We released an initial site visit report discussing Focus Ventures’ (FCV.V) Bayovar 12 project earlier this year, and in the past 10-12 months, Focus has made a lot of progress. As the company expects to release a pre-feasibility study before the end of this year, this seems to be a good moment to review Focus’ progress and to discuss our expectations for the PFS.
A brief overview of Bayovar 12 and the progress made in the past year
Fourteen months ago, Focus’ maiden resource estimate showed a total resource of 188 million dry tonnes of phosphate at an average grade of in excess of 12.4% P2O5. Considering this large resource was found on just 5% of the total size of the Bayovar 12 land package, Focus ‘had’ to increase its exploration target to 300-400 million tonnes of phosphate. This once again seemed to be a conservative resource estimate because earlier this year Focus’ updated resource estimate at Bayovar outlined a total resource estimate of almost 330 million dry tonnes at a (higher) average grade of in excess of 13% P2O5.
That’s an amazing result, considering 80% of the land package remains unexplored. As of this moment, Bayovar 12 is the fifth or sixth largest phosphate project in the world owned by a junior exploration company and that’s pretty impressive for a company trading at just C$11.5M.
It was pretty clear the ‘critical mass’ to develop a mine had been reached and Focus started to focus on delivering a pre-feasibility study before the end of this year as it doesn’t make a lot of sense to continue to drill just for the sake of drilling. Focus wants to achieve two things with the pre-feasibility study. First of all it’s obviously very useful to be able to give the market an idea about the potential returns and economics of this future phosphate mine, but secondly, and maybe even more important, Focus had promised JV partner JPQ it would either complete a PFS by the end of this year or pay JPQ a ‘penalty fee’ of US$500,000. Whilst paying a $0.5M penalty wouldn’t be the end of the world, we’d obviously like to see the cash being spent on the project instead of ending up in JPQ’s pockets.
As we explained in our site visit report, the Bayovar 12 project is blessed with excellent access to existing infrastructure. We aren’t aware of any other projects where not only the Pan-American highway is going right through the land package but which also has access to high-voltage power lines and a port just 30-40 kilometers away, and that’s exactly what makes Bayovar 12 extremely appealing.
A pre-feasibility study will be released by the end of this year
We are really surprised to see Focus’ share price slipping to just 11.5 cents for a market capitalization of less than C$11.5M and we believe the upcoming pre-feasibility study will be an important catalyst for the company as it will be the very first time an independent valuation report will be released at Bayovar 12.
We believe the company’s share price has been hit by the fact phosphate isn’t really a mainstream commodity and the news a Brazilian competitor has failed to deliver on its promises, but both elements don’t really matter to continue to develop this project as they are unrelated to Focus’ development plans.
As you might remember, the phosphate layers at Bayovar 12 are almost perfectly horizontal which makes it pretty easy to recover the phosphate (which is visible with the naked eye!) through a simple excavating exercise. Yes, the strip ratio will be very high (we are expecting a double-digit strip ratio), but keep in mind the ‘overburden’ is just sand (and nothing else but sand). No blasting will be required and to remove the overburden, all you’d need is just a few excavators and trucks as you could literally move the overburden with a simple spade and wheelbarrow. This shouldn’t cost more than 50 cents per tonne of waste. So no, the overburden and strip ratio don’t worry us at all.
Focus Ventures plans to start with a ‘small’ 300,000 tonnes per year open pit scenario to keep the initial capital expenditures at an acceptable and ‘financeable’ level and will reinvest the cash flow of the first few years to increase the output to 1 million tonnes of direct application phosphate rock per year.
We already made some back-of-the-envelope calculations to get a rough idea what the NPV’s and payback periods would look like, and even in our most conservative scenario we end up with an after-tax NPV8% of C$234M for Bayovar 12. Keep in mind our calculations are based on our own parameters and are most definitely not an official guidance from the company.
The final outcome might be very different as the initial capital expenditures and the operating margins might be better than what we are projecting. Long story short, if the pre-feasibility study would show an after-tax NPV of less than C$200M, we would be very disappointed.
Conclusion
Based on our calculations, Focus Ventures is currently trading at less than 0.1 times the expected NPV of Bayovar 12. We obviously hope the upcoming pre-feasibility study will confirm our expectations and we’re secretly hoping for an NPV of in excess of C$300M.
We strongly believe a positive pre-feasibility study might be an extremely important catalyst for the company’s share price and are looking forward to see the final results of the study. We have a long position in Focus Ventures and are participating in the current financing at a premium to the current share price.
Disclosure: Focus Ventures is a sponsoring company, we hold shares. Please see our disclaimer for current positions.
