MBAC shows Santana’s feasibility

MBAC Fertilizer (TSX: MBC; US-OTC: MBCFF) is de-risking its Santana phosphate project in Brazil, with a feasibility study showing that the company could, for US$427 million, build a 32-year operation producing 500,000 tonnes of granulated single super phosphate (SSP) a year.

The study pegs initial capital costs at US$377 million, not including a US$50-million contingency. Operating costs are estimated at US$113 per tonne during the first year of production in 2017.

The Santana project has an after-tax net present value (NPV) of US$396 million and an after-tax internal rate of return (IRR) of 19.9%, using a 10% discount rate.

BMO analyst Joel Jackson describes the feasibility results as “relatively neutral,” noting a nearly 9% increase in total capital costs to US$427 million from the US$393 million in the April 2013 prefeasibility study. Initial production has also been pushed to 2016, from 2015.

But Santana’s mine life has increased to 32 years from 30 years, largely due to improved reserves. The project’s reserves sit at 45.5 million tonnes grading 12.86% P2O5, compared to 44.3 million tonnes at 12.2% P2O5 earlier.

Indicated and inferred resources were also updated. Santana has 60.4 million indicated tonnes averaging 12% phosphate oxide (P2O5), plus 26.6 million inferred tonnes of 5.6% P2O5, using a 3% P2O5 cut-off grade.

MBAC expects an SSP price of US$345 per tonne in 2016, its first year of sales. Santana, located in Brazil’s Para state near the border of Mato Grosso, is close to key fertilizer markets. Mato Grosso is Brazil’s largest soybean producer and fertilizer consumer, while Para is a leading beef producer. There is no current phosphate producer in the Santana project area. MBAC plans to sell SSP to the northern and eastern regions of Mato Grosso and the southern part of Para state.

The company says SSP demand in Mato Grosso alone is 1.5 million tonnes a year. It expects that to grow by at least 20% in 2015.

While Santana is one of the company’s growth projects, MBAC’s flagship asset is Itafos Arraias in central Brazil. Itafos is ramping up for operational capacity by year-end.

The Toronto-based miner says it will conduct detailed engineering studies at Santana before making a final construction decision.

“The sizable external financing requirement for Santana remains the key hurdle,” Jackson points out. To reduce the funds needed to build the project, MBAC is seeking strategic partners and considering selling a minority stake in Santana.

MBAC believes the Santana and Itafos projects combined could make it the largest SSP producer in northern Brazil, and the second largest in the country.

At press time the producer’s shares traded for $1.91 apiece, which is 24¢ below its opening price the day the study was released on Oct. 17. Canaccord Genuity analyst Keith Carpenter says the soft market reaction is due to the lack of an update on Itafos, and not the feasibility study. He has a target price of $3.55 and a “buy” on the stock. BMO’s Jackson has a $3 target price and a “speculative outperform” rating.