Chatham Rock Phosphate Ltd. has provided shareholders and stakeholders with another of its regular updates.
The last few months have been very good for CRP and its shareholders.
A combination of successful corporate initiatives, helpful background factors including rising fertilizer prices and increasing international focus on the ESG (environmental, social and governance) attributes of companies appears to have significantly changed investor perceptions of the company.
As a result, hundreds of new investors have invested in Chatham in recent months. This groundswell of investor support is most encouraging, and it is a great signal that it is seen to be on the right track given this broad-based support.
Corporate initiatives
The merger with Avenir Makatea was announced in December and has, in recent weeks, clearly impacted on investor perceptions in Germany, Canada and New Zealand (being the three places where the company has stock exchange listings). The market prices have risen in all three markets, and trading volumes, particularly on the NZX in New Zealand, increased very significantly. Consequently, the company’s recent private placement was oversubscribed for the first time since 2015. And this time, due to the fundraising partnership agreement the company has with Stockhouse, it also attracted new Canadian retail investors for the first time since listing on the TSX Venture Exchange in 2017.
Welcome to 1,700 Sharesies investors
In recent months, much of the investing in Chatham shares has been undertaken by predominantly New Zealand-based investors using the retail investor platform known as Sharesies.
Before Sharesies was established, it had approximately 1,300 shareholders in New Zealand and about 2,000 in total. Now Sharesies investors alone number 1,700, and they are now the second-largest shareholder with over 3.4 million shares.
Turnover was often less than 100,000 shares a month in N.Z. and less in Canada. Now, it regularly exceeds a million shares a month with over 2.8 million in February alone. Canadian volumes have also increased, primarily due to the company’s relationship with Stockhouse and other on-line marketing initiatives the company has undertaken in overseas markets.
Rising fertilizer prices
Chatham rock phosphate, in untreated form, apart from being ground into small particles, has (in recent independent tests) been established as being 85 per cent as effective as triple superphosphate (TSP).
TSP is manufactured in a two-stage process and results in quantities of waste products being produced that need to be dealt with. TSP is expensive to produce, and market prices reflect that.
The good news is demand for TSP has risen during the last seven months driving the market price from $240 (U.S.) per tonne to $337 (U.S.) per tonne. The World Bank predicts the market price will continue to rise. Rock phosphate prices are also predicted to rise.
The most recent estimate of the recovery and processing cost of Chatham rock phosphate is less than $80 (U.S.) per tonne.
However, it will likely be even lower than that for the Avenir Makatea-sourced rock when that project is at full production. Due to its inherent quality, the weighted-average selling price of the Avenir Makatea rock is likely to be higher.
The project economics of Chatham and Makatea, once fully permitted, are attractive.
Environmental, social and governance wins
ESG has been brewing for a while, and is hitting the mainstream now, driven by united demand from employees, investors and customers. All three groups are forcing companies to step up against climate change and social injustice. As the pressure became explicit, companies responded with a shift in operating principles, proving again the power of the conscious consumer in today’s market.
ESG causes can be strong environment standards, such as sustainable natural materials, water conservation and carbon dioxide reductions. They can be advancing social issues, such as diversity in work force and leadership, human rights, or poverty reduction.
Chatham has been ahead of this wave for years and has been consistently advising investors and stakeholders of the following benefits of using its rock phosphate product:
Water quality: When applied to the soil in its natural form, there is 80-per-cent- to 90-per-cent-less runoff into waterways due to its slow release characteristics. This results in less riparian eutrophication. It has recently been established that eutrofied waterways result in significantly increased carbon emissions;Significantly reduced (90-per-cent-lower) carbon emissions due to closer location to market and less frequent application to the land as a result of the slow release;Improved soil health: Chatham rock phosphate (a reactive phosphate rock or RPR) works with plant root ecosystems. Manufactured fertilizers tend to bypass these and feed the top of the plant directly. As a result, the plant root ecosystems atrophy over time, and the soils become inert.
Chatham rock contains approximately two parts per million cadmium, ultralow by world standards. Most of the major exporting countries have levels well over 60 ppm. The European Union has just introduced a limit of 60 ppm, due to eventually fall to 20 ppm. Cadmium accumulates in red meat and is directly linked to cancer in humans.
Avenir Makatea ticks all the same boxes.
- Water quality: When applied to the soil in its natural form, there is 80-per-cent- to 90-per-cent-less runoff into waterways due to its slow release characteristics. This results in less riparian eutrophication. It has recently been established that eutrofied waterways result in significantly increased carbon emissions;
- Significantly reduced (90-per-cent-lower) carbon emissions due to closer location to market and less frequent application to the land as a result of the slow release;
- Improved soil health: Chatham rock phosphate (a reactive phosphate rock or RPR) works with plant root ecosystems. Manufactured fertilizers tend to bypass these and feed the top of the plant directly. As a result, the plant root ecosystems atrophy over time, and the soils become inert.
Chatham rock contains approximately two parts per million cadmium, ultralow by world standards. Most of the major exporting countries have levels well over 60 ppm. The European Union has just introduced a limit of 60 ppm, due to eventually fall to 20 ppm. Cadmium accumulates in red meat and is directly linked to cancer in humans.
Avenir Makatea ticks all the same boxes.
Why the Avenir Makatea deal is so significant
This acquisition transforms Chatham’s investment profile and is a positive development for the company and for the shareholders of Avenir for a number of reasons, including:
It broadens the company’s portfolio as neither party will be reliant on a single, partially permitted, phosphate deposit requiring a major cash injection to complete the final step.
AM has made significant progress since getting started in 2011 and particularly so since it first considered investing back in 2015.
AM rock phosphate comes in two blended forms. Both are very high-grade, low-cadmium, reactive phosphates, one type already certified in the Canadian and U.S. markets as organic, which will attract a pricing premium.
The AM mining costs will be lower when in full production, and rock prices are expected to be higher than for the company’s project, and hence, the project economics are even more attractive.
AM is well advanced in project finance discussions and expects multiple parties to be competing for phosphate rock offtake agreements.
It is onshore, so technology risks are reduced, and environmental impacts will be small scale, very easily monitored and controlled.
It is a very simple, open-cut mining operation, which will also mine valuable dolomite rock (used for construction and roading) and food grade limestone as byproducts.
The project is based in a friendly jurisdiction, where the permitting process will result in a single permit, including environmental operating conditions.
Extensive consultation during the last nine years has resulted in local support from the landowners, the residents of Rangiora (the local commune) and the French Polynesian administration.
There are major community benefits as the mining process will rehabilitate a high proportion of the unusable land resulting from historic mining.
The island of Makatea will also benefit from the construction of a new port, roads, housing, schools and other infrastructure.
The company expects the Avenir Makatea project to be fully permitted in 12 months, and project development can then begin, leading quickly to strong operating cash flows, which can then pay for the Chatham Rise marine consent permitting process.
- It broadens the company’s portfolio as neither party will be reliant on a single, partially permitted, phosphate deposit requiring a major cash injection to complete the final step.
- AM has made significant progress since getting started in 2011 and particularly so since it first considered investing back in 2015.
- AM rock phosphate comes in two blended forms. Both are very high-grade, low-cadmium, reactive phosphates, one type already certified in the Canadian and U.S. markets as organic, which will attract a pricing premium.
- The AM mining costs will be lower when in full production, and rock prices are expected to be higher than for the company’s project, and hence, the project economics are even more attractive.
- AM is well advanced in project finance discussions and expects multiple parties to be competing for phosphate rock offtake agreements.
- It is onshore, so technology risks are reduced, and environmental impacts will be small scale, very easily monitored and controlled.
- It is a very simple, open-cut mining operation, which will also mine valuable dolomite rock (used for construction and roading) and food grade limestone as byproducts.
- The project is based in a friendly jurisdiction, where the permitting process will result in a single permit, including environmental operating conditions.
- Extensive consultation during the last nine years has resulted in local support from the landowners, the residents of Rangiora (the local commune) and the French Polynesian administration.
- There are major community benefits as the mining process will rehabilitate a high proportion of the unusable land resulting from historic mining.
- The island of Makatea will also benefit from the construction of a new port, roads, housing, schools and other infrastructure.
- The company expects the Avenir Makatea project to be fully permitted in 12 months, and project development can then begin, leading quickly to strong operating cash flows, which can then pay for the Chatham Rise marine consent permitting process.
Progress report on the merger
Avenir Makatea is steadily working through the conditions that need to be satisfied before the merger can be finalized. These include the commissioning of an independent report on the phosphate resource, which is now under way.
Given the short time frame before it goes into production, significant work is going into further market development.
Avenir Makatea will be able to offer a range of phosphate, limestone and dolomite products. Several are already certified organic, and there appear to be at least two food-grade products. As such, it appears likely they will achieve premium prices.
Rare earth update
It has been known for a decade that the sea floor muds in the company’s permit area include rare earths and other valuable minerals or elements. Subsequently, the company established that the phosphate nodules (which will be recovered using the company’s existing engineering designs) also contain rare earths and other valuable minerals.
These include 15 of the 17 recognized rare earths, as well as other valuable minerals, including nickel, cobalt, chromium, vanadium, zirconium, elemental fluorine and strontium.
The issue the company faces is to establish the technical and economic feasibility of extracting these valuable substances. Before that, the company needs to better understand how it is chemically and physically bound together in both the sea floor muds and in the company’s phosphate nodules. The company has recently completed the scoping work required to be undertaken by a New Zealand university and has just applied for a grant from the New Zealand government to partially finance the project.
The way forward
The company’s key objective is to create value for shareholders, and as such, it has agreed to acquire and advance the Avenir Makatea project to create shareholder value and the means to progress a second application with the New Zealand Environmental Protection Authority for a marine consent.
The company is confident the second application will be successful because many positive changes have occurred since February, 2015. For example, evolving farming-related environmental standards, more rigorous health and safety standards and phosphate ethical supply issues tilt the playing field in the company’s favour.
Chatham is benefiting from evolving social standards and views concerning a range of environment and health issues. It is clear the greater likelihood of the company’s gaining a social licence or community approval to operate will improve the company’s chances of being granted the marine consent.
Upon the grant of the marine consent, Chatham will be a fully permitted guardian of a substantial source of low-cadmium, reactive, phosphate rock, relatively close to all the key Asian markets. When successful with the marine consent, given the strategic nature of the resource and the nil development costs required, the intrinsic value of the company is expected to be significantly higher than at present.
