Encanto Potash
Encanto Potash (TSXV EPO) released a positive preliminary economic assessment (PEA) on its Muskowekwan potash project in Saskatchewan.
The PEA analyzed two possible mining scenarios for Muskowekwan: one for a conventional mine and one for a solution mine.
The conventional mine process would allow the company to target higher-grade potash ore. The tradeoff would mainly be between the higher capex costs needed to drive the shafts for a conventional mining operation versus the higher operating costs for a solution mining operation.
In a solution mining operation, wells are drilled from the surface, and then heated water is pumped to dissolve the potash. The potash is then removed from the resulting saturated solution. This process is more energy intensive than conventional mining, which accounts for the higher operating costs.
In the end, though, the superior economics of the solution mining method, as demonstrated by the PEA, have led the company to opt for this method as it moves the project toward feasibility.
Under the solution mining scenario, the indicated resource (79.1 million tonnes of 29.4% Kcl) and the inferred resource (60.5 million tonnes of 29.7% Kcl) are significantly larger, albeit lower grade, than the resources mineable under a conventional mining scenario.
These larger resources allow for a long mine life of 32 years for the indicated resource and another 24 years (potentially) if the company opts to mine the inferred resource. It will also boost annual production to 2.5 million tonnes from the 2.0 million tonnes envisioned under the conventional mining method.
Now the numbers that really matter: The solution mining method will generate a 24.0% after-tax-and royalty irr based on an average sale price of $450/tonne for the mine's potash. Even with the reduced capex for the solution method, this capital outlay number is still large at $2.4 billion (compared to an NPV of roughly $2.9 billion, at a 10% cash discount rate).
There is room to improve those numbers somewhat, particularly if the company can access a local water aquifer for the mining process. The company is also in the process of negotiating an increase in the size of its Treaty land Entitlement (TLE) land holdings with the Muskowekwan First Nation.
The next steps are to begin Environmental Baseline Studies and to commence with a prefeasibility study. These steps will take a while to evolve, so I don't see a short-term impetus for an upward movement in Encanto's share price.
However, it remains a strong hold, given that the company's market cap still sits at a fraction of the gap between the capex and the NPV envisioned under the solution process, much less the NPV itself.
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