IC Potash Corp. (ICP: TSX) annual and special shareholders' meeting at the offices of Cassels Brock, Suite 2100 in Scotia Plaza, 40 King Street West, Toronto, Ontario on Thursday, June 28, 2012 at 3:00 p.m.
IC Potash has a multitude of near-term value creating catalysts:
The company is scheduled to launch a bankable feasibility study with a major engineering firm which will display the level of technical depth and expertise contained within the IC Potash team.
IC Potash will also be providing an update on the availability of water supply. The project is located in the deserts of New Mexico, some ask, what about water? The answer, there are billions of gallons available from the Capitan Reef, and confirming the availability of this water supply will further de-risk the IC Potash project...
In terms of the strategy to convert this IC Potash opportunity into a reality, the management team has devised a financial strategy that includes attracting world class partners, such as the recently announced transaction with Yara International ASA, a first of its kind partnership with the leading distributor of plant nutrients globally. This investment in combination with the previous one by Resource Capital Funds (+20% of the stock), the world’s largest mining focused private equity firm, proves IC Potash’s ability to attract the very best financial partners to build this project.
The company is currently trading at an unbelievably attractive valuation with $58 million cash. This means the market is currently valuing a project with more than a $1.3 billion NPV at about $60 million.
The IC Potash project places considerable pressure on other SOP producers including Compass Minerals, K+S Kali, and SQM. In the case of Compass Minerals, currently the only large scale producer of SOP in the US, Yara and ICP represent a considerable threat to their market share and pricing power. It is reasonable to assume Compass may attempt to acquire ICP to protect its position in the most profitable market for SOP globally.
Western Potash shareholders were well rewarded with yesterday's water source approval news.
IC Potash is also scheduled to confirm the availability of water supply which will further de-risk the project.
The Permian-age Capitan reef is a confined aquifer that is recognized by the New Mexico Office of the State Engineer and U.S. Geological Survey as a significant brackish water resource with a history of industrial use.
The Capitan aquifer is the most viable water supply option for the Ochoa project because (1) no water rights are needed to develop deep brackish water in New Mexico, (2) the New Mexico Office of the State Engineer and Bureau of Land Management are both supportive of the use of deep brackish groundwater for industrial purposes, (3) there is a track record of previous deep brackish groundwater development from the Capitan Reef, and (4) the hydrogeology of the system is favorable in that there would be no expected impacts on other water-right holders.
The Capitan aquifer is composed of the Capitan Formation, parts of the Goat Sheep Formation, and the Artesia Group (all referred to as the Capitan Reef complex). The Capitan Reef complex is a horseshoe-shaped limestone deposit surrounding the Delaware Basin, and is present in southeastern New Mexico and western Texas. The complex extends over a distance of approximately 200 miles. Within Lea County, the aquifer ranges from 800 to 2,200 feet thick and is approximately 12 miles wide near the Eddy County and Lea County boundary and 6 miles wide near Jal, New Mexico.
History Of Water Use
Brackish groundwater from the Capitan Reef has been used historically for secondary oil recovery, thus establishing a precedent for using this resource for industrial purposes. Historical sources discuss a number of brackish groundwater development projects in the Capitan Reef, including the Jal Water System near Jal, New Mexico, and El Capitan Well Field near Kermit, Texas.
The El Capitan system was developed in the mid-1960s by Shell Oil as a water source for secondary oil recovery. These wells were completed in the Capitan Reef with plans to pump up to 28,000 acre-feet per year. The New Mexico Office of the State Engineer documented water use from this well field in the range of 8,000 acre-feet per year in 1964, expected to be in the range of 13,000 acre-feet per year in 1965. In 1965, the estimated total fluid withdrawals from the Capitan Reef in Texas were in the range of 30,000 to 40,000 acre-feet per year from 1945 to 1965.
There is clear evidence of significant historical usage of brackish water from the Capitan Reef, indicating a high probability of success for its use as a supply source for the Ochoa project.
The total water demand for the project is expected to be approximately 2,000 gallons per minute. Of the total supply required for the project, approximately 73% of the total supply (or 1,460 gpm) will be used for ore processing and 27% of the total supply (or 540 gallons per minute) will be treated to drinking water standards and provided to the plant facilities building.
ICP intends to use a desalination system to treat the brackish water obtained from the Capitan Reef. A preliminary design for the desalination system has been developed. The reverse osmosis (RO) water treatment system was designed assuming the Capitan Reef well water contains Total Dissolved Solids of 10,000 parts per million and is close to calcium sulfate saturation. The preliminary system includes a design feed rate of 4,000 gallons per minute (a high, conservative estimate) and will operate at a recovery rate estimated to be greater than 90% to provide at least 3,600 gallons per minute of purified water containing less than 250 parts per million of Total Dissolved Solids. The primary system consists of three skids, each providing 1,000 gallons per minute of low- Total Dissolved Solids source water. The secondary system includes an interstage precipitation reactor and will treat the concentrate stream from the primary system to recover an additional 750 gallons per minute of low- Total Dissolved Solids water, resulting in a final concentrated stream of only 250 gallon per minute. The membrane skids, interstage precipitation reactor, and associated pumps, tanks, motor control center (MCC) room, and cleaning skid will require a building approximately 125 feet long and 70 feet wide. The total power requirement for the entire system is approximately 2,000 kilowatts.
Key features of the Ochoa Project
- +414 million tons of proven and probable reserves in the entire proposed mine plan
- +838 million tons of measured and indicated mineral resources
- Project to produce premium price and premium quality SOP and SOPM
- +100 years of minable ore
- Base case production of 568,000 tons per year of SOP and 275,000 tons of SOPM
- Bottom quartile operating cost of $147 per ton and low capital cost of $706 million
- Positive economics with Net Present Value (after-tax) of $1.3 billion and Internal Rate of Return (after-tax) of 26%
- IC Potash's Ochoa Project is located in southeast New Mexico, an industrial region known for potash production. The project consists of over 100,000 acres of federal subsurface potassium prospecting permits and State of New Mexico potassium mining leases. The Ochoa Project is at the development stage and represents a long term source of premium quality potash for the US and international markets.
- The IC Potash team has completed five years of exploration, engineering and permitting work on the project, and production is expected to commence in 2015. This positions the Ochoa Project as the most advanced stage Sulphate of Potash ("SOP") and Sulphate of Potash Magnesia ("SOPM") project globally.
- Yara International ASA, the world’s largest distributor of plant nutrients, made a strategic investment of $40 million into IC Potash (ICP) and entered into an off-take agreement that guarantees the sale of 30% of ICP's production on a take or pay basis. The term of the off-take will begin upon the commencement of commercial production for a period of 15 years and will automatically extend every five years thereafter unless either party elects not to extend.
- Yara paid $1.32 a share for 30.1-million ICP shares resulting in Yara owning 19.9% of the issued and outstanding common shares of ICP on a non-diluted basis.
- All products will be sold to Yara based on market prices. Yara's ICP shares are subject to a 24 month lock-up or until all financing to complete construction is secured.
- Yara is the ideal partner for ICP with a strong distribution network for potash products. Yara has a market cap of $13.5 Billion, revenues of $14 Billion, and EBITDA of $3 billion. The company has operations in 50 countries and annually distributes 20 million tons of fertilizer products into 150 countries.
- Yara and ICP continue discussions about forming a joint marketing company to distribute products cooperatively. This partnership could result in the leading global supplier of Sulphate of Potash.
- Sulphate of Potash (SOP) is used by producers of vegetables, fruits, tobacco, horticultural plants due to the fact it does not contain the chloride associated with regular potash fertilizer which can damage high value crops.
- This partnership is transformational and the first of its kind in the junior potash development space. With Yara as a financial and commercial partner, this validates ICP as the world's leading potash development company and has set the precedent for all other potash development companies.
- This investment delivers an immediate premium to ICP shareholders (48% premium to the closing price pre-transaction) and substantially de-risks the Ochoa project which has 190 million tons of sulphate of potash contained within the ore. SOP current sells for approximately $700 per ton in the United States, which translates into a contained product value within the ore of over $130-billion. ICP is trading at a discount versus its peers. Analysts have NAV calculations of $4.00 per share using a 12% discount rate and one would expect upside to price targets now that the project is de-risked through the addition of a strategic partner and off-take agreement.
- Post transaction, ICP has retained 100% of the project level equity allowing ICP to enter into additional JVs at the NPV of the project closer to production (current NPV of $1.3 Billion as of the release of the prefeasibility study). Selling 25% of project equity for +$250 million is all the equity capital required to build the project, based on development capex of $706 million, which is low relative to most junior potash projects.
- Additionally, with Yara and Resource Capital Funds as strategic investors, this will empower ICP in raising this required equity capital.
- In terms of debt financing, with 30% of sales guaranteed through the off-take with Yara, ICP has immensely increased its ability to obtaining credit financing for the debt portion of the project.
- Upon reaching production, ICP will generate $440 million of revenue and $315 million of EBITDA based on current market prices. This means at an 8x EBITDA multiple, ICP could obtain a valuation of more than $2.5 billion dollars.
- This partnership also places considerable pressure on other SOP producers including Compass Minerals, K+S Kali, and SQM. In the case of Compass Minerals, currently the only large scale producer of SOP in the US, Yara and ICP represent a considerable threat to their market share and pricing power. It is reasonable to assume Compass may attempt to acquire ICP to protect its position in the most profitable market for SOP globally.
- CEO Sid Himmel has assembled a world class management team. The Chief Exploration Officer is Pat Okita, who was previously the head of Industrial Minerals Exploration for BHP, the world's largest mining company. Pat did the original work on the mineral ICP is developing while at BHP. The property came to the attention of ICP from Robert J Hite, who was the head of the evaporite division of the United States Bureau of Mines during the 1970's and 1980's. The Chief Operating Officer is Randy Foote, a professional engineer who was the mine superintendent of the Potash Mines in South East New Mexico when Mississippi Chemicals owned them. He was afterwards at Intrepid Potash, as Vice President. Randy joined ICP in early 2009. The company has built very strong relationships politically with all relevant officials, and has developed good relationships with the regulators.
- ICP has the most advanced junior SOP development project in the world and has many advantages over existing producers. ICP has a lower cost versus traditional SOP production with opex per ton of production is $147, which is well below the industry norm (near $400 per ton). The project is past prefeasibility. The PFS released last November provides for improved economics in almost all of the relevant metrics including lower opex and capex, and higher total production. Production is targeted for a 2015 start-up with a project life of 40 years beginning at a production rate of 568,000 short tons per annum of SOP plus 275,000 short tons per annum of potassium magnesium sulphate (SOPM). The prefeasibility computes a $1.3 billion after-tax NPV and a 26% IRR.
- We anticipate ICP shares to move towards Yara’s investment price ($1.32), and begin to close the gap to analysts’ upgraded targets.
- The Yara transaction speaks not only to the value of the asset, but also to the attractiveness of the industry, and the ability of management to advance the project in a challenging market.
With this deal, ICP has:
- minimized future dilution
- increased the creditworthiness of the company
- allayed any remaining process risk concerns
- structured a transaction which should not preclude other players from making further strategic investments, signing offtakes or acquiring ICP outright
- positioned ICP in the race to develop a low cost unconventional SOP supply