Reward Minerals – worth 14x current market cap?

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Reward Minerals (ASX: RWD) believes the NPV of its upcoming deposit is worth 14x the current market price of $22m.  Once RWD’s Lake Disappointment (LD) Sulphate of Potash (SOP) deposit passes all the expected environmental regulations by March 2020 on a post-tax basis, the NPV at an 8% discount rate is $293mn, based on an IRR of 15%. How many best-in-class lowest cost SOP deposits with 100-yr+ lifespans trade with such a minuscule capitalization against the prospect of sharp growth in plant-based foods requiring the very input to produce?

While all Potash fertilizers contain Potassium the two most common forms are Muriate of Potash (MOP) and SOP,

SOP is a premium potash fertilizer free of chloride (unlike MOP) which is harmful to plants). SOP is used primarily on high-value crops, usually leafy plants, such as fruits and vegetables. MOP is commonly used on carbohydrate type crops such as wheat. SOP may be applied to carbohydrate crops however the use of MOP on leafy plants will typically burn and harm them while also affecting the taste.

Reward Minerals have 100% ownership rights of the LD SOP deposit which will have lowest quartile production costs thanks to being derived from brine, not the expensive Mannheim method. LD is situated in the driest place in Australia which means it has the highest evaporation rates, perfect for brine-based SOP collection.

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Lowest cost producer of SOP

Only 29% of global SOP is created from brine. Around 50% of SOP is produced via the Mannheim process, an energy-intensive conversion process whereby MOP is combined with sulfuric acid to create SOP and a hydraulic acid by-product. Not only is the process highly capital intensive, but it is also predicated on the availability of markets to sell both of the resulting products.

It is this supply of SOP which creates a price floor for the commodity well above the marginal production costs for any primary deposits.

LD’s expected cash cost of A$335/t selling into a US$500/t wholesale market, RWD expects to have an EBITDA return of around $118m p.a. This will make it one of the lowest-cost producers globally thanks to the natural conversion process afforded with brine deposits.

SOP output expectations

The deposit is expected to get the EPA green light in early 2020. RWD is targeting 407,500tpa production in a global market of 6mtpa. This will be the world’s second-largest brine SOP deposit by output. The deposit has 153Mt of resource at its disposal.

Initial capital costs to extract the mineral are expected to be $405mn all in.

EPA

Unaffected by instability in MOP

The premium between SOP over MOP has widened in recent times due to instability in the MOP market through the split of Uralkali, a major Potash producer, from the Belarusian Potash Company. Throughout this period the price of SOP has remained stable.

The SOP price is underpinned by the rarity of sizeable primary deposits and the high cost of the Mannheim production process through which approximately 50% of SOP is created. There are no viable substitutes and demand continues to steadily increase, unaffected by the instability in the MOP market.

Put simply, SOP is a value business. MOP is a volume business.

Teaming up with Twiggy

On November 12, RWD announced a $2mn JV with Fortescue Metals (FMG) a Farm-in and Joint Venture Agreement. Reward’s rights in relation to the Lake Disappointment SOP Project’s infrastructure requirements are protected under the agreement.

7 Billion reasons & environmentally conscious millennials

With a 7 billion population to feed, the SOP market will continue to be firmly supported. It will be helped by a push towards more plant-based diets, SOP’s lower salinity will be superior to MOP which reduces yields in the same crop field over time. Plant-based protein could represent one-third of overall protein by 2054, according to Lux Research.

CM holds RWD stock in his SMSF and own account.

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