valuation is very difficult to determine because there are very few producing public company SOP mines other than large companies like NYSE listed Compass Minerals. We know;
1) At the peak of the potash cycle in 2011 that
Tata valued this resource at $200 million
2) The Preliminary Feasibility Study (PFS) demonstrated a
30 year mine life with a pre-tax net present value (NPV) of $957 million. This was based on name-plate production of 300,000 ton per year generating
annual earnings in the range of $140 million - these are extremely strong numbers for a small company.
3) Current fair value given the dynamics of the industry may mean this is worth “at least” $50 to $100
million. That is only a best-guess estimate. In production this could be worth multiples of that number.
My report from last year is just as relevant and now is a good time to review it:
May 16, 2014 - SOP shortages, drought & 350m Chinese smokers:
https://stockhouse.com/media/tickertrax/banners/TTraxMay16EPKmain.pdf
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Disclosure: Danny Deadlock owns 150,000 shares of EPK
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