bayovar

The Sandpiper scoping study estimated that operating costs at US$58/t FOB for beneficiated material. Based on pilot plant studies, the quality of the Sandpiper beneficiated material is expected to be at least as good (if not better) than beneficiated rock phosphate that is currently being shipped from the Bayovar mine in Peru. (see: http://www.mining-technology.com/projects/bayovar-phosphate/ ).

Bayovar beneficiated material currently sells for $152/t (see last week's phosphate price trade newsletters). Thus, if Sandpiper material is indeed comparable to Bayovar, $150/t is presently a fair metric upon which to estimate Sandpiper margins.

If Sandpiper produces 3Mtpa at $60/t and MAK/UCL are able to sell this for $150/t, Sandpiper will generate approximately $270mill pa. Of this $270mill, MAK will receive around $131mill pa under the present ownership structure. (Keeping in mind that the Sandpiper scoping study has a margin of error of +/- 30%. Also keep in mind that MAK may be in a position to increase its ownership over time).

Assuming a positive DFS (which I'm confident of), and assuming bank financing is locked in relatively quickly (something I'm also reasonably confident of – see my earlier post), Sandpiper could begin commercial scale production and shipping by the middle of 2013, with production capacity of 3Mt being achieved late in 2014.

Thus, on some reasonable assumptions, MAK could be generating earnings from Sandpiper in the region of $100mill during FY14, rising to $130mill+ in FY15. And these numbers assume there are no further phosphate price rises over the next three years, which is probably a conservative assumption. (Yes, there will be seasonal dips and troughs over the next few years – the odd 20% price fall – but the overall, long term trend in phosphate prices is undoubtably up).

MAK's current EV is less than $70mill. While there is likely to be some dilution between now and first commercial production for Sandpiper, and while there is plenty of garden variety risk, there is nevertheless a solid investment argument for MAK to eventually be valued, on the basis of its share of Sandpiper alone, well in excess of $1bill. All going well re financing, plant construction, etc, the time line to this valuation could be as little as two years.

The market is, at present, valuing MAK mainly on the basis of Wonarah alone – or at least the near term likelihood of an NMDC JV being finalised (and judging by MAK's share price, the market seems to have pretty low expectations in relation to the NMDC jv). However, I think that, whatever happens with the NMDC JV, and assuming no macro-economic meltdown, Sandpiper will begin to move MAK share price in a seriously positive direction when/if the DFS is completed and bank financing is locked in.

Turning now to Wonarah, I've said in recent posts that the NMDC deal is likely to take some time to be finalised. I still hold this view. My gut tells me that NMDC/the Indian govt are not just kicking tires, but seriously want/need Wonarah. I.e., with a rapidly growing population and most rock phosphate and phosphate product production presently occurring in unstable regions, national security dictates that they need access to a reliable, 100 year supply of downstream phosphate products. However, NMDC also realise that they are presently the only interested party, and so feel they can play hardball with the terms of the JV.

I'd encourage MAK management to take all the time they need in negotiating the JV to get the best deal for shareholders. In the long run, it far better to take a few extra weeks (perhaps months?) to negotiate a good deal, than to rush through a deal that is not as good as it could be. Furthermore, NMDC will probably recognise that, if phosphate prices continue to rise next year, it is only a matter of time before a second bidder for Wonarah emerges. So while NMDC can afford to play hardball now, perhaps in 6 months time, and as MAK's position is strengthened by Sandpiper advancing to production (and with the extra investment community attention that this will attract), NMDC's present negotiating advantage will begin to diminish.