McDouall Stuart Securities report on Chatham Rise Project

Widespread Energy 


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Widespread Port. 

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Rock phosphate is a core input to fertiliser manufacture. Currently more than a million tonnes of phosphate is imported annually from Morocco, mostly by local heavyweights Ravensdown and Ballance AgriNutrients.At current prices of around US$200/t, the commodity value of imported phosphate adds to around $300m pa.

Cost of freight, which because of the extreme seaborne distance from Morocco is a very significant component of delivered cost, adds a further $170m pa. The opportunity therefore is for import displacement to the tune of around $500m annually, although potentially considerably more (during the peak of the 2007/08 commodity cycle, spot prices rose to US$500/t (Fig 11).

The prospecting permit requires the JV to undertake a specific work programme involving analysis of data collected during the 1970s and 1980s that supported the initial reserve estimates. Within the first 12 months of the permit the work programme agreed also requires the JV to undertake an environmental impact study and a pre-feasibility study into project economics of a commercial operation.

Investment view

Rock phosphate is not pie in the sky; it is both very real and very valuable. The specific potential of the Chatham Rise rock phosphate deposit was discussed in our Stepping Up report to MED last year. The extreme distance that imported phosphate must currently be hauled to reach the manufacturing process in New Zealand implies a very significant import displacement opportunity. The macroeconomic and external account benefits of large-scale import substitution are also highly attractive.

 Despite the obvious benefits, the challenge would be a steep one. Seabed mining brings with it a substantially higher risk profile than onshore mining, particularly given the mid-water (~400m) depths in the Chatham Rise area. That said, seabed mining technology is already well established and the challenge of applying it to Chatham Rise appear manageable.

WEN/WID could not go it alone in a development (MD of both companies Chris Castle is WEN and WID’s only employee). The companies would likely sell-down their interest(s) to a party with the capability and capital needed to progress the venture, and to fund the estimated US$300m needed to bring to production.

Equity participation by one or perhaps even both local fertiliser majors also presents as an obvious option. In their release, WEN and WID report it “likely that the year two work programme, which will include a full bankable feasibility study and the gathering of seabed samples in order to define the minable resource, will be significantly enlarged and fast tracked. The broad expressions of interest in this project from investors, the fertiliser sector and other mineral exploration companiesindicate that funding of this later phase will be achievable.”

WEN and WID are, in our view, stocks to watch over the next 12-18 months.