Chatham seabed phosphate worth $6.7 billion

NZPA | Tuesday May 25, 2010 - 08:52pm

A preliminary feasibility study of mining the phosphate nodules scattered over the seabed on the Chatham Rise east of New Zealand suggests reserves of 30 million tonnes would be worth about $6.7 billion, or $156m a year at an annual recovery rate of 700,000 tonnes.

That would be enough to provide about half the phosphate the nation's two big fertiliser companies import -- mostly from Morocco -- to sell to farmers, according to the Widespread joint venture which wants to mine the phosphate from the seabed.

"Commercial development of the resource is a realistic possibility," the companies involved said today.

But further scientific studies of the extent and distribution of the resource, engineering and environmental studies to develop and refine a recovery system, and market studies were required, they said.

Two mining entrepreneurs, Widespread Energy and Widespread Portfolios, jointly applied in August 2007 for prospecting rights over a 3048km area, 600km east of Christchurch, which includes seabed deposits of rock phosphate, and now has mining rights over 4726km.

The deposits, also known as phosphorite, are at depths of about 400m.

In the 1980s, Fletcher Challenge investigated mining some of the 100 million tonnes of phosphorite deposits spread along 400km of seabed on the Chatham Rise -- variously valued at between $10 billion and $50 billion -- as a potential substitute for imported rock-phosphate used in fertiliser.

The area covered by the Widespread consortium's licence application was later reported to have been surrounded by a subsequent application for 71,750sq km by Auckland company Chatham Phosphate.

Widespread Portfolios, which said it has been approached by major fertiliser companies, holds 10 percent of the joint venture, and the rest is held by Widespread Energy, but as Widespread Portfolios also holds 20 percent of its joint venture partner, it effectively has an 18 percent interest in the project.

The phosphate nodules are found in layers up to 700mm thick. Their phosphorus content is 9.4 percent, higher than manufactured super-phosphate, but lower than most of the million tonnes of phosphate rock imported annually.

Rockpoint Corporate Finance has valued the project at $20.9 million, but an appraisal programme including the require scientific, engineering, environmental and market studies could take four years and cost over $30 million, it said.

There is a realistic probability about 20 percent of the project going ahead, Rockport said.

An initial financial model prices the phosphate at $223/tonne, with reserves of 30m tonnes and annual recovery rates of 700,000 tonnes giving the project a 40 year life.

It would require capital costs of $65m for specialist dredging and annual operating costs of $117 million, which the company said implied annual tax paid earnings of approximately $30 million throughout the 40 years.

If the Rockpoint independent valuation of the project was adopted as the carrying value, Widespread Energy's net assets would increase by $18.75m to $19.9m, and Widespread Portfolio's net assets would rise by $5.84m to $10.68m.

Widespread Portfolios Ltd today reported a $336,000 loss for the year to March 31, compared to a $6.66 million loss in the same period last year.

Disregarding unrealised losses and non-cash provisions, the company reported a pre-tax loss of $269,000 compared to a loss of $776,000 last year. No dividend was declared.

"Apart from our associate company, Widespread Energy, which had quite an active year that saw its market capitalisation double, most of our portfolio was in a walking-wounded state," the company said in a statement to NZX. Asian Minerals, Glass Earth, King Solomon Mines and Golden Phoenix had all reined in their activity.

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Chatham Rise Rock Phosphate Project Valuation

Rockpoint Corporate Finance has undertaken a preliminary feasibility study of the Chatham Rise phosphate resource contained within Mineral Prospecting Licence 50270 recently granted to the Widespread Energy/Widespread Portfolios joint venture. 

This preliminary study confirms that commercial development of the resource is a realistic possibility. 

However, further scientific studies are required to satisfactorily establish the extent and distribution of the resource, engineering and environmental studies to develop and refine the recovery system, and market studies to assess supply to both domestic and export markets. 

The Widespread Joint Venture and Rockpoint have considered the appraisal work programme required to address outstanding issues leading up to an investment decision. Rockpoint has advised the Joint Venture that, based on its central assumptions and the risk parameters leading up to an investment decision, the current valuation of the project is $20.9 million. This valuation is effectively the present value of the prospecting licence that the Widespread Joint Venture now holds.  

The project valuation comprises two parts, the appraisal programme to point of investment decision, and then the value of the development project.  The appraisal programme involves several stages, presenting numerous decision points, including:

• scientific studies, including further sampling and testing, to satisfactorily establish the extent and distribution of the resource;
• engineering studies to review, design and test recovery and separation systems;
• environmental studies to assess existing ecosystems and the impact of recovery operations;
• market studies to assess supply opportunities in both domestic and export markets; and
• financial modelling to establish project feasibility. 

This appraisal programme could take up to four years, could cost over $30 million, and given the uncertainties being addressed, offers a realistic probability of a final investment decision to proceed of some 20%. 

A financial model has been developed starting at the point of final investment decision and is based on initial estimates of all input parameters, estimates that will be progressively refined through the appraisal programme. The key elements of the model are:

• phosphate prices, derived from current market price ex- Morocco, and current shipping costs, assuming $223/tonne;
• reserves of 30 million tonnes based on existing estimates (Cullen Report), with recovery rates of 700,000 tonnes annually (implying half of domestic market), giving a 40 year project life;
• capital costs of $65 million, based on specialist equipment to be provided by global dredging company Jan De Nul, in addition to development of land-based port receival, separation and storage facilities;
• operating costs of $117 million annually, based on estimates provided by Jan De Nul Group combined with port, separation, storage and marketing costs; and
• these assumptions imply annual tax paid earnings of approximately $30 million throughout the 40 year project life.

The project, from final investment decision, is considered to be viable across a wide range of likely scenarios. While the base case assumptions are considered conservative, the $20.9 million current valuation (derived by discounting the project to reflect the uncertainties to be overcome before the final investment decision) should be considered speculative given the appraisal programme is addressing material uncertainties spanning scientific, engineering, environmental and market issues.

Effect of Project Valuation on Widespread Energy (WEN) and Widespread Portfolios (WID) Balance Sheets

The Chatham Rise Rock Phosphate Joint Venture is held by WEN (90%) and WID (10%). As 20% of WEN is held 20% by WID, WID has a further indirect interest of 18% in the Joint Venture. 

The Rockpoint independent valuation of the project has not yet been adopted as the carrying value of this asset in the financial statements of WEN and WID, but if it were that would have the following effects on the balance sheets of the two companies:

• WEN’s reported net assets (as at 31 March 2010) would increase by $18.75 million to $19.9 million
• WID’s reported net assets (as at 31 March 2010) would increase by $5.84 million to $10.68 million

On behalf of the Board
Chris Castle

Onekaka, 25 May 2010

Widespread wins Chatham Rise permit

Widespread Energy and its associate Widespread Portfolios have been granted a prospecting permit on the Chatham Rise, allowing them to test whether the area contains an estimated 100 million tonnes of rock phosphate, which could be worth $28 billion.

The estimates come from 30-year-old data derived from exploration work carried out by the government and companies such as Fletcher Challenge in the 1970s and 1980s. Widespread director Chris Castle says current market prices for phosphate, used by the fertiliser industry, could make extraction feasible, replacing imports from Morocco that amount to about 1 million tones a year.

Shares of Widespread Energy, which owns 90% of the joint venture, fell 17% to 10 cents yesterday.

Six investors have agreed to stump up $200,000 to help fund preliminary work on the permit, having already subscribed for similar sum at 12 cents apiece.

The venture is highly speculative and Castle acknowledges on his website that investors require plenty of “intestinal fortitude” to go along for the ride.
Based on the company’s assumptions of costs and an extraction rate of 500,000 tonnes a year, the project could generate pretax earnings of US$55 million a year, Widespread Portfolios said in a statement yesterday.

Alternatively, the joint venture could on-sell the resource on-situ, which could be worth US$10 million, or $2.12 per Widespread Portfolios share, it said.

Widespread aims to review data for the 4,726 square kilometre permit area over 12 months then work up a “full bankable feasibility study” and gather seabed samples in year two.

“The broad expressions of interest in this project from investors, the fertiliser sector and other mineral exploration companies indicate that funding of this later phase will be achievable,” the company said.

The rock phosphate is in the form of phosphorite, in pebble-like form sitting in the top third of a metre of ocean floor. The estimated size of the resource was suggested in a 1987 report by David Cullen called ‘The Submarine Phophate Resource on Central Chatham Rise.’

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Stocks to watch: Contact, Nuplex, POT, SLG, WID

Themes of the day: Statistics New Zealand will release data for the current account, which is expected to show the deficit shrank in the fourth quarter, while figures tomorrow are forecast to show the economy accelerated in the final three months of 2009. Stocks rose on Wall Street and in Europe after U.S. figures showed sales of existing homes fell less than expected in February. The European Union continued to haggle over support for Greece, with German Chancellor Angela Merkel saying Europe’s largest economy would only agree to financial aid as a last resort, and when done in tandem with the International Monetary Fund.

Contact Energy Ltd. (CEN): Environment Minister Nick Smith yesterday announced that the company’s 240MW Tauhara 2 geothermal generation proposal has become the first to have a power station proposal referred to an independent board of inquiry under the fledgling Environmental Protection Authority. The new rules ensure a speedy hearing for the consent, with reduced rights of appeal from other parties for projects of national significance. The shares fell 0.2% to $6.10 yesterday.

Nuplex Industries (NPX): The specialty chemicals manufacturer today said it agreed to buy the ingredients business of Med-Chem group, saying the purchase will lift earnings for its Specialties unit in the next 12 months. It didn’t disclose the purchase price. The shares rose 1 cent to $3.32 yesterday.

Port of Tauranga (POT): The port’s $15 million acquisition of Auckland-based Tapper Transport will improve its supply chain links and its ability to grow container movements at Ports of Auckland’s expense, said Craigs Investment Partners analyst Geoff Zame, according to the ShareChat website. The acquisition is part of Port of Tauranga’s building-blocks approach to develop a more complete supply-chain for its inland Metroport, to compete for import volumes that are currently going through Ports of Auckland. The shares fell 3 cents to $6.97 yesterday.

Sealegs Corp. (SLG): The designer and manufacturer of amphibious boats said it will move to a larger factory at the end of the month. The new facility will combine hull fabrication, assembly, service, development, sales and marketing into one building “which will result in savings and productivity benefits, said chief executive David McKee Wright. The company has rolled out new models including a concept cabin boat and an all-wheel drive option. The shares surged 17% to 17.5 cents yesterday.

Telecom Corp. (TEL): The phone company’s XT network crashed again yesterday, disrupting customers’ phone calls, text messaging and data use. The shares are trading near their lowest levels since the early 1990s. “It’s difficult to see it as being a compelling investment at the moment,” despite the low values, said Craig Brown, who helps manage $3.3 billion at ING New Zealand. “I think investors are holding off getting comfort before they invest.” The shares remained unchanged at $2.14 yesterday.

Warehouse Group Ltd. (WHS): The discount retailer announced the bookbuild for its 5-year bond being two-times oversubscribed, removing the need for a public pool. The $100 million bond will have a minimum interest rate of 7.3% per annum. The funds are planned to help the company expand its product range and open new stores. The shares climbed 1.3% to $3.98 yesterday.

Widespread Portfolios (WID): The company managed by Chris Castle yesterday announced a share purchase plan to raise about $960,000 at 15 cents apiece to help fund its share of study of exploration data on the Chatham Rise prior to developing a feasibility study for mining phosphates from the sea floor. The funds will also top up the company’s interest in affiliate and Chatham Rise partner Widespread Energy (WEN), which is currently 22% and is being diluted by WEN’s own capital arising. WID fell 5.3% to 18 cents yesterday and WEN was unchanged at 12 cents.

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Widespread companies may need financial clout for Chatham Rise

McDouall Stuart stockbrokers consider that the linked companies Widespread Portfolios Ltd (NZX: WID) and Widespread Energy Ltd (NZAX: WEN) will not be able to “go it alone” in developing the Chatham Rise marine phosphate deposits.
The broker’s Market Weekly said the two companies have only one employee, in executive director Chris Castle.
It was likely the two companies would sell down their interest to a party with the capability and capital needed to progress the venture.
It was estimated the project would need $300 million.
WID and WEN had indicated there would need to be a two years work programme that will include a full bankable feasibility study and the gathering of seabed samples to define a mineable resource.
McDouall Stuart said exploration in the Chatham Rise area, near Chatham Island and 600 kilometres east of Christchurch, in the 1970s and 1980s indicated a significant potential seafloor resource of rock phosphate.
“Those studies have assessed proved reserves of 30 million tonnes but with a total resource estimate of 100 Mt,” the broker said.
Rock phosphate is a core input to fertiliser manufacture. Currently, NZ imports more than 1 Mt of phosphate annually from Morocco, mostly by heavyweights Ravensdown and Balance AgriNutrients.
At current prices of about $US200/tonne, the commodity value of imported phosphate adds to around $300 M per annum. Cost of freight from Morocco adds a further $170 M to that bill.

Ross Louthean — 5 March 2010