Sunkar Resources - Any Capital Growth From This Fertilizer?

26th Oct '09 by cuckfield1704

4 comments 4636 reads

Can I interest you in a company that mines phosphate ore in NW Kazakhstan, processes it in an adjacent integrated fertiliser manufacturing plant and then, from this landlocked country, it seeks to market its product to the world? Well, this is not one for the faint-hearted...

The investment plus points first:

The resource to which SKR have the rights and available for extraction is estimated at 800 million tonnes ^[1]
It is contained very close to the surface and therefore can be mined at low cost. The phosphate reserves are estimated to take over 50 years to exhaust.
Operating costs in Kazakhstan are low (see country note below) and apart from transportation and marketing all costs will be within that country. There is a large pool of available labour nearby the site of the plant.
Having mentioned the seeming geographic limitations of the national site, it should be hastily added that SKR list the main market for its product amongst the emerging BRIC economies of Russia, China and India – all butting on to Kazakhstan but with the mine and plant in Chilisai in the north west, up near the Russian border, China and India are a long road haul away – and not along motorways either. However, having got the product to China, that does open up the world’s shipping channels...
The global market for phosphate fertilisers is presently over 40m tonnes p.a. and expected to grow by 1.5% p.a for the next 20 years. ^[2]

The general cautionary aspects are:

The economic, political and financial risk concomitant with Kazakhstan (see below).
The growing wariness of phosphate fertilizers in America and the UK (see later ‘Health Warning’), although these are admittedly not the the company’s intended main markets.
Fertilizer production accounts for 87% of global phosphate consumption. ^[3]
Performance of the share price to date.

The Company

The Company debuted on AIM in July 2008 when some resolute investors bought 28m Ordinary Shares at 120p each. The shares are currently (23.10.09) quoted at 39p each which is a severe enough loss in a little over 12 months. It was even worse news at times in the intervening period when the shares were quoted at just 5.25p each.

At 39p, SKR is capitalised at £62.3m which converts to 160m shares so who owns all the rest?…

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cyberbub

26th Oct '09

Hi,

Your article seems to be a bit slack in several regards, (a) you underestimate the amount of capital to fund the DAP plant by a considerable marin but the figure is readily available in Sunkar's presentation, (b) you do not seem to know about the international railway network passing directly through Sunkar's claim, and (c) you seem to think that there is some lack of clarity about the directors' shareholdings, when in fact they are readily available in the RNSes from July 2009, there is no "rumour" about it.

AFAICS, SKR are due a more serious re-rating in the medium-term (6-12 months) as their business plan is increasingly de-risked, albeit that you are probably right in that their milestones are slipping slightly.

All IMO

Cyberbub

Betasurfer

27th Oct '09

Hi, while interesting, this article seems to have a conspiratorial tone which is not justified by the facts. I am a bit mystified by this "missing shares" point. If you look here on the website, it spells out the management holding in detail, as of June 02 2009 -http://www.sunkarresources.com/en/pages/significant_shareholders

Shares in issue: 159,849,327 of 0.1p
So far as the Company is aware, 32.20% of the Company's ordinary shares are not in public hands.

In addition, if you refer to the Admission Document (http://www.sunkarresources.com/userfiles/files/Admission%20Document.pdf), it describes the share capital arrangements in pretty exhaustive detail. See page 186 onwards.

What exactly is the issue here?

cuckfield1704

Cyberbub and Betasurfer: Thanks for your interest. The £100m is the immediate (medium term) amount of new capital required ($150m reported at the July 2009 AGM duly converted) you are correct that much more will eventually be needed. Mention was made of the very direct railway system in Kazahstan and I had intended to mention the proposed link between the factory and the railway system at Kandagash (on both Moscow-Tashkent and the Orsk-Atyrau rail links) for distribution as an alternative to the very dodgy roads, so apologies if that was not clear from the article. The shares in issue quoted above agrees with the article, as for the share register 25% is definitely with executive directors and considerably more listed with funds and nominees the details on which are near impossible to uncover.

RogB

Hi cuckfield

Certainly the recent rises in Sunkars share price have alerted a number of newcomers to the company, and maybe that’s where you interest has started, it's not clear from your original post if you are an investor in the company or not, although by implication only I would suggest you are not.

As stated by the previous posters Cyberbub and Betasurfer, I too believe there are a number or misleading comments and assumptions in your original article, more on those in a min. However as Betasurfer says it is the tone that particularly interests me, it appears very negative from the first paragraph and continues to the end, I suppose you could say I don't believe it's as balanced as could be, but readers will as always make their own conclusions.

Regarding the details contained in the article I won't repeat the comments already made on the rail links, which have always been Sunkars proposed route of distribution, the cost of $20/t to western China and $45/t to central China are low in the scheme of things and apparently less than the cost of transport from China's Pacific coast.
There is also another option of $90/t to India via the Black Sea. Costs to local areas and Russia will probably be less.
Remember also that at aprox $125/t to produce this is probably going to be the lowest cost DAP anywhere in the world. One of the first 2 Pilot Plant testers suggested that this may have to rise by a very small margin due to the need for larger filters in the plant, but that it would be minor, so it is likely to remain as competitive.

There is here as elsewhere some confusion on the BFS (Bankable Feasibility Study), this has started and has been going on for some time.
The BFS includes Resource Estimation, Extraction and Beneficiation Testing, Pilot Plant Testing, Feasibility Study Contract, Off-take Arrangements & Front End Engineering.
Therefore the BFS has started, is well underway, and all appears to be positive so far, I will however agree the timeline has slipped a little, earlier Sunkar had hoped to complete by the end of 2010, now they are quoting the end of Q1 2011, hardly a big slip in such a long term project. The final work will be carried out after a contract is awarded to one of the pilot plant testers.
Just to add Sunkar have the finance to complete this already.

Although I am struggling to see where your financial requirement figures come from, I will outline what I know...
The total requirement for a DAP plant is $750m, this though is a 2 stage project and the initial requirement is $450m, much more than your short/medium term figure, but not a figure that has ever been hidden or in doubt.

Sunkar themselves say that a JV is probably the most likely way ahead...

"Various strategies for marketing products are being investigated with the aim of securing off take agreements for a significant proportion of production. Management believe that a strategic partnership with one of the global or regional industry leaders could be beneficial."

This is a quote from the AIM Admission document, page 20.

This of course may change with time, but the options are much better now we know the feasibility of DAP production. I keep an open mind on this and look forward to future company announcements on this.

Regarding your comment....
"The reported forecasts of £41.3m turnover (there has been none to date) and pre tax profits of £10.48m for the year to 31 December 2010, giving the Company a projected P/E of 9, now seem to be hopelessly out of reach."
Although I agree this is unlikely I wouldn't consider it impossible as flour sales should commence shortly, Sunkar have discussed the local requirements and are keen to get an income flow established, we know volume shouldn't be a problem, as 12 month mining has now been proven, and there are already stock piles of ore available.

I don't wish to go on too much here, I would probably write a longer reply than the original article, but I will for the sake of balance add that the political situation is potentially an issue, while the current president, Nursultan Nazarbaev, stays in power then all will be fine and he has a few years to go yet, so I remain optimistic.

Currently I am a long term holder of SKR (Sunkar) shares, not a huge holder, but significant for me.

As always I welcome comment and corrections if needed.

Sunkar Resources - any capital growth from this fertilizer?

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Cuckfield1704

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