Chatham Rock Phosphate Initiation Of Coverage

Chatham Rock Phosphate (CRP.NZ) is moving closer to demonstrating a technically and commercially viable undersea mining project. Risks still remain but the most significant are easing. Doubts over the technical viability of CRP’s seabed mining concept have reduced significantly with global dredging major Royal Boskalis taking a cornerstone equity stake in CRP. The other main area of risk – mining and environmental approvals – will be CRP’s major focus over the coming 12 months.

Undersea phosphate
CRP is seeking to commercialise a known significant resource of rock phosphate residing as nodules on or near the seabed in around 400m of water on an area known as the Chatham Rise, around 450km east of Christchurch. Exploration and surveying completed since the resource was first discovered in the 1950s gives CRP significant confidence in the nature and extent of the likely endowment. With a substantial pastoral-based primary sector, New Zealand has a very significant fertiliser market that currently imports all its rock phosphate from Morocco. A clear import-parity regional market opportunity therefore exists.

Project risk material but abating
A commercial mining operation at the depths CRP is contemplating would represent a world-first for the subsea sector. Offsetting this, concept studies completed by three of the world’s largest dredging operators each concluded the project as technically viable at economic cost. One of those operators, Royal Boskalis, has recently taken a 20% equity stake in CRP, significantly lifting confidence in the mining concept and reducing CRP’s standalone risk profile.

In addition to design and execution of the mining concept, CRP’s other key pre-production challenge is achieving mining and environmental approvals. Preparations on this front are well advanced and CRP expects to apply for a mining licence within the next few weeks. Final environmental approvals should be applied for and a decision reached during 2013.

Valuation
CRP intends to complete a TSX-V listing before the end of 2012 to accompany a US$10m raising that it considers would bridge it to first production in late 2014. Our modelling concludes a success-case valuation of $1.87 per fully-diluted share. CRP’s economics are strongly leveraged to its three key value drivers: rock phosphate pricing, forex and the cost of its contract mining arrangements.

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