MagIndustries Makes Headway At Kouilou

Using a treasury that held consolidated working capital of more than US$100 million in September, Mag-Industries (MAA-V, MAAFF-O) continues to advance its Kouilou potash project in the Republic of Congo (ROC). In December, the company signed an investment agreement with the ROC government, addressing all aspects of the project, including key fiscal and development terms. The agreement remains confidential pending approval by the ROC parliament.

MagIndustries has also signed two contracts to drill production wells and build warehouses, and is hoping to raise US$100-200 million in equity, followed by a US$700-million loan. Once the government agreement receives parliamentary approval and financing is in place, construction can proceed.

The project is 25 km from the city of Pointe Noire (population 1 million). The city has a deepwater port, and MagIndustries plans to develop an area in the port as a dedicated potash export facility.

A key component of the Kouilou project is an agreement in principle with the ROC government to supply free natural gas to the project for 25 years. This is crucial to project economics, since MagIndustries is planning to use solution mining — an energy-intensive process.

The process involves injecting hot water (90 C) into the mine. The water dissolves the mineral and brings it to surface as brine, from which the potash is recovered and crystallized. The natural gas would also be used to generate electricity onsite for plant use.

The company would finance the infrastructure to deliver the natural gas, and amortize the cost over 25 years. The government is prepared to give away the natural gas at zero cost since at present the gas is flared and goes to waste. Beside MagIndustries and the government, Italian oil company ENI (E-N) would also be a party to the natural gas agreement.

Kouilou is being advanced via a subsidiary, MagMinerals Potash, which holds most of the consolidated working capital, or about US$100 million. Plans call for the project to be built in two phases, each with a production capacity of 600,000 tonnes potash per year. If financing can be lined up and agreements with the government are finalized, construction of the first phase is scheduled to start in early 2009, and production should start in late 2011. Second-phase construction is planned to begin immediately afterwards, and it will start producing in 2013. At the full production rate of 1.2 million tonnes potash per year, the mine life is estimated at 27 years.

The company is hoping to finalize both the natural gas and investment agreements early this year. Another key component to be finalized is an agreement with the government giving the project a 10-year tax holiday, structured as an initial five-year period, automatically renewable by another five years if the company is producing as planned. However, the government will own a 10% free carried interest in the project.

It is anticipated that most of the potash would be exported to Brazil, a considerably shorter shipping distance than those of many other international potash export routes. An existing railway line to Pointe Noire passes near Kouilou, and the project calls for two short railway spurs (a few kilometres each) to be built at Kouilou and Pointe Noire, allowing the potash to be shipped by rail to the port.

The natural gas deal, short transportation routes and tax holiday combine to offer compelling project economics. A feasibility study estimates total costs at US$83 per tonne potash, while current market prices stand at about US$870 per tonne. The feasibility study uses a price of US$500 per tonne potash, and at this price, the internal rate of return in the first phase is 26%, while the net present value is US$450 mil- lion at a 12% discount rate.

The mineral deposits at Kouilou consist of carnallite, a hydrated double salt of potash and magnesium chloride. The carnallite occurs in multiple, horizontal horizons ranging in thickness from 0.5 to 24 metres with an average content of about 70% carnallite. Four horizons, located between 400 and 800 metres below surface, have been considered for commercial development.

Based on potash contained in the carnallite, the project has proven and probable reserves of 33.5 million tonnes potash, and measured and indicated resources of 35.2 million tonnes. Inferred resources stand at 209 million tonnes potash. These figures include a reduction to account for anticipated losses from solution mining. The ore grades 17.2% potash. The company believes that there is considerable potential to define more resources with further exploration.

First-phase costs are estimated at US$723 million, growing to US$1 billion once interest during construction, insurance and other related costs are added. It is anticipated that 30% of the funds will come from equity with the rest raised as debt. US$90 million has already been spent. The company believes that if it is successful in rais- ing US$100-200 million in equity, the financial institutions slated to provide the US$700 million in debt will advance the loan despite tight credit markets.

In October, MagMinerals Potash signed a j12-million, 24-month contract with Foraco International (FAR-T) to drill production wells on the project. An $8-million contract with Socofran to build warehouses in the Pointe Noire harbour has also been signed.

MagIndustries has been planning to take MagMinerals Potash public and has filed a preliminary prospectus for the planned initial public offering. However, given current market conditions, the IPO has not proceeded. Instead, the company is planning to issue about 90 million new shares to MagMinerals Potash shareholders, taking the number of shares outstanding to about 288 million.

Beside MagMinerals Potash, MagIndustries has three other subsidiaries: MagMetals has been established to produce magnesium metal from carnallite after potash is recovered; MagForestry is a wood-chip business based in the ROC; and MagEnergy is a hydroelectric generating business in the Democratic Republic of the Congo.

On Sept. 30, MagIndustries had a consolidated working capital of US$121 million and about US$32 million in corporate notes outstanding (not included in the working capital reported.)

In the nine months to Sept. 30, 2008, the company lost about US$32 million on about US$21 million in sales.

At presstime, MagIndustries shares were trading at 36.5¢. They have been trading in a range of 16.5¢- $3.72 in a 12-month window.