Phosco (ASX:PHO): Potential to deliver 67.6Mt of phosphate over nearly 5 decades!

Phosco (ASX:PHO) is bringing its Gasaat phosphate project in Tunisia online. The need for sources of fertilisers like phosphate are well known, although this has not stopped many of its peers falling over. While many of its peers attempting to advance fertiliser projects have not succeeded, Phosco has already made it further than few other aspirants have, and its current resource could be just the beginning. Several years of legal dramas have finally been put behind it, and even though Tunisia is not the most familiar jurisdiction to ASX investors, the government supports the project.

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Phosphate is needed

Phosphate is a term alluding to any compound containing the element phosphorus bonded with oxygen. Phosphorous is a natural occurring mineral found in rocks, soil and living organisms. It is needed in photosynthesis, DNA, cell membranes and general bone health; and it is one of 3 essential macronutrients for plant growth with the other 2 being nitrogen (in the form of urea and ammonia) and potassium (in the form of potash, either muriate of potash or sulphate of potash).

90% of the world’s phosphate consumption is in agriculture and 40% of the world’s food production is linked to fertiliser use, for good reason. It helps plants develop strong root systems, produce seeds and fruits, and convert sunlight into usable energy. Investors should not confuse phosphate with potash because it is potassium based instead of being phosphorous based, notwithstanding they are both important for plant health.

It is generally mined from phosphate rock and most of the world’s reserves are in North Africa. 90% of the world’s reserves are possessed by the USA, Morrocco, Jordan, China and South Africa. But the biggest producers are Russia and China, and these countries are reducing their imports from the West. Australia and Europe mostly import it due to the lack of reserves.

Prices were low during the bear market of 2015-20 – US$70/t. Since then, there has been a major bull market due to several factors including export bans by major producers, the war in Ukraine, rising logistical, freight and operational costs and also the threat of tariffs (albeit a threat that does not exist). Still prices are at US$150/t and prices for certain ammoniated phosphates are even higher.

Structural factors including food demand, nutrient use efficiency all support baseline demand. This demand has been bolstered in recent years by the increased use of phosphate in the production of electric vehicles, due to the majority of EV’s utilising Lithium Iron Phosphate (LFP) chemistry in their batteries.

PhosCo’s Gasaat project has a monster resource

PhosCo’s Gasaat project lies in Tunisia, 35km from the nearest railhead which connects to the Port of Rades. It covers 112sqkm and has 9 prospects, only two of which have been explored more than at a rudimentary level. There is a Maiden Resource from one particular prospect (KM) due in the first quarter of 2026, and there is a broader Exploration target of 110-165Mt across the rest of Gasaat. This does not even account for other projects PhosCo has including Sekarna which is analogous geologically to Gasaat.

As it currently stands, PhosCo’s flagship Gasaat project has 146 million tonnes at 20.6% P2O5. A December 2022 Scoping Study found a post-tax NPV (using a 10% discount rate) on the project of US$657m. The development capital required was US$170m but at a phosphate price of US$150 per tonne, the IRR is a very strong 54% and the payback is only 1.5 years. The scoping study used the published KEL and GK resources to establish an open pit operation producing a concentrate containing greater than 30% P2O5 and less than 1% MgO.

The operation can potentially run for close to 50 years and see 67.6Mt produced over the life of mine, 15Mt of which could be in the initial 10 years. While the operating costs are not cheap, the project is high margin considering opex is US$79/t given the low strip ratio open pit, high grade mineralisation and low-cost operating environment.

Is Tunisia a safe jurisdiction?

Tunisia is an attractive place to build a phosphate mine. Tunisia is a small North African country of only 12.3 million people which used to be one of the world’s largest producers of phosphates, producing over 8Mt in 2010, but has been a sleeping giant since then due to political turmoil. The past couple of years has seen significant efforts to bring back the glory days including the rapid expansion of exports and significant investments into state-owned companies.

The newly granted permits to PhosCo (the first time the Tunisian government granted such a permit to a foreign company) signal an acceptance of private companies to operate phosphate mines. PhosCo will be in fair company, with several international resource and energy companies active in-country including Shell, Anglo Oil & Gas, TotalEnergies, Scatec and AMEA Power. The government has several initiatives to encourage development including a corporate tax rate in Tunisia that is 25% ordinarily, but zero for first five years of a mining project.

If Tunisia successfully re-establishes itself as a globally significant phosphates player, we expect PhosCo will find a receptive audience from offtake partners, and, importantly, project financiers.

What’s next?

Our friends at Pitt Street Research have recently released a note on PhosCo. Pitt Street valued the Gasaat project at A$839m in a base case and A$975m in a bull case and PhosCo as a company (based on its comprehensive cash flows) at $0.35 per share in a base case scenario and $0.56 per share in our bull case.

Beyond continued exploration work, PhosCo is seeking to take the project into production. To this end, the next goal is a Bankable Feasibility Study and PhosCo has a formal mandate with the European Bank for Reconstruction and Development (EBRD) towards funding the deal – a deal involving ERBD granting $1.8m to co-finance technical work and EBRD receiving 150m options exercisable at 5 cents. Other potential catalysts could include offtake deals, the upgrading of the current JORC Resource and continued momentum in phosphate prices.

PhosCo is a research client of Pitt Street Research. Pitt Street directors own shares.