Interesting article from financial mail - Sth AfricaKore Potash:...

Interesting article from financial mail - Sth Africa

Kore Potash: some food for thought
The %rm is closer to South American and African markets than its rivals, and has shallow,
high-grade deposits — but as it mines a single product in only one place, there are risks
 BL PREMIUM
26 SEPTEMBER 2024 - 05:00
b y RAYMOND STEYN

Contrary to Tesla CEO Elon Musk’s claims that a population collapse is looming, we’re
not going to run out of humans any time soon. Thanks largely to Africa, the UN
predicts the planet will grow its headcount from 8-billion now to about 10-billion by
2050 — an increase of 25%.
That’s a lot of mouths to feed.

In addition, as people’s diets diversify and become more protein-rich, demand for
crops will grow. But, with scarce arable land, this requires better yields.
Enter fertiliser, the performance-enhancing drug of the agricultural world. Various
formulations exist, but the three major nutrients are nitrogen, phosphorus and
potassium, each fulfilling a unique role. Potassium is known as the “quality” nutrient,
helping to increase the size, nutritional value, flavour and resilience of crops.
Kore Potash, listed in the UK, Australia and South Africa, holds mining rights in the
Republic of the Congo (not to be confused with its larger neighbour, the Democratic
Republic of the Congo) for potash, a mineral containing potassium in water-soluble
form. Though potash is relatively abundant — most of the world’s deposits having been
formed from residual marine salts when ancient inland seas dried up — the majority of
ore bodies are buried deep underground.


As there are no viable substitutes for the mineral, the potash market is projected to
grow at a compound annual growth rate of 4.5% for the foreseeable future — attractive
fundamentals that have led major miners Anglo American and BHP to invest billions of
dollars in potash projects in the UK and Canada respectively.

Most of the world’s potash now comes from the northern hemisphere countries
Canada, Russia and Belarus. Because transportation costs are material, the location of
Kore Potash’s operations on the west coast of Africa gives it a significant advantage in
South American and African markets. The company further benefits from having highgrade deposits at shallow depths — half as deep as most potash mines — and it is a
resource that can be exploited via conventional techniques.

Still, like many projects that look good on paper, the reality is that the Kore Potash
operation needs extensive funding (about $2bn) and a skilled set of engineers to
execute its mine construction plans. It is hoping that its Chinese partners, headed by
construction giant PowerChina, can provide both.

“ As there are no viable substitutes for the mineral, the potash market is projected to
grow at a compound annual growth rate of 4.5% for the foreseeable future ”
A deal between the parties has been reached in principle. Lawyers are hammering out
the fine print, and no details had been made public yet at the time of writing. It’s
believed the Chinese funding package will consist of debt and royalties, thereby
eliminating the need for any large equity raise, bar working capital requirements. This
might explain why the company hasn’t been actively promoting itself.

Construction of the underground mine and associated infrastructure is expected to
take 40 months. As with any project of this scale, time delays and cost overruns are
significant risks. Just ask shareholders in Sasol, Anglo American, Renergen and many
others. That’s why the deal with the Chinese partners is so important. Ideally, they’d
want a fixed-price contract with most of the execution risk lying with the
counterparty. We’ll have to wait for the details.

Besides its main Kola project in the Republic of Congo, which is expected to deliver
2Mt of potash a year, the company owns other deposits that can be developed or sold
to third parties.

Of course, operating in a frontier African market comes with its own risks. Two years
ago the company had a scare when the Congo government, eager to diversify its
economy away from oil and create export income and jobs, arrested two senior
employees without charge while expressing displeasure over the project’s slow
progress. Since then, Kore Potash has accelerated development plans and liaised
closely with local officials.

One of the company’s strategic shareholders, New York-listed Sociedad Química y
Minera, based in Chile, is a global producer and supplier of potash and has been
providing technical oversight to Kore Potash. Along with another large shareholder it
has expressed an interest to conclude offtake agreements for 40% of Kore Potash’s output.



The company’s board of directors is chaired by David Hathorn, the well-regarded exCEO of Mondi and a former director of Anglo American, where he oversaw many
mining operations. The recently appointed CEO, André Baya, also has vast African
mining experience.

Kore Potash’s financial projections show that annual free cash flow could exceed its
current market cap once steady-state production is achieved, but it’s not advisable to
value pre-production plays on this metric, given execution risks and the uncertain
direction of future potash prices (there have been periods of oversupply).
A more reasonable approach would be to compare the company with similar pre-
production opportunities. In this regard, the proposed US listing of Brazil Potash is
instructive. Of similar size as Kore Potash, the Canada-domiciled company is looking to
raise equity capital that would give it a market capitalisation of at least R10bn. This
compares with Kore Potash’s current market cap of about R2.4bn.

Given the attractive long-term fundamentals of its 30-year-plus life of mine
operations, Kore Potash might be a takeover target for international mining companies
willing to enter African territories. But, like the project itself — based on a single
commodity in one location — it’s speculative. So don’t bet the farm, and accept that
unexpected obstacles may arise. As boxer Mike Tyson famously said, everyone has a
plan until they get punched in the face.

* The writer owns shares in Kore Potash

The reference to the Brazil Potash listing just highlights that KP2 is still significantly undervalued...