Chatham Rock Phosphate: Plenty Of Upside As Timeline Becomes Certain

Chatham Rock Phosphate (CRP.NZ) continues to make significant de-risking strides with its New Zealand seafloor rock phosphate mining project. In particular, the environmental consenting process and timeline facing CRP are now much more certain. With front-end engineering making good progress, technical risk is also falling. The steps taken by CRP to add organisational mass are also positive. On an unrisked basis, we value CRP at NZ$2.00/share. As it continues to achieve milestones over the balance of 2013 and into 2014, we expect the valuation gap to continue to narrow.

On-land de-risking gathering pace
Since our Outlook report, CRP has continued to make strong progress on its pre-development critical path. In particular, regulatory and consenting processes have gained substantial forward clarity. We expect CRP to lodge its marine consent application with authorities as soon as new regulations are in place in June, following which a decision would be required under law before January 2014.

Q413 FID still on track, for Q115 commissioning
With consenting processes increasingly in hand, focus is turning to technical and operational issues. Ownership and operatorship of the estimated US$300m of mining infrastructure required to support mining operations will rest with CRP’s mining partner and cornerstone shareholder, Royal Boskalis. Boskalis therefore serves as a pivotal CRP investment bellwether. Since Boskalis took its 20% stake in mid-2012, indications are increasingly encouraging. Detailed engineering design is reported to be moving positively towards Q313 completion, after which final commitment decisions can be taken. Q413 remains for now very much in play for a final investment decision (FID), as does an early 2015 start date for mining operations.

Valuation: Upside aplenty on unrisked economics
CRP has now raised US$17.5m of the US$25m it considers it needs to see it through to first production. CRP is considering a number of viable options to meet the balance. The commercial arrangements that will underpin long-term mining operations between CRP and Boskalis have yet to be agreed. While these are critical to CRP’s long-term economics, Boskalis’s cornerstone equity holding in CRP provides significant comfort that commercial incentives are aligned. While our DCF modelling concludes a base valuation of NZ$2.00/share, up from NZ$1.87, it sits within a backdrop of very sharp sensitivity to revenue (variable, determined largely by commodity prices and FX) and cost (fixed, made up primarily of contract mining) structures, of which investors must be cognisant.

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