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Tedoby, thank you for taking the time to publish 12 pages of wonderful in-depth thoughts. Fully appreciate it.
I can't fault your dedication tedoby, thanks for the detailed report on Circum. I'm glad you agree that it can one day be a $3bn to $4bn company, which would add around 1p - 2p to Prem's share price if retained, that's 10x of the expected cash in value at IPO. However most here seem happy to take the IPO money and run. Even an old fogey like me would be happy to wait a few years for a Circum ten bagger.
Appreciate this epic posting ! Thanks.
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Prems value will inevitably be made up of it's constituent parts of which Circum Minerals is one four taking center stage at the moment.
Circum is a private company of substance. It has a “Board” of six Directors who appear to compliment each other will and are experts in their own field. They are supported by an extensive and competent management team and together with outsourced specialists and 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.
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 have been buying back the shares since then and currently own 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.
From Circums recent letter to it's shareholders we now know a little more about their intentions on their Danakil potash project in Ethiopia as set out below. Also from Pems RNS’s we’re told that Circum are on schedule to achieve their objectives. Moreover Prem has pledged to give its shareholders a choice of how the company's shares are dealt with come the day conditionally but entirely to the advantage of it's shareholders which is truly extraordinary.
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The project 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!
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!
Again just for 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 $10 bn Market Cap at its height running in an optimised state producing the 5m tonnes annual production figure I’ve used.
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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.”
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The update goes 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 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.”
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.
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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's last Webinar was $1.1bn. I'm not sure but I imagine the addition $100m is for contingencies which is an allowance that always features.
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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, all within its license area. All very conducive to mining and reflected in the 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) but only 1 weeks supply of water the mine needs was extracted without any significant impact being observed in the water table. Based upon these results and extensive groundwater modelling expert engineers have concluded that the alluvial fans are excellent aquifers of sufficient storage and yield to supply the required volume of water to satisfy the mines demand beyond the envisaged requirements called for in Circums mining plan.
Nevertheless the groundwater supply is finite and whatever the limitations of that source will almost certainly be the factor that will determine the LOM and more importantly it’s optimised production rate. The water usage is estimated to be 30 gigalitres which per annum is 30 bn litres per annum and Danakil will be allowed to use that amount of water under Ethiopian Law as 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 in the boreholes as they are situated in well defined salt layers at different levels. It's quite an important point to make as it 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 brines are separated 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
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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 is more difficult to assess but I have them at about $150/t for MOP and nearer $350/t for SOP respectively.
In Prems last 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 conclusion.
The intention is to ship the potash from the mine to the port using huge “roadtrains” 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.
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.
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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 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."
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%.
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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
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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 per share for negotiations to start. So between $12.5m to $20m or thereabouts to Prem.
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 th
have witnessed your posts here for so long now your utter contempt of GR your dissing of rha etc , will refer you to my post at 6.33 and Tedoboy sat post where he had been vilified by posters and stopped posting.
Could of easily been influenced by you to sell and took loss !!!
Happily still here !
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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. 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 workstreams for an IPO in the background and should market conditions change, this option could be activated.”
Going the IPO route the Government have 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.
Arguably at present Prems 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 Prems 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.
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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 todays MOP & SOP prices which suggests its Market Cap should be near $3bn to $4bn at that point in an earnings metric equation using a P/E ratio of at least 10 to reflect its attractive LOM.
Working that back on a reasonable ROI I get to a value at IPO of approximately £750m. Prems holding could be diluted in percentage terms to 2.5% going that route. For simple maths that would put the value of Prems holding at around $17.5m which would result in an addition of 0.15p per share to Prems shareholders!
It seems there may be a lock - in period for the shares possibly 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 if its holding falls below the 3% trigger of “significant shareholder”.
Setting aside the length of this post I hope some of the thoughts I’ve shared in this overview are of interest.
This is a genuine and rare opportunity for Prem shareholders to benefit to the extent of as much as 0.15p addition to their shares before this Christmas IMHO but please DYOR as always.
GLA all genuine shareholders
Great post Darth, welcome to the LSE BB :-))
great week ahead me thinks!!!
Good Luck all - we have been here long enough - coming to fruition with the start of the EPO sign off and then JV with big player on Enlarged Zulu will do it!
RHA latterly along with CIRCUM end of year or early 2020 - whenever....
I’ve been here 2 1/2 years and averaged down now - therefore what’s another 3/6 months or more.....
Welcome Darth , i don't use twitter but have heard of you.
I can not recall a company in such a potential position with so much news flow likely to come in next few weeks with such a low market cap relative to what is coming.
Oh and as posted earlier, discussing financial costings for the company operations doesn't class me as a troll. A realist maybe...
Mal, Seems you don't like people posting their viewpoint and are using disgusting individuals names to try to shut those down who disagree with you. Again it shows the sort of person you really are Mal
Maybe you think of these sorts of people as you have issues?
Todoby - Great insight, brilliant!
The assets are brilliant - can’t wait for the proper reRate from hereonin !!!
I have never posted on LSE as I favour Twitter myself... Generally, I avoid LSE discussion boards as it’s usually trolls spouting utter nonsense and I just don't have the patience for it.
What a pleasant surprise today has been to find posts based on facts and solid research. As someone who has been heavily invested for some time, I try and keep myself close to the company and abreast of as much information related to my investment in PREM as possible. There have been some standout posters on here of late, to mention a few:
But Tedoby you have truly outdone yourself today my friend, by posting solid facts based on some amazing knowledge. It’s clear to see you have a lifetime’s experience in the mining industry!!! When this is all said and done, I hope we can become acquainted and share a dram or two!!!
Anyone following the company will understand that the EPO is a doorway towards the complete transformation of the company. The EPO paves the way forward for multiple JV's across various Minerals, Lithium, gold etc.... Furthermore, we have RHA which will be coming into Production in the near term and potentially an amazing deal with MNH which will see us cash positive for the first time.
How many investees are in a share where they stand to receive a special dividend for somewhere in the region of 0.1 per share (£1000 per 1m PREM Shares) in such a short period of time?!
I’m super excited with my investment in this share and see it is as my road to early retirement!!! Good luck to all genuine holders and thank you to all the genuine posters sharing their research and views....
Couldn't agree more colby. It was something i raised here and was vilified for the figures until I pointed out they were from Prems own documents...
It’s not really been seen that positively when it was announced but the electrification for RHA is massive. The cost of running the generators would of been extortionate.