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Given the governmental approval delays and resulting impact on share prices for Mkango and Tirupati, we have been cautious about posting our latest Idea for Research, which is a potash project in Morocco that has been waiting for an environmental permit ahead of its mining permit for some time i.e. it’s an early stage mining project in Africa with a potentially significant valuation disconnect if the company can get its approvals and secure financing for mine development. However, given increasingly persistent speculation that the environmental permit really is now expected shortly, with the International Agricultural Exhibition starting today in Morocco (https://www.salon-agriculture.ma/en/) as a backdrop, we present Emmerson plc.
In summary, Emmerson has been developing the Khemisset project in Morocco with its DFS (Definitive Feasibility Study) highlighting a $1.4bn NPV based on a potash price per tonne of $412. The price of potash has been coming down over the last year after Russia’s invasion of the Ukraine caused a significant increase in pricing, with Russia being one of the world’s key sources of potash (alongside Canada), but it remains above the $412 per tonne level. With a market cap currently below £60m and despite the company needing to secure funding for $411m upfront capex (which we assume is now a higher figure given the time that has passed since the DFS was published) the value opportunity is clear. Similar to our valuation methodology of Mkango, 15% of the $1.4bn project NPV results in a share price of 18p.
As most probably know, potash is a key fertiliser used to increase crop yields and the Khemisset project presents a compelling investment case given its location. Not only can it service an expected growth in demand for fertiliser in Africa, it can also provide potash to Brazil (the world’s largest importer of potash) with delivered production at prices greatly below Canada which is currently the key source of Brazil’s supply. The company’s commercial prospects are, therefore, robust for a project of this nature, particularly in light of the long term food security demand drivers for potash.
The company appointed Mandated Lead Arrangers for the debt funding of the project in Feb-23, selecting ING Bank, Banque Centrale Populaire, Bank of Africa (Groupe BMCE) and one further international European Bank. ING Bank is mandated to act as Export Credit Agency (“ECA”) Co-ordinator and Documentation Bank. Based on current discussions, the US$310 million dual-tranche project financing will be split between an ECA covered tranche led by UK Export Finance (“UKEF”) of US$230 million and a dual currency (US$ and Moroccan Dirham) commercial tranche of US$80 million. The key question and risk then becomes the potential dilution for the equity portion of funding and the price at which this is concluded, assuming all permits are secured. However, the company has a $40m convertible loan note (“CLN”) subscription from strategic investors Global Sustainable Minerals Pte Ltd and Gold Quay Capital Pte Ltd, convertible into shares at 8.2p, which was extended in Sep-22 up to Sep-23 as part of a $6m equity raise at 6p. In addition to the CLN, the strategic investors hold 50m warrants exercisable at 8.2p, potentially providing a further $4.1m of funding.
Funding is, therefore, reasonably well advanced, pre-construction technical workstreams including basic engineering are now largely complete with Barr and Reminex appointed to begin construction, and the company has already signed non-binding offtake agreements for 490,000 tonnes per year with Keytrade AG and Hexagon Group AG. The valuation inflexion point now really appears to be the issue of the environmental permit as a pre-cursor to the mining agreement. The environmental permit has taken much longer than expected given the requirements for the company to revise and optimise its water management plan, sourcing water from its waster water treatment plant rather than reservoirs, but recent company updates suggest that these issues have been solved and the relevant authorities are close to signing off.
The corporate presentation provides a good summary of the business:
https://www.emmersonplc.com/wp-content/uploads/2023/02/EML-Corporate-Presentation-Feb23-02.02.23.pdf
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