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Elemental Minerals starting to catch the eye as Kola shapes up as a world class potash deposit

Tuesday, May 22, 2012 by Ian Lyall

The company owns the Sintoukola potash property in the Republic of Congo

Elemental Minerals (ASX:ELM, TSX:ELM) has taken a very restrained approach to marketing itself since it started developing the project about three years ago.

And this has been a deliberate strategy, according to Iain Macpherson, chief executive of the group, which owns the Sintoukola potash property in the Republic of Congo.

“The project is good, so we have taken the decision to get our heads down and let it speak for itself,” said Macpherson.

The story was introduced to a new audience au fait with the dynamics of the potash market recently via its listing in Canada.

The TSX IPO raised about C$61 million, which will fund the group through its bankable feasibility study scheduled for next April.

In terms of outside interest in the project, the preliminary feasibility, due for publication in August or September this year, may prove pivotal.

“The PFS is not a traditional go, no-go decision point for the company,” said Macpherson.

“It is more a marketing process for future project finance requirements or capital requirements.”

So far, exploration work has focused on the Kola deposit, which represents 60 square kilometres of a possible 1,400.

Even so it has delivered a 43-101 sylvinite resource of 413 million tonnes in the measured and indicated catagories with a further 261 million tonnes in the inferred mineral resource category.

This is the key component of a potash resource of just over 959 million tonnes in the measured and indicated categories, with a further 513 million tonnes in the inferred mineral resource category.

“We are exclusively focussed on the highly sought after sylvinite resource,” said Macpherson.

“And despite having examined only a very small section of the Sintoukola property we have already confirmed sufficient sylvinite tonnage to support a long life production of two million tonnes a year of finished potash, which is a vital ingredient in fertiliser.”

The capital costs associated of putting Kola into production are estimated at US$1.7 billion, though they are modest when compared with the massive investment being sunk into other projects.

For example last year, Germany’s K+S Group gave the green light on a massive US$3.25 billion of capex to get work underway on its giant deposit in Saskatchewan, Canada.

Kola, meanwhile, hits the sweet spot on a number of levels that mark it out as different and potentially very special.

The first is the quality of the sylvinite mineralisation, which at around 20 per cent potassium oxide, is at the “top end of the industry curve”.

The relatively shallow depth of the deposit means it is amenable to conventional underground mining, rather than extraction via more exotic, expensive and complicated methods such as in-situ leaching.

As important, is Kola’s location some 90 kilometres north of the deepwater port of Pointe Noire, but only 30 kilometers from the coast.

The company has designed its own ship loading facility at Tchiboula, a suitable location a mere 36 kilometers from the planned mine, which gives the company access to that all important export base.

And it has infrastructure such as roads and power supply already in place on the coastal region. The company has planned the necessary additional infrastructure to bring the facilities to site in order to optimise its mining operations.

Kola will, when up and running in 2015, be the closest potash project to Brazil, the world’s second largest consumer of the fertiliser.

South America’s largest economy currently consumes more than six million tonnes of potash, which is used to fertilise cash crops such as bananas, sugar cane and cocoa, and this figure is set to double by 2025.

Globally the market is growing by an annual rate of 4.5 per cent a year, or the equivalent of one new potash project a year.

The logistics mean that Brazil would be the obvious target market. However there have apparently been approaches from China and India regarding off-take agreements and potential finance.

Kola has also piqued the interest of the major miners, although that interest is unlikely to crystallise formally until after the PFS, CEO Macpherson said.

“It is the job of the junior to get in there, break the ice, de-risk the project technically, environmentally, politically and commercially,” he added.

“Once this is done the majors start focusing on it. The point this typically happens is the pre-feas [pre-feasibility study].

“We are getting some interest. But the time for any strategic partner to come in seriously is after the pre-feas.

“From our perspective this is when we can demonstrate the value of the project.”

By African standards the Republic of Congo is seen as comparatively stable. It has an active and significant oil and gas industry, with mining just starting to flourish.

FTSE 100 giant Xstrata has an iron ore joint-venture in the RoC with AIM-listed Zanaga, while Exxaro Resources will soon be active locally through the acquisition of African Iron.

The regulatory framework follows the West African model, according to Macpherson, which means that miners enjoy a supportive fiscal environment.

Potash was formally discovered in the Congo in the 1960s and 1970s by Les Mines de Potasse d’Alsace, though the early work carried out by the French oil companies five decades earlier noted its existence.

“It is a well understood potash mineralised zone,” said Macpherson.

“We became aware of it in 2008, so a few years later when the potash market started showing some signs of life and when we secured the rights to the project we put together a team that have been driving its development.”

The assets were reversed into an existing ASX company and the exclusive exploration licence secured in the late summer of 2009.

The current share price of 85 cents a share values the group at less than US$210 million after what appears to have been an interminable drip of stock into the market, which thankfully appears to have dried up.

The net present value of the project (at a conservative 12 per cent discount rate) is put at $990 million, while Foster Stockbroking in Australia reckons Elemental is worth $2.80 a share, or $680 million.

A trigger for the stock’s re-rating could be the recent resource upgrade, which included the discovery of a new sylvinite bearing footwall seam.

“The large sylvinite resource provides a significant competitive advantage and will underpin our new feasibility economics,” said Macpherson.

“What is particularly pleasing is the high conversion rate to measured and indicated mineral resource categories which was a key objective of the phase-two exploration programme while the new resource is also within our phase-two target range.

“The increased tonnage and strategic nature reinforces our confidence that this project will be built."