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Deep-sea phosphate miner CRP on track for final investment decision this year

Tuesday 21st May 2013

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Independent research commissioned by would-be undersea phosphate miner Chatham Rock Phosphate has raised the company's share price to a target value of $2 from $1.87 last September as the timetable firms for mining from early 2015.

The latest analysis from Edison Investment Research suggests CRP is overcoming technical hurdles, its dredging partner may be able to retro-fit an existing ship with deep-sea dredging technology, and environmental and regulatory factors are now a greater concern than the feasibility of mining.

The proposal to mine phosphate nodules off the ocean floor near the Chatham Islands would be a world-first, and could produce an industry that replaces imported Moroccan phosphate, widely used in agriculture as a fertiliser, with locally produced material and create a new export market.

The report comes as Edison considers how best to raise approximately US$7.5 million of additional capital required to take it through to first production, which could be as early as the first quarter of 2015, although Edison calls that timetable "tight."

A final investment decision is likely in the fourth quarter of this year. The US$300 million cost of developing dredging equipment lies with Dutch dredging experts Royal Boskalis, who are also 20 percent shareholders in CRP, which has been developed from scratch by Takaka-based entrepreneur Chris Castle.

The Edison research was completed before release of new mining tax rules to Parliament yesterday, which will remove concessionary treatment for mining companies that currently allows them to write off development expenses in the year they're incurred. Instead, expenses will be deductible over the life of the mine.

However, in an email from the US where he's travelling, Castle told his tax advisers: "This doesn't concern me given the very low level of development expenditure compared with future profits. Our forecasts don't even take the potential deductibility of development expenditure into account."

"It obviously needs further study."

The Edison report says CRP "continues to make significant de-risking strides."

"In particular, the environmental consenting process and timing facing CRP are now much more certain", with Boskalis seeming "significant more concerned about the regulatory and consenting aspects of CRP's pre-development critical path than about technical and operational issues."

CRP is expected to lodge mining applications in June, after new deep-sea mining law comes into force, starting a seven month mandatory timeline for approval or rejection by the Environmental Protection Authority. The application would the EPA's first under the new law governing New Zealand's 200 nautical mile exclusive economic zone.

Boskalis's plans to retrofit an existing vessel with a trailing suction dredge hopper would shorten timelines and was "central" to Edison's assumption of commissioning in the first quarter of 2015.

Edison stressed the low capital intensity of the CRP business model because of Boskalis's responsibility for providing capital equipment, but noted the potential for conflicts of interest since Boskalis is both a shareholder and supplier to the project.

"CRP's capital requirements will be limited to the amount required onshore and corporate operations," says Edison, which produces paid, independent research on listed companies that struggle to attract analyst coverage. "CRP's business will be largely that of a commodity trader supported by a long-term, probably fixed-rate contract, mining agreement with Boskalis.

As a result, phosphate rock prices, exchange rates and the terms of the mining contract were the three drivers of future profitability, with CRP only able to influence the mining contract terms.

The $2 a share price assumes a rock price of US$150 a tonne and mining costs of 70 Euros per tonne, with assumed exchange rates of US82.2 cents and 63.8 Euros to the New Zealand dollar.

If those exchange rates were to fall to the averages since the kiwi dollar floated in 1985, a share price of $3.05 could be justified.

Conversely, at the assumed base case exchange rates, but with a rock price of US$150, Edison's model produces a projected share price of 63 cents.

CRP shares last traded on May 20 at 34 cents, up 36 percent on a year earlier, although they have traded up to 46 cents apiece within the last 12 months.

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