We have visited Focus Ventures’ (FCV.V) Bayovar 12 phosphate project in Northern Peru and now strongly believe the company is gearing up for what could be an extremely exciting year for Focus.
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The background of Bayovar 12
Back in 2013, Focus Ventures wanted to increase its exposure in the fertilizer sector and signed an agreement with JPC whereby Focus Ventures can earn an initial 70% stake in the Bayovar 12 phosphate project. The land package was extremely interesting as it’s located on strike of Vale’s (VALE) Bayovar phosphate mine (producing 4M tpa, increasing to 6M tpa shortly) and the phosphate project operated by Fospac which is getting ready to start producing.
The Bayovar project is a sedimentary deposit which means that in this case the layers of mineralization are very flat and extremely consistent. This allowed Focus Ventures’ independent consultant to sign off on a maiden resource estimate which contained both indicated and inferred resources using a drill hole spacing of 800 meters.
The maiden resource estimate surpassed both our and the management’s expectations, as the overall estimate contained 188 million (dry) tonnes at an average grade of 12.4% P2O5. More importantly, the upper four mineralized layers already contain 51 million dry tonnes at an average grade of 14.3% P2O5 which would already underpin a multi-decade mine life.
Why mining at Bayovar 12 will be cheap
As the deposit seems to be extremely predictable (Vale’s own Bayovar mine is very likely mining phosphate from the same beds 15-20 km away), the modelling of the resources will be easy, resulting in a very straightforward mine plan. The overburden is extremely soft and free-digging (it’s basically just sand which Focus will need to dig away) so except for excavators and trucks, no other mining equipment will be needed. As the first mineralized bed is at a depth of just 25 meters it should be very easy to remove the overburden and access the first layer.
We also visited a small-scale phosphate mine just a few kilometers down the road and we were surprised to see how that specific mine was able to produce a few hundred thousand tonnes of phosphate per year with literally nothing else but one excavator, two trucks and a simple ‘concentrator’. That mine is also believed to be mining the same phosphate beds which seem to be continuing onto Focus’ land package and forget about confirmation drilling or taking additional samples; the phosphate layers are visible with the naked eye which makes it unbelievably easy for the excavator operator to separate waste from phosphate. Focus Ventures will have to purchase some surface miners as that would increase the efficiency of any mining operation. Those mechanized surface miners should be able to mine the phosphate beds pretty accurate.
The surrounding infrastructure
It’s not just a straightforward project from an operating point of view, the Bayovar 12 project is also located in what could best be described as every mining company’s wet dream. First of all, it’s located right at the Pan-American Highway which is a paved road in a better shape than many North American or European roads. A high-voltage power line runs literally right through the company’s land package (to supply Vale’s mine with electrical power), so if Focus Ventures would like to tap the power grid it would probably just have to build a sub-station at a cost of just a few million dollars.
That already sounds great but it gets even better. The vendor of the project also owns and operates a port just 30-40 kilometers to the west of the land package which it uses to export gypsum from its gypsum mine. Their gypsum mine is located on the Bayovar 12 concession and could be seen as another positive as it should be very easy to get a larger mine permitted on a land package which is already being used for mining.
What’s next for Focus Ventures?
2015 will be an extremely important year for Focus as a lot of milestones will be reached. Let’s start with the bad news first. In order to secure 70% of the project, Focus needs to make a payment of $3M by the end of February. This means that the company will have to raise more cash and in an ideal world, Focus would be able to attract a joint venture partner which could either take care of the payment (and subsequent annual payments of $1M until a PFS has been completed) and the required exploration expenditures of $15M or that a potential joint venture partner would pay Focus a lump sum to buy a stake in the project.
We are however very confident that dilution will remain limited. Even though Focus’ management team didn’t want to give us any details yet, we had the impression they weren’t worried about the $3M payment at all. On top of that, by looking at the insider filings, Chairman Simon Ridgway has purchased several hundred thousand shares in the past few weeks and months, strengthening our belief a suitable solution will be found.
There will also be positive news as Focus will design a new drill program to test the continuity of the beds towards the east and we are expecting at least 75-100 million tonnes to be added to the current resource estimate. Another part of the 2015 drill program will be used to start some infill drilling on the western portion of the project to increase the tonnage in the measured and indicated category. This will be needed for the mine plan in the pre-feasibility study (which we expect to commence shortly after the results of a PEA will be published in the summer of this year). It would make a lot of sense for Focus to fast-track the project towards a pre-feasibility study as it would allow the company to cease the $1M annual payments to the vendor and instead invest the cash in the property.
We have also visited an outcrop of the phosphate mineralization with two of Focus’ geologists and it looks like that specific area could be fast-tracked towards small-scale production. We aren’t expecting anything big, but a 250,000 tpa operation would have several advantages. First of all, Focus could gain valuable operating expertise which could be applied to the larger mine later on. But a more important advantage would be the incoming cash flow that would allow Focus Ventures to continue its exploration work without having to issue more shares. Looking at the nearby small-scale mining operation, a 250,000 tpa operation could bring in $18-20M per year in cash flow.
Conclusion
Focus Ventures’ Bayovar 12 project truly is quite a unique project that will be incredibly easy to develop. There still is a near-term uncertainty regarding the $3M cash payment to the property vendors, but as insiders have been buying several hundred thousands of shares in the past few months we think we shouldn’t lose our sleep over it as the Focus management team has a lot of skin in the game.
2015 will be an important year with progress on several fronts and we are secretly hoping for a strategic partner to step in by the end of this year which could reduce (or remove) Focus’ funding needs. We are quite excited about Bayovar 12 after having visited the project and have zero doubt there will be a mine on the land package in the not so distant future.
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Disclosure: The author holds a long position in Focus Ventures. Please see our disclaimer for current positions.
