Key points
- Independent Investment Research (IIR) initiated coverage of Chatham Rock Phosphate Ltd., with the report also published on Bloomberg, Reuters, FactSet, Capital IQ and Research Tree.
- The Chatham Rise phosphate project’s resource is estimated at 24.3 million tonnes grading 21.5 to 22 per cent P2O5, targeting a 2022 production start.
- IIR estimates the project could generate about $41-million (U.S.) in annual free cash flow and $58-million (U.S.) in average annual EBITDA.
- As of June 30, 2017, the company held $779,000 in free cash and no debt, with a market capitalization of about $7-million.
Today, Australia-based Independent Investment Research released an independent research report on Chatham Rock Phosphate Ltd. to its extensive international client list. The report has also been published on the Bloomberg, Reuters, FactSet, Capital IQ and Research Tree (United Kingdom) platforms.
A summary of the report follows. The full report can be accessed from IIR, is available on request and is also accessible at the company’s website.
Equity research
Metals and mining
Chatham Rock Phosphate
Initiation of coverage
Low-capital-expense, high-quality phosphate
Chatham Rock Phosphate is working toward a planned 2022 start of production from its 100-per-cent-owned offshore Chatham Rise phosphate project (CRPP), located in about 400 metres of water on the Chatham Rise, about 450 kilometres east of Christchurch in New Zealand.
The current resource, estimated to contain about 24.3 million tonnes of high-quality phosphorite nodules, with an estimated grade of 21.5 per cent to 22 per cent P2O5, is sufficient to support a 15-year, 1.5-million-tonne-per-annum operation, with significant resource upside. The company is currently working toward a late 2018 submittal of a reapplication for the marine consents environmental approval, with a 20-year mining licence previously granted in 2013.
Key points
Low-capex operation: The development strategy is to develop the project using contract mining/dredging, to obviate the requirement to raise and spend the significant capital required to buy and fit out a suitable dredge. To that end, the company has worked closely with the Netherlands-based Boskalis Offshore Subsea Contracting BV, one of the largest dredging companies globally, which is also the technical partner on the CRPP. The planned vessel also includes on-ship processing, resulting in ports being the only required onshore facilities.
Ready access to ports: To that end, the project is located within 500 kilometres of five New Zealand ports with the capability of handling the planned vessel. Of these, four have dry-bulk-material-handling facilities, with the only expected cost to the company being handling charges on a per-tonne operating basis.
Strong financial metrics: Given the above, and using current estimated revenues and operating costs, the CRPP has the potential to provide about $41-million (U.S.) per year in free cash flow to Chatham Rock Phosphate and an average annual EBITDA (earnings before interest, taxes, depreciation and amortization) of $58-million (U.S.).
Quality resource: Work to date has highlighted the quality of the CRPP phosphate, in being a highly reactive phosphate rock (RPR), suitable for most applications, including being used to produce single superphosphate (SSP) and being suitable for direct application as a substitute for both SSP and triple superphosphate (TSP). This quality is supported by the results of agronomic work to date.
Low contaminants: A key feature of the Chatham Rise phosphate project is the low level of toxic elements, in particular cadmium. The European Union is in the process of legislating lower levels of cadmium in phosphate fertilizers, which will preclude supply from current major producing areas and thus increase demand for the cleaner products.
Supportive shareholders: Recent capital raisings have seen the entry of cornerstone investors from Switzerland, Germany and Singapore, with representatives being appointed to the board. The cornerstones hold about 30 per cent of Chatham Rock Phosphate, with the other board members holding an additional 10 per cent, thus aligning their interests with those of other shareholders.
Stable, mining jurisdiction:
New Zealand is a stable mining jurisdiction, having a long history of mining for various commodities.
Well leveraged to success: With a market capitalization of about $7-million, Chatham Rock Phosphate is well leveraged to positive news flow.
Financial position
As of June 30, 2017, the company had $779,000 in free cash and no debt.
Chatham Rock Phosphate also has restricted cash of $481,000, held in trust and representing approximately 64 per cent of an unpaid amount claimed by the EPA currently in dispute with the company.
There are currently about 1.5 million in-the-money warrants on issue with the potential to bring in $560,000 in cash if exercised.
Over the 15 months to June 30, 2017, the company spent $1,526,000 on operating activities.
Over the same period, the company has raised $2,656,000 after costs, with the most recent raising being a brokered private placement of $442,000, through the issue of 884,587 units each consisting of one 50-cent ordinary share and half a two-year warrant with an exercise price of $1.
The company has announced that it expects to have to raise an additional $14.14-million (U.S.) over the next three years largely to finance activities related to project permitting, which will include offshore activities.
Capital structure
Chatham Rock Phosphate currently has 14,988,184 fully paid ordinary shares on issue.
The company underwent a one-for-10 consolidation in March, 2017, concurrent with listing on the TSX Venture Exchange.
Warrants on issue include 1,524,618 discretionary warrants with an exercise price of 36.6 cents before March 17, 2018, and 442,294 warrants with an exercise price of $1 before June 28, 2019. The latest warrants were issued as part of the latest capital raising.
Cornerstone investors hold about 30 per cent, with board and management, not including the cornerstone investors or their representatives on the board, holding an additional 10 per cent approximately.
The top-20 shareholders hold 57.79 per cent.
Chatham Rock Phosphate has about 1,500 shareholders.
Chatham Rock Phosphate peers
Research presents in tabular form the various Australian Securities Exchange- and Toronto Stock Exchange-listed phosphate developers with published resources.
The company has converted Australian-dollar-denominated share prices and market capitalizations to the Canadian dollar at a one-to-one exchange rate.
Chatham Rock Phosphate is the only listed phosphate company with an offshore project. The only other offshore phosphate project is the Sandpiper project owned by Namibia Marine Phosphate, a private company majority held by Mawarid Mining of Oman.
What firm’s research highlights is the relatively low market capitalization of Chatham Rock Phosphate and the uplift potential with project derisking as compared with its peers globally in the sector.
Valuation summary
The firm completed a risked DCF (discounted cash flow) valuation for Chatham Rock Phosphate, with this presented in a tabular form in its research report. This is a base-case valuation, with significant upside on derisking, particularly with grant of the marine consents. The per-share valuation is based on the current share structure diluted for raisings of $14.14-million (U.S.) as flagged by the company. It would expect this risked base-case valuation of $1.64 per share to increase as the project is advanced and derisked. A critical driver of value will be the approval of the marine consents.
