Shares of Morocco focused potash project developer Emmerson have rallied well since December. However, the ephemeral distraction of flavour of the month plays in tech and blockchain still leaves the valuation of the company at the ground floor for new investors.
The stock market is an enigmatic place, even at the best of times. In some ways one could argue that the start of 2021, in a liquidity boom for small caps means we are very much in the best of times. What is noticeable is bull markets though, is that investors tend to get a little distracted by the more esoteric plays, and perhaps take their eye off the ball in terms of situations where the fundamentals are stacked up? After all, these days it is all too easy to be lured by the temptation of doubling (or halving) your money day-trading a CBD or blockchain stock.
But as we know the key to the stock market is to get rich slowly. Here it is the impatient day-traders who finance the patient investors. Most of all, those who win are those who identify value. Ideally, you are paying 70p, or 50p or less in the Pound for a stock. You are then waiting for the true value of a company to then become apparent to the market as a whole. To mix cliches, as the penny drops, we have lift off for the stock price.
License Inflection Point
This delay factor has been in play with over the course of much of the past year, with the excuse of milestones such as permitting, strategic partners, funding et al. However, as we have seen since the turn of the year, and especially since the latest mining license for the Khemisset project was granted. If there was heavy lifting in the story of Emmerson, it was the license. With this in the bag, we have passed the fundamental inflection point, and the project risk is gone.
For instance, with or without financing, strategic partners or debt finance, Emmerson already has a commercially valuable asset. Given the way the company is sitting on a $1.1bn NPV8 versus capex of $411m, and a market cap of £50m, there is at least $500m of pure value in Emmerson. Put simply, taking the current stock market valuation alone, Emmerson is trading at a fraction of its NPV8.
Indeed, this value includes none of the sizzle of the massive inflation in commodities price, none of the strategic interest both in the location of the project, or the need for many mining groups to switch from dirty coal to green potash.
There is also the aspect of the latest announcement on phased work, which the market appears to have missed. This could take the company up from $300m per annum of EDITDA to over $500m. Indeed, in the current climate it could very well be that capex is reduced to below $300m, something which would really make the “math” of the current share price seem bargain basement, rather than just ground floor.
Winning Both Ways
The reality of the matter is that Emmerson should be a winner either as a developer or a producer, and can decide which it wants to be. The key here is that the company has an objectively modest valuation – less than half the market cap of sector peer Highfield, and is de-risked at the present valuation with the latest license news.
With fertiliser markets globally quietly entering a strong bullish phase not seen for more than a decade, potash is likely to come back into the spotlight as a key strategic mineral for fertiliser producers. Emmerson, with is objectively industry leading economics and very low execution risk, is the standout among potash development hopefuls.
There is almost certainly strategic interest in this asset from the likes of OCP, K+S, ICL, Mosaic and even BHP, who have been long labouring in the build of its Jansen Project in Canada. But there may even be some interest from left field in an asset of this quality – think coal producers looking to diversify into a green commodity, or large agricultural companies that have a large potash requirement.
The elephant in the room, or perhaps the 800lb gorilla, is OCP, one of the world’s largest fertiliser companies. OCP is a Moroccan powerhouse and given it currently imports the best part of 1mtpa of MOP into Morocco, to help with its fertiliser blending operations, the obvious value and synergies with its operations make it by far the most likely partner in the medium term. Will it want to partner or just own the whole project?
Re-Rate Green Light
The irony for the increasingly impatient investors of 2021, is that with Emmerson in the wake of the green light for Khemisset, events may catch them out in terms of the speed at which they occur. This is especially the case if funders or partners decide that the under value and strategic attractions of Khemisset are too hard to resist. In such a scenario for would be Emmerson investors, unless they are already in the stock they risk missing out on the final inevitable re-rate for the company.
Zakmir.com is a purely journalistic website – Zak Mir is a member of the National Union of Journalists. There is no intention here of providing financial advice. It is recommended you seek an independent professional opinion before deciding whether or not to take any action with regard to anything written here.