Chatham provides 5 November Update

Update
5 November 2014

Thank you - and we need just a little bit more please….

There’s been a great response to our latest tranche of capital-raising. Habitual investors (including existing shareholders) contributed more than $900,000 towards the rights issue shortfall, and we’ve had continuing interest since we closed off the latest allotment last week. We ‘ve reached this position (effectively in sight of the finish line in a marathon) with your continuing support. Thank you for your ongoing faith in the project.

We still need another $1 million to complete this Marine Consent application process. This a bit more than we were initially expecting, partly because we’ve done some additional research to ensure we’ve covered all of the bases. Budgeted costs charged by the EPA have also increased.

The offer, for habitual investors, is priced at the same level as the recent rights issue, i.e. 12 cents with an entitlement to a 68.8 cent option andcompares attractively with recent share price trading at up to 23c. (Note these options have been extended for a year). The price rose in response to profit guidance that reinforced the robust financial basis of the project and then fell again - normal market behaviour given share placements being offered at a market discount.

We will seek to raise only the funds we really need to achieve the Marine Consent. This opportunity is not without risk but in my view has significantly greater upside than downside. So if you’re up for another contribution, I’d love to hear from you.

Marine Consent hearings on track

We’re now nearing the end of the Marine Consent hearings. This week we’ve heard from the fishing industry, we’re completing the presentation of some scientific evidence that could not be scheduled earlier and next week we’re heading to the Chathams for a rescheduled visit after the first planned hearing was postponed due to a death on the island.

In the week starting 17 November our final two witnesses, from environmental consultants Golders, will summarise our environmental impact assessment and present our proposed consent conditions. Then there will be closing statements with legal counsel James Winchester from Simpson Grierson presenting on 19 November. If you have the opportunity to attend this session at the RA Vance Stand at Wellington’s Basin Reserve it will be a comprehensive overview of why this project is so compelling.

The hearings are panning out pretty much as we expected. We were pleased the decision-making committee agreed to our request for the supplementary staff report not to include any recommendations. The report authors appeared at the hearing but offered very little in terms of additional information or insight and we continue to believe the report is an expensive waste of resources and inappropriate to the process.

Our scientific experts have met to caucus with those hired by the opposition and are mostly reaching a consensus. This includes common ground on all the major elements of our proposal including the plume, sedimentation deposition, effect on fishing, uranium (non) effects, etc. As a result, it appears that these perceived issues are unlikely to have a significant influence on whether or not the DMC will grant consent.

Thanks to shareholders Mac Beggs and Paul Martin who appeared at the hearings, putting a lot of effort into well-researched professional presentations.

Remember every word of what happens is on the EPA website. Each day’s proceedings appear the day after. Check out: http://www.epa.govt.nz/EEZ/chatham_rock_phosphate/Pages/default.aspx

Profit guide enthuses investors

Issuing guidance on our expected business plan and financials had a (at least temporary) positive effect on our share price. We issued the guidance because of confusion among some witnesses at the hearings regarding our financials. It was a good opportunity to clarify to the decision-making committee and financial markets the significant economic benefits our project offers for New Zealand and the attractive profitability.

Environmental benefits - As we’ve commented before, we’re also proud our project offers new environmental benefits for New Zealand’s farming industry, in terms of using a low cadmium, low carbon footprint, low run off, potentially organic product. This project will create a new industry with strong ties to agriculture, our most important export earner. Our product will enhance New Zealand’s security of supply and reduce our exposure to politically risky sources of a critical input to this country’s biggest industry.

Over the past few years our marketing vice president Najib Moutia has undertaken extensive market research and sales development in international and local rock phosphate markets. The factors potential buyers consider in assessing the attractiveness of the different phosphate rock available on international markets include the level of phosphorus and other minerals and ease of handling. CRP rock phosphate can be used to make either medium or high grade superphosphate, direct application fertiliser, or even dicalcic phosphate.

We’ve identified buyers in eight Australasian and Asian countries and expect to export 1.15 million tonnes annually and for 350,000 tonnes to be used within New Zealand, with two thirds of the total used to make single super phosphate and one third sold for direct application use.

Big potential - Rock sold for direct application use sells at a substantial premium in some markets so we’ll focus on maximising direct application use. We believe the market for direct application rock phosphate in New Zealand is 100,000 to 200,000 tonnes a year, but with potential for significant expansion, given:
• this product has not been readily available from a local source
• there is a desire or likely requirement to reduce leaching run-off effects, and
• our product is the ideal for high country use and for maintenance in dairy farm application.

We are undertaking pot trials to validate the work done in earlier years proving the strong performance of our product on New Zealand soils, and evaluating the market potential for RPR on home garden use in New Zealand and internationally.

Price confusion - There’s also been some confusion at the hearing about the use of the World Bank quoted spot price, which is simply a reference point and often bears little resemblance to the contract prices with individual buyers that are the industry norm.

We expect an average revenue per tonne of USD 125 (NZD 158) yielding annual project revenues of USD 187.5 million (NZD 237 million). These revenues are net of export freight costs.

One of the key financial strengths of the project is the cost of transport of imported rock phosphate to New Zealand is about equivalent to Chatham’s current estimated mining costs, which gives the project a significant financial advantage.

After deducting expected contract dredging costs, incoming port charges, environmental monitoring costs, community contributions, biodiversity offset costs and business overheads, the annual profit before royalties is estimated to be USD 54 million (NZD 68 million). From this Chatham estimates paying USD 5.4 million (NZD 6.8 m) in royalties and USD 13.6 million (NZD 17.2m) in income tax.

Benefits for NZ - There are also significant economic and employment benefits for New Zealand including:
• Port charges to the port where the operations and product stockpiles will be based of several million dollars a year
• Port support services relating to product handling
• Overseas phosphate export vessels provisioning support services ( 30+ ships)
• Survey vessel services
• Portside engineering services
• Jobs on the mining vessel
• Other jobs relating to environmental monitoring services
• Maritime training opportunities
• Ongoing scientific research and data gathering
• Mining vessel provisioning and bunkering
• Jobs arising from increasing farming outputs where CRP rock is used on marginal land.

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