Highfield Resources delivers high profit margin DFS for Muga Mine

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Potash developer Highfield Resources (ASX:HFR) has released a Definitive Feasibility Study for its Muga Potash Project in Spain which has revealed a long mine life and rank as the most profitable potash operation when in production.

Muga is located in northern Spain with close proximity to the Atlantic coastline of Northern Spain and Southern France.

Under the DFS Muga would have an initial mine life of 24 years based only on Proven and Probable Ore Reserves.

The DFS assumes 50% of product produced is sold in granular form into Brazil and 50% is sold in granular form into North West Europe.

The study based on production of 1.123 million tonnes of granular K60 potash delivered an after tax unlevered Project net present value of US$1.42 billion and a very handsome internal rate of return of 51.9%.

This would produce EBITDA in first full year of production of US$296 million with a cracking margin of 66%.

The DFS is based on extracting 138 million tonnes of the sylvinite Ore Reserve at an average grade of 12.75% K2O. The 138 million tonnes was taken from the total Ore Reserve of 146 million tonnes of sylvinite at an average grade of 12.73% K2O.

Operational expenditure in full production was estimated at US$135/tonne which provides a tasty margin based on a product reference unit revenue of US$315 a tonne.

This includes all transport to key customer markets.

Pre-production capital cost was estimated at US$256 million including a 12.5% contingency.

Construction tenders are to be released to Spanish contractors next quarter and construction remains on track for Q4 2015.

As Highfield Resource’s managing director Anthony Hall said:

"...We believe Muga has the potential to be the highest margin potash mine globally in production. The DFS builds on a compelling pre-feasibility study and reconfirms Muga´s potential to be a very low capex high margin potash mine.

We are now moving into a construction ready phase and anticipate releasing tenders next quarter to ensure we are ready to commence construction in Q4 of this year as planned.”

The work of our Spanish team and predominantly Spanish based consultants has been exceptional. I cannot overstate how important it is to have such a strong local capability."


Mining

Mining is assumed to target four distinct seams across different sections of the Resource horizon as delineated in the block model constructed by Agapito.

The principle mining horizons will be accessed via two straight line declines approximately 2.9km and 2.5km in length respectively accessing the same mining horizon at two different points.

The eastern decline reaches the mineralised horizon at 228 metres below surface and the western decline approximately 348 metres below surface.

It is anticipated that the decline construction will be completed by specialist Spanish contractors.

The dual decline strategy is anticipated to enhance operational efficiency and reduce risk. Each underground operation and decline will deliver 50% of the 6.3m tonne production schedule to the processing facility.


Metallurgy

Highfield engaged Saskatoon based independent specialist consultants EngComp to develop and supervise the completion of a series of detailed metallurgical test work programs.

EngComp confirmed the metallurgical properties of the ore at the Muga Project lends itself to a simple proven and technologically sound process flow sheet which has been successfully implemented at many operations globally.

Based on the analysis conducted and EngComp’s operational experience with similar potash processing operations Highfield assumes with a ROM feed comprising 74% banded ore and 26% brecciated ore a constant life of mine plant recovery of 84%.


Processing

The processing flow sheet selected by Highfield is a simple two stage crushing process an attrition scrubbing and hydro-cyclone de-sliming stage followed by a simple well understood KCl (Potassium Chloride) froth flotation circuit. This provides a simple cost effective and technologically proven process route.


Logistics

Highfield has signed non-binding MOUs with the Port of Pasajes and the Port of Bilbao. Both MOUs confirm the ability to ship significant quantities of product through these ports.

For the purposes of the DFS the company has elected to outsource its transport solution and its port handling and ship loading facilities.

This will reduce upfront Capex estimates but will add marginally to the Opex estimates of the Project. Product will be delivered by 20 tonne trucks from the Muga site to the Port of Pasajes which is located approximately 150 kilometres mostly by multi-lane motorway north northwest of the project area.


Timeline and Targeted Production

The company is seeking to commence preliminary site works and to start the construction of the two declines in Q4 of the current calendar year.

Meeting this timeline will see initial production in Q2 of calendar year 2017. It is assumed construction takes 18 months to the point of commissioning of the processing plant.

Construction of the second phase is scheduled to commence in Q3 of calendar year 2017 with initial production targeted for Q4 of calendar year 2018. Full production is targeted to commence on 1 January 2019.


Analysis

Key take aways from the DFS for Muga Potash Project are:

- Low Capex
- High Margin
- Technically robust with two declines underground conventional mining and flotation circuit processing.
- Producing basin
- Still targeting commencement of construction this calendar year
- Construction team being built out with real mine builders in the team and living in Pamplona with the project
- More upside to come with three other projects and full control of the entirety of the Navarra sub basin of the Ebro Basin.

Another way of looking at the DFS and Highfield Resources' valuation is to pit it against Allana Potash Corp (TSX:AAA). Allana is this month on the receiving end of a takeover offer by ICL (NYSE:ICL).

Allana´s projects are in Ethiopia and the company has a second project at Scoping Study level.

Based on respective feasibility studies market caps enterprise values and production would arrive at the following Value per tonne:

US$841.5/t - Allana
US$607.2/t - Highfield

When viewed on relative capital cash cost and capital intensity per tonne of production and EBITDA margin Muga is at low end of its peers.

In fact Muga Mine Project has the lowest capex of any development stage potash project.

In production it will have first quartile EBITDA margins driven by combination of high price end markets and low total cash costs to customer.

The projects are in a producing potash basin where conventional underground mines have operated via decline and sylvinite flotation circuit processing.

The management team has been assembled with proven mine building experience in Spain and in potash operations.

There are also price catalysts ahead for Highfield for its other Spanish potash projects in 2015 including: Q2 Muga Mine project finance term sheets agreed; Sierra del Perdón Scoping Study. Q3: Muga Mine Financial Close and Q4: Muga Mine construction commences.

Based on this there is still plenty of upside in the total Highfield valuation and hence share price.

Factor in that Highfield also has a second project at completion of Scoping Study level and it controls the entirety of a producing basin in Spain (less jurisdiction risk) with four identified projects with additional upside then the current market cap. of Highfield of $366 million despite the recent run up does not look high on a medium term basis.

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