Better than Gold
Even considering the massive correction going on in gold and silver, the metals have had a hell of a run over the last 14 years. Gold bottomed at $252 in August of 1999, silver at $4 in November of 2001. While the cheerleaders have cost their readers billions of dollars with their constant “Gold to $50,000, Silver to the Moon” mantra, you never hear the word correction from them.
It’s a correction, no big thing. Gold has a long way to go before it tops. Nothing has changed except all the chumps who were told to sell everything they own and buy physical silver at $49 an ounce are standing in line to sell so they can capture not only the very top, but the very bottom as well. The metals are moving from weak hands back to strong hands. Eric Sprott’s Physical Silver Trust was selling at a 26% premium in late April of 2011. Today it’s selling at a discount. Go figure.
Anytime you are in an investment you need to not only know where you stand with that investment, you need to be thinking about what the next big thing is. The time will come when gold and silver are not the best investment. Gold and silver are investments, not a religion.
We know that peak oil is both real and upon us. Peak oil consumption was in 2005 and has been declining. We aren’t out of oil; we are just out of cheap oil. Food is an analog of energy. It takes X calories of energy to produce Y calories of food. So when energy costs more, food costs more and we either have massive starvation or we figure out how to produce food more efficiently albeit at a higher cost.
Potash used as a fertilizer provides an excellent way of producing more food on less ground. There are two forms of potash, MOP or Muriate of Potash and SOP or Sulphate of Potash. Muriate of Potash is also known as potassium chloride and contains both potassium, needed for growth of plants, and salt or sodium chloride. Many plants are sensitive to salt and require another form of potash known as Sulphate of Potash.
SOP provides a higher value form of potassium but costs more than MOP. Through a chemical process, MOP can be converted to SOP but that costs money. Basically the price of MOP and the cost of the chemical conversion of MOP to SOP provide a financial floor to the producers of natural SOP.
Up until about 14,500 years ago, there was a giant lake in the Western US called Lake Bonneville. Due to changes in the climate, the lake shrunk to a series of salt lakes today, the Great Salt Lake being the most famous. A remnant of Lake Bonneville is called Sevier Lake.
During the 1970s, a rich Texan came up with the idea of leasing the lake from the BLM and a State of Utah land agency with the intent of creating a giant potash company. His company drilled hundreds of wells to test the brine in Sevier Lake. The company was on the verge of production when the Texan died and with him the potash company died as well.
A Utah group headed by Salt Lake City business man Lance D’Ambrosio discovered the data on the project and formed a company in 2008 to advance the potash project at Sevier Lake. The BLM regarded the program as an advance-mining project and required a bidding process to determine who would operate the project. EPM Mining won the bid and controls 96,000 acres directly and another 28,000 acres through agreements with the landowners of those claims.
EPM has completed an additional 414 drill holes defining 29.5 million tons of K2SO4 (potash) and another 8.95 million tons of potash in the inferred category. The mineral resource is located in only the first 30 meters from the surface although the maximum depth runs from 80.8 meters on the State ground to 151 meters on the Federal ground. In short, there is a lot of blue sky potential.
The company plans on producing an initial 35,000 metric tonnes in 2017 and ramping up to 300,000 metric tonnes by 2020. Their studies show a 30-year mine life.
Based on $721 per metric ton of potash, the PEA indicated an after-tax NPV of $630 million with an 8% discount rate and an IRR of 24%. With the number of shares outstanding today, the NPV of $630 million compares with a market cap of $37 million. Given the blue-sky potential of the untested brines, it should be obvious that the company is absurdly cheap. Their anticipated cost of production is about $155 per ton.
With industrial metals, it’s important to understand a couple of key issues. Unlike gold and silver juniors, investors in industrial materials are not speculating on the price of the metals or value of the US dollar. Demand for fertilizers is constant and predictable. And second it’s important to understand as a producer of industrial materials that you need an outlet. Anyone can take a silver bar or gold coin down to a coin dealer and sell it. But fertilizers need a demand chain.
Mr. D’Ambrosio anticipated the need for a demand chain and completed a $16 million private placement with Tata Chemicals of India in mid 2011 at $2 a share. Tata wants to be the worldwide distributor of the SOP produced by EPM. That private placement was after an initial raise of $30 million at $.67 in late 2010. EPM anticipates the feasibility study to be completed in H2 of 2013.
At present 70% of world SOP production comes from far higher processes such as the Mannheim Process and Sulfate Salts Reaction. Brine processing is the lowest cost way of producing SOP. SOP is a higher value form of potash over MOP. The business plan first begun in the 1970s would have worked even at lower prices for SOP. With today’s price for fuel and fertilizer, a brine process for producing SOP is pretty much a slam-dunk.
EPM expects their detailed engineering studies to be complete by late 2014 and pond construction to begin in mid-2014. For stability of the salt flats to allow the weight of heavy equipment the company will need to evaporate a two-year supply of potash before production.
The company awaits permitting but the project was fully permitted twice in the past. They have their land use agreements in place for 124,000 acres of brine lake. Access via existing country roads is possible and there are no known tailings or by-product issues.
SOP is required for growing tree nuts, fruit, vegetables and other high value foodstuff. There will always be a floor under the price of SOP due to the high cost of alternative ways of producing SOP from MOP and due to the lesser suitability of MOP for food crops. There is only one other SOP producer in North America and 70% of their total production is consumed domestically.
The PEA released by EPM shows production of 300,000 MT of potash per year valued at $721 per ton. That’s cash flow of over $216 million a year. This is not going to be a small company but the Capital costs are only $310 million and deferred Capital only $209 million. The company had over $10 million in cash at the end of 2012 so isn’t in need of financing any time soon.
Every silver lining has its cloud. I’d like to see the company do a couple of things. Today it’s a penny stock even though it was a $2 stock two years ago when potash was hot. I’d like to see management change the name. EPM is pretty meaningless and worthy of forgetting.
I’d like to see management focus on creating THE POTASH COMPANY for US investors and that needs a share price above $3. I’d like to see them do a 3 or 4 to 1 rollback. When resource shares recover, as we know they will, the stock could easily triple and with a 3-1 rollback, that would make a $3 stock and brokers could recommend the stock to their clients. This company is not a penny dreadful lottery ticket. Industrial mining companies all make money for their investors. They aren’t idle speculations.
The company is practically invisible. Investors don’t know what they have. EPM has focused very successfully on creation of institutional investors albeit at the expense of attracting retail investors. It’s nice to have institutional investors when you need a few spare million in a PP but retail investors set the price. The stock trades a dismal 19,000 shares a day. It’s important to the company and to investors that they be able to both take a position and to sell a position.
I like the company enough to pick up some shares as soon as I heard the story. The shares are sitting near an all time low price even though nothing has changed with the dynamics of the company. EPM may advertise, they have indicated they want to increase their retail presence. I am biased. That said, they are probably the cheapest potash company I am aware of with the most potential.
As always, do your own due diligence.
EPM Mining Ventures