#PREM has many partially or wholly owned assets in its portfolio. But it
also has an investment of just over 5m shares in Circum Minerals.
Here’s some information on Circum and it’s Danakil potash opportunity
in Ethiopia. Some LTH’s are sure to be well aware of it given it’s been
an investment in #PREM portfolio for several years now.
It’s long been known that Circum intends to either launch it’s Danakil potash project in Ethiopia or sell it outright. From its latest presentation and recent letter to its shareholders we now know a little more about it’s intentions. We also know from #PREM RNS’s that Circum is on schedule to achieve its objectives.
Moreover we know that #PREM has pledged to give its shareholders a choice of how #PREM shares are dealt with come the day, which is quite a generous offer and truly extraordinary. Here’s an overview:-
Circum is a private company of substance. It has a “Board” of six Directors each of whom have a high net worth but more significantly appear to compliment each other as experts in their own field. Circum was founded by Canadian billionaire Stephen Dattels who is still the company Chairman:
It’s long been known that Circum intends to either launch it’s Danakil potash project in Ethiopia or sell it outright. From its latest presentation and recent letter to its shareholders we now know a little more about it’s intentions. We also know from #PREM RNS’s that Circum is on schedule to achieve its objectives.
Moreover we know that #PREM has pledged to give its shareholders a choice of how #PREM shares are dealt with come the day, which is quite a generous offer and truly extraordinary. Here’s an overview:-
Circum is a private company of substance. It has a “Board” of six Directors each of whom have a high net worth but more significantly appear to compliment each other as experts in their own field. Circum was founded by Canadian billionaire Stephen Dattels who is still the company Chairman:
Who is Stephen Dattels? (click here to view)
The BOD’s are supported by an extensive and competent management team and together with outsourced specialists, I’ve no doubt they form a team with a high level of skills. A team more than competent to develop the Danakil project into a successful potash mine if that’s the way it goes.
The Ethiopian government remains extremely supportive of the project and continues to progress the final major infrastructure work required for the development. This includes a newly upgraded 600km road corridor to port in Djibouti as well as power lines linking the mine to Ethiopia’s new sustainable hydroelectric supplies.
Ethiopia has featured prominently in the news recently with encouraging reports on many fronts including: Prime Minister Abiy Ahmed receiving the UNESCO Prize for Peace for his reconciliation with Eritrea; announcements of Ethiopia’s ongoing economic growth at around 10% p.a.; successful attraction of foreign direct investment in the past year; political restructuring including empowering and unifying opposition parties to enable democratic elections this year and Ethiopia’s successful completion of new infrastructure around the county including business parks, the Addis Ababa rail links and international railway lines.
Circum through its wholly-owned subsidiary, Circum Minerals potash Ltd. has held a majority ownership of Danakil since 2013. It was originally owned by AgriMinco but they sold 70% of it to Circum and 30% to #PREM. Circum subsequently bought out #PREM in 2014. But #PREM has been buying back the shares since then and currently owns just over 5%.
As things stand #PREM holds 5,010,333 shares in Circum Minerals Limited ("Circum")
The project has the potential to be a world class asset and one of the largest potash mines on Earth producing both Muriate of potash (MOP) & Sulphate of potash (SOP) at the same time from the same boreholes.
It is situated in the Danakil evaporite basin which is recognised as one of the hottest places on Earth. Temperatures there are over 40* C for most of the year and that’s an ideal climate for the mines evaporation process. Just about as good as it gets.. The area is also well mapped for potash having been extensively explored for over 100 years.
The potential resource there is nothing short of mind blowing. The licensed area covers 36,500ha which is over 140 square miles. It’s a similar size to the Isle of Wight for scale. So it’s big...... Very big!
The BOD’s are supported by an extensive and competent management team and together with outsourced specialists, I’ve no doubt they form a team with a high level of skills. A team more than competent to develop the Danakil project into a successful potash mine if that’s the way it goes.
The Ethiopian government remains extremely supportive of the project and continues to progress the final major infrastructure work required for the development. This includes a newly upgraded 600km road corridor to port in Djibouti as well as power lines linking the mine to Ethiopia’s new sustainable hydroelectric supplies.
Ethiopia has featured prominently in the news recently with encouraging reports on many fronts including: Prime Minister Abiy Ahmed receiving the UNESCO Prize for Peace for his reconciliation with Eritrea; announcements of Ethiopia’s ongoing economic growth at around 10% p.a.; successful attraction of foreign direct investment in the past year; political restructuring including empowering and unifying opposition parties to enable democratic elections this year and Ethiopia’s successful completion of new infrastructure around the county including business parks, the Addis Ababa rail links and international railway lines.
Circum through its wholly-owned subsidiary, Circum Minerals potash Ltd. has held a majority ownership of Danakil since 2013. It was originally owned by AgriMinco but they sold 70% of it to Circum and 30% to #PREM. Circum subsequently bought out #PREM in 2014. But #PREM has been buying back the shares since then and currently owns just over 5%.
As things stand #PREM holds 5,010,333 shares in Circum Minerals Limited ("Circum")
The project has the potential to be a world class asset and one of the largest potash mines on Earth producing both Muriate of potash (MOP) & Sulphate of potash (SOP) at the same time from the same boreholes.
It is situated in the Danakil evaporite basin which is recognised as one of the hottest places on Earth. Temperatures there are over 40* C for most of the year and that’s an ideal climate for the mines evaporation process. Just about as good as it gets.. The area is also well mapped for potash having been extensively explored for over 100 years.
The potential resource there is nothing short of mind blowing. The licensed area covers 36,500ha which is over 140 square miles. It’s a similar size to the Isle of Wight for scale. So it’s big...... Very big!
We should take note that the Danakil Project of Circum is a substantially larger resource than the adjacent deposit in Eritrea owned by Danakali Limited as to 50%, and the market valuation of Danakali Limited is currently approximately US$105 million.
There's an NI 43-101 compliant reserve and resource of 5 billion tonnes of potash salts there at grades of over 18% KCI at varying depths from a shallow 80m to 500m. Again as things stand.
There's also an additional 7 to 9 billion tonne potential identified reasonably accurately by a detailed seismic survey.
Again for scale a large mine there producing 5m tonnes of MOP & SOP a year combined would give the project a mining extraction rate or ROM of 27.5m/t’s p.a. and give the project a LOM of over 5 centuries!
Just for further perspective that would give the project an in ground value of nearly $650 billion at today's potash prices. Using the adage of valuing the project from its in ground resource we get to roughly a $6.5 to $10bn Market Cap at its height running in a steady and optimised state at the 5m tonnes annual production figure I’ve used.
I believe Circum now has a new DFS for Danakil. But as far as I'm aware it's a private document that’s currently undisclosed. The new one is now based on further studies to optimise the project. The development of the processing plant has been modularised enabling Circum to build the mine in phases which will produce much better economics and at the same time require lower initial Capex.
For now as shareholders we’re only able to consider Circums latest information in the public domain along with any further information we're given by #PREM or are able to wheedle out of them. Significantly amongst other things the new DFS will enable a bankable valuation to be made and the importance of that to both Circum as a sales document in an outright sale or to raise finance in an IPO cannot be overstated.
We're told that Circum is at a crossroads with the project and there's been debates going on behind closed doors amongst Directors as to which way to take it for some time. Circums recent update confirms:-
“The Boards approved strategy is to achieve a liquidity event for shareholders either through an outright sale or development of the project. Strategic Sale/Partnering Process As advised previously, various parties are in the process of undertaking due diligence and given the size of the project this is a time consuming process, however, it is expected that it will be concluded by year end. These parties could either acquire the company outright or contribute a significant portion of the equity leading towards the development of the project.”
The update went on to say:-
“The company is, however, doing some preparatory work including debt and offtake workstreams for an IPO in the background and should market conditions change, this option could be activated.”
So Circums BOD are running two scenarios. One preferred and the other secondary.
Furthermore the last official update tells us:-
“In the event that the project is taken forward to development it is intended to finance Capex through a combination of debt and equity to enhance project returns. A leading London based financial advisor was appointed last year to structure a suitable debt package. Excellent progress has been made in this regard, with Expressions of Interest being received from various commercial and development banks for the entire debt package. In addition, there have been strong indications of support by various Export Credit Agencies to provide the required commercial and political risk insurance. The Board of Circum is optimistic that the positive developments noted above will result in a successful achievement of a liquidity event for shareholders in due course.”. A copy of the Circum policy is below:
Should a mine be developed by Circum the plan is to achieve a steady state production of 3.5mt's/ annum in less than four years. Based on the estimated total resource that production rate would give the project a Life Of Mine of roughly 750 years which is the best part of a kiloyear or 1 Millennium. So it’s a huge mine from that perspective too.
Circum was granted its mining license over two years ago which is valid for an initial 20 years, renewable thereafter in 10 year increments. Circum has also obtained government approval of its Environmental and Social Impact Assessment and Environmental Management Plan. Since then they appear to have been working on getting the $1bn Capex finance arranged. No doubt all aspects necessary for making a start on constructing the mine will be under consideration too not least of all selecting a suitable contractor to build the mine.
The processing plants have now been modularised and Circums plan is to ramp up production to 3.5mt's/annum in four phases in order to minimise the Capex needed and to mitigate the risk. Potash mines are renowned for needing disproportionately high Capex which is why very few get beyond feasibility stage. So the planned construction period for the mine of two years may at first appear long is probably commensurate.
Phase 1 production target of 750kt's /annum is set for 2021 leading up to a phase 4 optimised and steady state production of 3.5mt's /annum by sometime in 2024. The modules have been designed to be either SOP or MOP focused to allow Circum to adapt its production to respond to changes in demand and market forces.
The development this way adds exceptional optionality to the project as Circum can bolt on more production modules over time after the initial construction period and it makes any additional phases beyond phase one largely self-funding out of WIP.
The Capex needed to get to phase one is said to be $1bn. Although the figure mentioned in #PREM recent Webinar was $1.1bn. I'm not sure but I imagine the additional $100m is for contingencies which is an allowance that always features.
Solution potash mining uses exceptionally high volumes of water but Circum's process is designed to predominantly use saline brines from the existing water table. Hydrogeological studies that show Circum has access to sufficient brines for its initial operations from the nearest three alluvial fan complexes within its license area. All very conducive to mining and reflected in Circums cost appraisal.
In field test work, over 600 million litres of brine (roughly the equivalent of two hundred and fifty full size olympic size swimming pools) equivalent to only 1 weeks supply of water the mine needs was extracted without any impact being observed to the water table. Based upon these results and extensive groundwater modelling expert engineers have concluded that the alluvial fans will be excellent aquifers of sufficient storage and yield to supply the required volume of water to satisfy the mines demand beyond the requirements called for in Circums mining plan.
Nevertheless the groundwater supply is finite and whatever the limitations are of that source they will almost certainly be the factor that will determine the LOM and more importantly it’s optimised production rate. The annual water usage is estimated to be 30 gigalitres which per annum is 30 billion litres and Danakil will be allowed to use that amount of water under Ethiopian Law given it will be collected from within it’s licensed mine area.
The SOP & MOP is able to be extracted in solution from the same boreholes. They are able to be kept entirely separate as they are situated in well defined salt layers at different levels.
It's quite an important point to make as it gives greater control and brings flexibility to the mining plan. As does the plant modularisation all of which will allow the mine to vary the output for each type potash at any time to its advantage. It’s only when the brine is pumped into the drying beds that the two types of brine are separated entirely to dry. Initially I imagine the mine will produce more SOP to enable it to finance the ramp up from phase one out of profit rather than dilute the equity any further or take on more debt.
SOP & MOP have both cost and value differentials. Cash Costs (CC’s) or mining production costs if you prefer are said to be less than $40/t for MOP and $112/t or thereabouts for SOP. Both of those rank amongst the lowest costs in the world.
Revenues after Offtake commissions are more difficult to assess but I have them at about $150/t for MOP and nearer $350/t for SOP respectively.
In a recent Webinar we were also told that Circum had secured the $750m debt finance it was looking for and two brokers were negotiating the $350m balance needed to be raised in equity with eight funds or interested parties. All of that seems a while ago now and it seems the negotiations may have changed tack slightly and are nearing a conclusion.
The intention is to ship the potash from the mine to the port using huge “road trains” via a newly built dedicated road financed by the Ethiopian Government to the port in Djibouti. But even so to ship 3.5mt's/annum is going to be a big ask. The mine will be capable of producing considerably more than 3.5mt's/annum but to do so the mine is going to need a rail link in my view. A combination of both may be the optimum.
What are road trains? (click here to view)
In fact rail transport has also been evaluated by Circum with the intention of incorporating it into the project economics once production in the Danakil Basin exceeds 3.5 m/t's per annum.
World fertilizer prices ebb and flow on the basic law of economics supply and demand as we all would expect. In recent history we've seen potash prices fall and they only bottomed out last year. They now continue to follow an upward trend and slow rally in line with the forecast by many experts. All of this bodes well for the Danakil project. SOP prices also continue to demand a considerable premium over those for MOP and I can't see that changing. This is what Circums update tells us:-
"Potash prices have continued their recoveries from the 2017 lows, owing to tight global supply/demand fundamentals, aided by increasing market demand for both SOP and MOP. The SOP price premium over MOP has been increasing but is expected to taper as China has relaxed its regulations on SOP exports. Positioning on the cost curve will be the key to success, this is where Circum, as one of the lowest cost producers, will have an advantage over other producers."
There was a noteworthy event that happened last year too but it isn't quite so well broadcast. In or around August India being one of the largest end users entered into a huge long term offtake agreement with the Belarusian potash Company (BPC) one of the worlds largest producers. The prices agreed were at a premium to the then market prices of about 25%.
The effect of that has been not only to lift the market prices generally but more importantly to lay a floor on future prices to prevent them falling close to or below cost. All good news for Danakil. This is what Londons ICIS said at the time:-
“The global muriate of potash (MOP) market is bracing for a flurry of trading and price fluctuations after Indian buyers finalised negotiations for a crucial long-term import contract at a $50/tonne increase”.
So what does all of what I’ve written come down to for #PREM and it’s shareholders. Well for starters it tells us that we have a 5% holding in what is looking very likely to be a world class potash mine regardless of who the developers are. It’s reasonable to assume that a bankable valuation will have been made on the project using the new DFS which will give support to values arrived at by the other methods.
Those of you familiar with the NI 43-101 Certification that it’s mandatory for valuations to be made on the project once it’s in production. Unfortunately for us however that document remains undisclosed for the time being at least.
It’s not difficult to see that Circums BOD’s are now favouring an outright sale of the project. The signs are clear and you don't have to look too hard to see Curcums update supports that view.
However as a measure of prudence Circums BOD's are also taking certain steps in the background in readiness to develop the project into a mine in the event the outright sale option becomes unattractive.
For obvious reasons it’s a strategy that any shrewd BOD’s would adopt. That is not wanting interested suitors to believe an outright sale is the only option being pursued.
At the end of the day going this route the outcome will depend upon what a suitor is prepared to pay for the opportunity and what circum are prepared to sell it for. Nothing more and nothing less.
Given some major shareholders paid $2 or slightly more for their shares I imagine an offer would need to be somewhere between $3.00 and $4.00 for negotiations on an outright buyout front to start. That would mean between $15m to $20m or thereabouts to #PREM. The following example is based on if you held 1,000,000 #PREM shares:
To find out how much you could be entitled to please use this live link: https://docs.google.com/spreadsheets/d/1TCFwl6-BZOJ8VD9MnSVR48WAdMg3OcEG0z_fCPN9Avs/edit#gid=0
If
there is more than one buyer in the frame each one will know that and
will want in the end to give their offers their best chance by
submitting the best offer they can. They will most likely have been told
what number their offer needs to start with and why shouldn’t they!
The IPO route did look likely to me up until the recent update. But now I think quite the opposite. I feel some of the interested parties are now seeing the potential in Danakil may be improving. Their consideration appears to have moved on from wanting to be a substantial investor to one wanting full control. Lasting peace with neighbouring Eritrea will surely be an influencing factor as it gives access to its neighbours extensive rail network and shorten the mine to port route. This is the reference in the update that’s persuaded me to change my mind:
“The company is, however, doing some preparatory work including debt and offtake work streams for an IPO in the background and should market conditions change, this option could be activated.”
Going the IPO route as I say the government has invested in and largely completed the necessary infrastructure works. Capex debt finance has been all but arranged. Capex equity finance is either being resolved too it seems or provisionally agreed. Permitting has been granted and the team is in place and so on.
Market testing of Circum’s product has found it to be of an excellent quality which is in high demand globally. Various parties have been engaged on offtake/marketing arrangements, with contracts currently under discussion. potash Markets potash prices have continued their recoveries from the 2017 lows, owing to tight global supply/demand fundamentals, aided by increasing market demand for both SOP and MOP. The SOP price premium over MOP has been increasing but is expected to taper as China has relaxed its regulations on SOP exports. Positioning on the cost curve will be the key to success, this is where Circum, as one of the lowest cost producers, will have an advantage over other producers.
Arguably at present #PREM shares can be substantially valued at over US$10 million. The substance being the latest price at which Circum has accepted subscriptions
As a comparison there is a benchmarking exercise to do against the neighbouring Danakali potash mine in Eritrea. Whilst that’s interesting Danakali is a few years ahead of Danakil. It's much smaller too and is a j.v. project. All of those factors make quite a difference. A valuation on this basis would put #PREM investment much higher than $10m. So I think a valuation on Circums last subscriptions whilst the safest way to value Danakil it’s probably too conservative and misleading.
Alternatively again when Danakil is producing 3.5m/t’s of potash in a steady state in three to four years time the mines “Earnings” should be about $300m at today's MOP & SOP prices which suggests its Market Cap should be near $3bn to $4bn in an earnings metric equation using a P/E ratio of at least 10 to reflect its attractive LOM. Justifiably it should attract a ratio of nearer 15.
Working that back on a reasonable ROI I get to a value at IPO of approximately £750m. #PREM holding could be diluted in percentage terms to 2.5% going that route. For simple math that would put the value of #PREM holding at around $17.5m which would be 0.15p per share to #PREM shareholders.
It seems there may be a lock - in period for the shares needed to maintain an orderly market. For how long and if it’s necessary will be at the behest of the funders we’re told. That being the case it’s unlikely to apply to all shareholders and perhaps not #PREM as its holding is likely to fall below the 3% trigger categorizing them as a “significant shareholder”.
This is a genuine and rare opportunity for #PREM shareholders to benefit to the extent of as much as 0.15p and possibly more in addition to the value of their shares in short order IMHO.
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The IPO route did look likely to me up until the recent update. But now I think quite the opposite. I feel some of the interested parties are now seeing the potential in Danakil may be improving. Their consideration appears to have moved on from wanting to be a substantial investor to one wanting full control. Lasting peace with neighbouring Eritrea will surely be an influencing factor as it gives access to its neighbours extensive rail network and shorten the mine to port route. This is the reference in the update that’s persuaded me to change my mind:
“The company is, however, doing some preparatory work including debt and offtake work streams for an IPO in the background and should market conditions change, this option could be activated.”
Going the IPO route as I say the government has invested in and largely completed the necessary infrastructure works. Capex debt finance has been all but arranged. Capex equity finance is either being resolved too it seems or provisionally agreed. Permitting has been granted and the team is in place and so on.
Market testing of Circum’s product has found it to be of an excellent quality which is in high demand globally. Various parties have been engaged on offtake/marketing arrangements, with contracts currently under discussion. potash Markets potash prices have continued their recoveries from the 2017 lows, owing to tight global supply/demand fundamentals, aided by increasing market demand for both SOP and MOP. The SOP price premium over MOP has been increasing but is expected to taper as China has relaxed its regulations on SOP exports. Positioning on the cost curve will be the key to success, this is where Circum, as one of the lowest cost producers, will have an advantage over other producers.
Arguably at present #PREM shares can be substantially valued at over US$10 million. The substance being the latest price at which Circum has accepted subscriptions
As a comparison there is a benchmarking exercise to do against the neighbouring Danakali potash mine in Eritrea. Whilst that’s interesting Danakali is a few years ahead of Danakil. It's much smaller too and is a j.v. project. All of those factors make quite a difference. A valuation on this basis would put #PREM investment much higher than $10m. So I think a valuation on Circums last subscriptions whilst the safest way to value Danakil it’s probably too conservative and misleading.
Alternatively again when Danakil is producing 3.5m/t’s of potash in a steady state in three to four years time the mines “Earnings” should be about $300m at today's MOP & SOP prices which suggests its Market Cap should be near $3bn to $4bn in an earnings metric equation using a P/E ratio of at least 10 to reflect its attractive LOM. Justifiably it should attract a ratio of nearer 15.
Working that back on a reasonable ROI I get to a value at IPO of approximately £750m. #PREM holding could be diluted in percentage terms to 2.5% going that route. For simple math that would put the value of #PREM holding at around $17.5m which would be 0.15p per share to #PREM shareholders.
It seems there may be a lock - in period for the shares needed to maintain an orderly market. For how long and if it’s necessary will be at the behest of the funders we’re told. That being the case it’s unlikely to apply to all shareholders and perhaps not #PREM as its holding is likely to fall below the 3% trigger categorizing them as a “significant shareholder”.
This is a genuine and rare opportunity for #PREM shareholders to benefit to the extent of as much as 0.15p and possibly more in addition to the value of their shares in short order IMHO.
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