MBAC posts cost hikes, delays at Itafos

MBAC Fertilizer (MBC-T) is raising $50.1 million to cover further cost escalations and delays at its Itafos Arraias single superphosphate (SSP) project in central Brazil.

The project — located in the southeast of Tocantins state, a few kilometres from Campos Belos, a town in Goias state — is now anticipated to cost US$323.1 million, up US$47.1 million or 17% from the January 2013 estimate, which contained an earlier US$18 million cost overrun.

To cover the earlier cost hike, the company closed a $35 million equity raise in February and is now eyeing a $50.1 million financing to have Itafos fully-licensed and running by June end, instead of in late March.

The Toronto-based junior citied several reasons for the delay and most recent capital increase, including renegotiating its electro-mechanical contract; poor engineering work and inadequate planning; logistical hurdles in moving equipment to the site; and replacing its civil work contractor due to poor performance.

MBAC’s management says since it initiated a capital cost review at Itafos in February, performance on the site has improved. Construction at Itafos to date is 90% complete, with the beneficiation plant being commissioned, mine construction done, power line in place, water dam ready, and all major equipment on site.  

The firm says to complete the project it has to wrap up the commissioning for the beneficiation, sulphuric acid and fertilizer plants as well as the water supply system.

To ensure the project stays on track, MBAC has appointed a general manager for Itafos, and an executive committee to oversee all aspects of the project. The committee consists of Chairman Peter Marrone and directors Alexander Davidson and David Nierenberg, one of MBAC’s two new directors. (Eduardo Ledsham is other new director.)

With first production at Itafos postponed to June end, and dry weather affecting fertilizer production and demand in Brazil, MBAC expects to sell 175,000 to 225,000 tonnes of SSP in 2013 at slightly lower prices of US$280 per tonne.

It anticipates reaching full capacity at Itafos in 2014 to generate 330,000 tonnes of phosphate rock concentrate grading 28% phosphate (P₂O₅). That concentrate will be mixed with sulphuric acid and re-processed to churn out 500,000 tonnes of SSP a year. MBAC predicts the SSP price will climb to US$325 per tonne from 2014 onwards.

Meanwhile to bring Itafos to the finish line MBAC estimates it would need to raise US$45 million and recently announced a private placement with a group of underwriters led by Canaccord Genuity, including National Bank Financial and BMO Capital Markets.

The underwriters will buy 22.7 million shares at $2.20 per share for gross proceeds of $50.1 million. The company’s management and directors agreed to take down US$9.5 million of the placement.

The underwriters also have an over-allotment option to buy another 4.5 million shares at the same price to raise another US$10 million. The financing should close on or around April 18.

Raymond James analyst Steve Hansen has reduced his target to $3 from $4.25 largely due to the share dilution related to the financing, but maintained his “outperform” rating.

“Notwithstanding MBAC’s obvious missteps in recent weeks, we continue to look favourably upon its portfolio of Brazilian-based fertilizer assets, with Itafos representing a cornerstone project as it migrates from a development-stage company into one of the few independent producers in the country,” he writes in a note.

Along with the April 1 corporate update, MBAC released an updated technical report for Itafos highlighting a 47% growth in reserves, which stand at 64.8 million tonnes grading 5.08% P₂O₅. The open-pit operation has a 19-year life, with a net present value of US$254.2 million and a 21% internal rate of return, using a 10% discount. Payback is expected in 4.5 years. 

MBAC closed April 2 flat at $2.15, after falling 4% a day earlier.