Minemakers (MAK) Phosphate Rock to Feed a Hungry World Recommendation: Minemakers is a speculative buy at around 25 cents with an initial target of 36 cents and a longer term objective of around $2 per share.
The company is backed by a strong cash position of about 15 cps. MAK controls two vast deposits of rock phosphate in Australias Northern Territory and in shallow waters offshore Namibia. The key to unlocking value for shareholders will be its ability to access finance. Rising phosphate prices combined with an ability to attract off-take and funding partners to support initial capital, should see the stock recover. Minemakers has completed a feasibility study to assess commercial potential of a direct shipping (DSO) rock phosphate ore project at its Wonarah project in Australias Northern Territory. The company estimates that 15 mt of Indicated Resources grading 30.1% P2O5 will produce 9.4 mt of DSO ore grading 30% P2O5 and that a further 28 mt of Inferred Resources will translate into a further 17 mt of mineable Reserves, supporting a 10 year project life at production rates of up to 3 mt pa.
After a GFC induced plunge in the rock phosphate price from over US$400 to below $100 per tonne, its price has edged back up to US$134 per tonne on an FOB Morocco basis. StockAnalysis believes that the rock phosphate price will continue to recover to range between US$150 and $170/tonne by late 2011. Morocco, China and Saudi Arabia dominate known resources of rock phosphate globally. The product is like oil in that it is mostly mined by government owned or controlled companies. Consumption in China is rising rapidly, so despite its large resource base, it should continue to be a net importer. Minemakers should have a $25/tonne shipping cost advantage over Moroccan product, when selling to customers in the Pacific Basin. In the current market, MAK should be able to secure a price of US$150/t, FOB Darwin for its low impurity product. Globally, we see a growing shortage of phosphate fertiliser and an ever rising demand for the product to boost crop yields as the worlds population continues to rise by about 80 million per annum from its current level of 6.8 billion. Over the past two to three years, the impact of high fertiliser prices, lower grain prices and a GFC induced credit squeeze has reduced fertiliser application. Moving into 2011, farmers will have little option but to add more fertiliser to their fields if they are to remain viable. The company plans to commence mining in the Northern Territory at 0.5 mt pa, ramping up to 3 mt pa within 3 years. Product will initially be trucked to a transport hub located north of the town of Tennant Creek, from where it will be railed to the Port of Darwin and loaded onto ships destined for customers in Asia. Longer term planning incorporates either a slurry pipeline to the rail hub from the Wonarah mine site or the construction of a rail spur, linking the Wonarah mine to a transport hub on the Adelaide to Darwin rail line. Eliminating the trucking leg is estimated to lower the ship loaded costs by about $30 per tonne. Minemakers Phosrock Resources Wonarah has a much larger Resource, amounting to over 400 million tonnes of mineralisation grading 21% P2O5 at a 15% cut-off grade which, with ongoing exploration efforts on the largely untested deposit, should support a long life operation of at least 100 years. The company has now embarked on a drilling campaign to bring some of its Inferred Resources into an Indicated status, so as to support a 10 year, DSO mining plan, which StockAnalysis believes is a lay-down misere.
Logging of drill core, backed up by a trial pit excavation, which was dug at the Arruwurra zone to produce large scale product samples for customer processing tests, shows that mineralisation occurs below about 15-25 metres of cover. A shallow, 1-4 metres of lower grade material, grading around 15% to 20% P2O5 directly overlies a flat lying 2-4 metre thick zone of DSO grade material, which can be mined at a head grade averaging 30% P2O5.
Longer term, the Wonarah mine will support a concentrating plant to upgrade run-of- mine product to a +30% P2O5 product for sale. StockAnalysis models the addition of a concentrator by 2020. The company is also undertaking desktop studies to examine the potential to use available gas at site or in Darwin to process the phosphate product to fertiliser for sale to farmers and wholesalers. The company estimates a total start-up capital cost of A$215.5 million, which will be spent in two stages. This increased capex now includes additional costs for establishing and owning a transport hub north of Tennant Creek plus associated port handling capex, as well as the cost of leasing and operating rolling stock, instead of paying contract transport charges. Minemakers estimates that a DSO project with a 10 year life will deliver a net present value of $256 million, which is five times the companys current market capitalisation. The project is expected to generate sales revenue of over $4.2 billion at a product price of US$150/tonne and operating cash flows are expected to total just over $1 billion with an attractive internal rate of return of 39%.
StockAnalysis runs a longer term model, assuming that a concentrator is added in year 9 and that the price of product rises at a modest 3% pa from year 3, while DSO incurs a 5% discount to high grade concentrate (which may be harsh treatment). If a product price of US$150/tonne can be achieved initially, StockAnalysis estimates that the Wonarah project would be worth over A$750 million. After adjusting for additional equity, which will be required to support project financing, StockAnalysis estimates that this project alone should be worth about $1.92 per share for Minemakers. Source: Strachan Corporate Pty Ltd Minemakers Estimates for Wonarah Project Economics Source: Minemakers The company is also progressing plans to dredge large tonnages of high grade phosphate mineralisation from the ocean floor, off the Namibian coast. MAK holds a 42.5% interest in the project and owns 15% of its JV partner in the project. While the Namibian project holds significant technical and product quality challenges, it is very large and has potential for low cost production of a saleable product. MAKs equity in Namibian Resources is estimated at 765 million tonnes grading 18% P2O5.
AEV Price at posting:
20.1¢ Sentiment: ST Buy Disclosure: Held
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