Q3 Newsletter

Emmerson Plc / Ticker: EML / Index: LSE / Sector: Mining

14 October 2019

Emmerson Plc ("Emmerson" or the "Company")

Publication of Quarterly Newsletter

 

Emmerson Plc, the Moroccan focused potash development company, is pleased to announce its Q3 Newsletter. The full document, inclusive of pictures, is available on its website: https://www.emmersonplc.com/investors/company-newsletters/. 

 

From the CEO

The third quarter of 2019 marked a number of significant achievements by the Emmerson Plc ("Emmerson" or "the Company") team which positions the Company exceptionally well to achieve its target milestone of delivering the Feasibility Study for the Khemisset Potash Project ("Khemisset" or "the Project") during the first half of 2020.

In July, we released the results of a comprehensive metallurgical test work programme which was undertaken at the Saskatchewan Research Council ("SRC") laboratories in Canada. The results were positive, confirming the technical viability of the processing method selected in the Scoping Study (20 November 2018) as well as the recovery rate assumptions used. It has also helped our process design engineers identify any areas of risk and, encouragingly, areas where they believe significant improvements from the Scoping Study can be made.

During the quarter, our team of geologists completed a 9-hole infill drilling programme at Khemisset on time and under budget. The geological model is being updated and, as soon as assays are received, an updated Mineral Resource Estimate will be released to the market; we believe this will see a significant proportion of the resource moved to the higher confidence Indicated or Measured categories.

In July, our study consultants conducted a end to end site visit to review all aspects of the Project and its potential execution. This included inspecting the local project infrastructure (electrical, roads, rail), potential plant sites and ports. The site visit provides vital information for the Options Study portion of the Feasibility Study, which assesses all parts of the Project both quantitatively and qualitatively, to ensure that the optimal development strategy is identified.

Khemisset is set to produce a significant quantity of by-product salt (NaCl) which, in the Scoping Study, was assumed to be stored as waste. During the quarter, the Company released a Preliminary Economic Assessment ("PEA") for the sale of by-product salt into the large USA de-icing salt market, which showed that there is an opportunity to potentially monetise some or all of this "waste stream". The numbers look compelling and provide us with encouragement to continue to analyse this business opportunity.

Since re-listing in June 2018, the Company has enjoyed a healthy balance sheet which has allowed it to continue to accelerate its development plans for Khemisset. Although the Company was fully funded through all the work currently underway, we elected to raise an additional £2.25 million (pre costs) to give us the ability to continue to fast track development and continue our strategic partner discussions. Shard Capital provided strong support in the capital raise and we appointed it as joint broker immediately following the completion of the raise.

As part of the preparations to transform our exploration permits into a mining permit, we decided to consolidate a number of our permits into a single, larger area. This was completed in September and simplifies our administrative and reporting burden and positions us well for the upcoming mining permit application. We were very encouraged by the strong support we received during this process from the Moroccan Government and, in particular, the Ministry of Energy, Mines and Sustainable Development.

At the end of the period, we met with the Moroccan Port Authorities and completed a site visit of the very large Port of Casablanca ("Port" or "The PoC"). The PoC is one of the largest ports in Africa, currently moving over 8 million tonnes of goods per annum and with capacity for over 10 million tonnes per annum. Importantly for Emmerson, the Port already handles significant quantities of salt, which have similar handling characteristics to potash. As a result, we believe the PoC offers several advantages over our Scoping Study assumption, including a reduction in capital cost.

Prior to the end of the quarter, Emmerson and its Feasibility Study consultants met to go through the detailed Options Study for Khemisset. The Options Study seeks to identify all potential development options and to rigorously analyse each in detail to ensure that the best option is selected for the project. Financial improvement is obviously a key driver, however, other considerations play a role including execution risk, timelines and ongoing operational risk. In most cases, the "go forward" case has now been identified to allow detailed work to continue.

We continue to believe Khemisset has the potential to be a world class potash project driven by industry leading low capital costs and, as a result of its location, very strong margins regardless of potash price. We are making rapid progress in the development and look forward to delivering the Feasibility Study during the first half of 2020.

 

Key Work Streams Completed During the September Quarter

Metallurgical Testing

In April, the Company commenced a comprehensive metallurgical test work programme following a rigorous planning phase, which was completed at the end of June.  The work was undertaken by SRC under the supervision of Emmerson's experienced processing consultant, Don Larmour.  SRC is a world leader in applied research, development and testing across many fields but particularly in potash mineral processing.  The results were released in July and confirmed that the process methodology used in the Scoping Study (November 2018) is technically viable. More importantly, it confirmed that the recovery rate assumptions from the Scoping Study were valid and achievable. Finally, the metallurgical testing indicated there are a number of areas for potential simplification and improvement, which could potentially significantly reduce overall operating costs.

Completion of Drilling Programme

On the 2nd of September 2019, Emmerson announced the completion of its drilling programme at Khemisset. The infill programme, which was undertaken by Drillon, consisted of nine holes, and successfully achieved its objectives of providing additional geological information in the area most likely to be the target of initial mining operations, providing enough sample material to complete a comprehensive metallurgical test work programme, and detailed geotechnical testing.

The entire drilling programme was completed within the timelines set by the Company and under the allocated budget. Final geochemical assays are expected in coming weeks, which will allow an updated geological model and JORC Mineral Resource Estimate to be completed prior to the end of October 2019.

PEA for Sale of Salt By-Product

On 9 July 2019, Emmerson released results of an internal Preliminary Economic Assessment ("PEA") completed on the potential sales of de-icing salt by-product ("salt") from Khemisset.

The internal study showed the potential for salt to be marketed in the East Coast US de-icing market competitively, delivering attractive margins, due to the salt being a waste by-product of potash production, the Project's locational advantages and the outstanding infrastructure in Morocco. It is estimated the sale of 1 million tonnes of de-icing salt per annum would have post tax cash margins of up to 40%, delivering approximately US$20 million of additional post-tax free cash flow and a post-tax NPV10 of US$133 million using historical salt prices in the US market. If sales are increased to 2 million tonnes per annum, then the additional NPV increases to US$266 million.

Based on preliminary studies, the Khemisset plant will produce a relatively fine salt by-product with purity in excess of 95% NaCl. This purity is saleable into the US de-icing market without requiring any further product upgrading or processing, positively impacting operating costs and margins. Compaction is expected to be required due to the fine nature of the salt waste produced and the strict sizing requirements for sales in the US market.

Salt is handled and shipped using the same infrastructure as potash, so synergies are expected to be available and captured by handling two comparable bulk products. In addition, Morocco already exports approximately 1 million tonnes of rock salt to the US de-icing salt market per annum shipped out of both the Port of Mohammedia and the Port of Casablanca. The Company will benefit from existing storage and expertise in handling in these ports. The in-land logistics model comprises of trucking to closest railway siding in Meknes, then loading into trains to take the product to Casablanca port, which is connected via railway. Casablanca is a significant port with capability for large, deep draft, vessels, which reduces overall delivery cost to the US market.

As a by-product, the salt is available with a very low operating cost, with the only real additional cost being those associated with compaction to meet the US de-icing market specifications and the freight and logistics to get it to the US market.

The US de-icing salt market is the largest in the world with approximately 27 million metric tonnes of demand per annum. Emmerson will focus its strategy on supplying the east coast US de-icing salt market due to Morocco's proximity to the market, the lack of local supply and the supply gap created due to the closure of the New Brunswick Potash Mine by Potash Corporation of Saskatchewan in November 2018. The East Coast de-icing salt market is estimated to be approximately 10 million tonnes of demand per annum, of which approximately 75% is supplied via imports from Chile, Mexico, Morocco and Canada.

Capital Raise for £2.25 million pre-Costs

On 12 July 2019, Emmerson announced that it had raised £2.25 million (before expenses) through an oversubscribed placing of 60,000,000 new ordinary shares of no-par value each in the share capital of the Company. The placing was led by joint brokers Shard Capital Partners LLC ("Shard") and Optiva Securities Limited ("Optiva").

It is intended that the proceeds of the Fundraising will principally be used for the continuation of development of the Project post the delivery of the Feasibility Study, including progressing debt financing and strategic partner discussions, any additional technical work required post the Feasibility Study including further drilling, metallurgical testing and engineering studies and to cover general working capital expenses for the Company.

Following the capital raise, Emmerson appointed Shard as joint corporate broker to the Company with immediate effect.

Consolidation of Exploration Permits

Just prior to the end of the quarter, Emmerson announced that, after broad consultation with the Ministry of Energy, Mines and Sustainable Development, it received the approval required to consolidate 21 of the core exploration permits of Khemisset into a single permit encompassing the combined area of the 21 permits.

Emmerson is one of the first companies in Morocco to achieve a consolidation of permits under the new mining code, which was implemented in 2015, and highlights the perceived importance of Khemisset to Morocco's rapidly developing mining sector. 

His Excellence, Mr Aziz Rabbah, Minster of Energy, Mines and Sustainable Development, commented:

"The Kingdom of Morocco implemented its new mining code in 2015 to provide a strong platform to facilitate and simplify the administrative procedures for local and overseas companies, with expertise in mining, to invest in our vast, largely untapped, mineral resources. We are strongly supportive of companies that approach investment in our country in the right manner, targeting the development of long term, sustainable businesses for the benefit of all stakeholders."

Management Visit to Port of Casablanca

At the end of the quarter, Management visited the large Port of Casablanca to meet with the Port Authorities and conduct a site visit to inspect the facilities and identify any areas of risk or opportunity for the upcoming Feasibility Study.

The Port of Casablanca is one of the largest in Africa with current movement of goods topping 8 million tonnes per annum. The Port currently has 10 million tonnes of capacity with a number of expansion projects underway to further increase its size.

The Port is mixed use importing coal, grains and other food and goods and exporting fertiliser, chemicals and salt. Importantly for Emmerson, salt has very similar handling characteristics to potash and, as a result, the Company does not believe that any additional capital will be required to ship its product from Casablanca.

Importantly for Emmerson, based on current information it does not appear that there will be any additional operating cost in using the Port of Casablanca rather than the Port of Mohammedia.

Options Study

A key component of the Feasibility Study is the Options Study. The Options Study seeks to identify, analyse and trade-off various development and operational options which are available to the Project to ensure than an optimal "go-forward" case is selected.

Since kicking off the Feasibility Study in June 2019, the Company and its Feasibility Study consultants, Golder Associates and Barr Engineering, have spent a significant amount of time analysing various development options. In late September, a final options study meeting was conducted, and a go-forward development strategy was identified for Khemisset.

Key areas considered include:

·    Site location

·    Mine Access

·    Mining equipment

·    Mining strategy

·    Process methodology

·    Waste management (salt, brine)

·    Water management

·    Infrastructure access

o  Electrical, road, port

·    Optimal infrastructure

·    Transport and logistics

Based on detailed analyses and trade-off studies an optimal go-forward development plan has been selected.

 

Current Workstreams

Feasibility Study

The Company is progressing well with the Feasibility Study and continues to expect finalisation in the first half of 2020. Detailed engineering work is well underway, which will result in news flow as discrete items are completed, prior to the release of the full study next year.

Environmental and Social Impact Assessment

Following the successful completion of the environmental and social baseline study (refer announcement 18 March 2019) the Company is well underway in its planning and preparation phase to kick-off the full Environmental and Social Impact Assessment ("ESIA").

The ESIA is being designed to adhere to both the Moroccan regulatory framework and the IFC Performance Standards. The process will commence now that preferred surface site locations have been identified and the impacted area can be studied.

The ESIA process will again be managed by the Company with the expert assistance of Phenixa S.A.R.L, a Moroccan environmental consultancy with deep experience in large industrial projects in Morocco.

The Company remains committed to the highest levels of environmental and social risk management as is seeks to develop a sustainable mining project, which mitigates as far as possible the environmental and social risks associated with mine development.

Strategic Partnerships

Emmerson continues to have discussions with a variety of potential strategic partners for all aspects of the project development. These include financial, sales and marketing, electricity, gas, infrastructure and transport and logistics partners. The Company will update on the progress of each of these discussions where appropriate.

Upcoming News Flow

The Feasibility Study continues to progress well, which will lead to further news flow in the December quarter of 2019. The Company expects to update investors on the following items:

·    Updated Mineral Resource Estimate

·    MOU with electrical partners

·    Release of discrete portions of the Feasibility Study as they are completed

·    Ongoing discussions with in-country partners including electricity providers, port authorities, transport and logistics providers and the Moroccan Government

·    Ongoing discussions with potential strategic and financing partners

 

For further information, please visit www.emmersonplc.com, follow us on Twitter (@emmerson_plc), or contact:  Hayden Locke Emmerson Plc Tel: +44 (0) 20 7236 1177 Edward McDermott   Damon Heath Isabella Pierre Shard Capital Partners Tel: +44 (0) 20 7186 9950 Isabel de Salis Megan Dennison St Brides Partners Ltd Financial PR/IR Tel: +44 (0) 20 7236 1177

 

Notes to Editors

Emmerson's primary focus is on developing the Khemisset Potash Project located in Northern Morocco.  The project has a large JORC Resource Estimate (2012) of 311.4Mt @ 10.2% K₂O and significant exploration potential with an accelerated development pathway targeting a low capex, high margin mine.  Khemisset is perfectly located to capitalise on the expected growth of African fertiliser consumption whilst also being located on the doorstep of European markets. This unique positioning means the project will receive a premium netback price compared to existing potash producers. The need to feed the world's rapidly increasing population is driving demand for potash and Emmerson is well placed to benefit from the opportunities this presents.

 

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014.