Centrex (ASX:CXM): Interview with CEO Robert Mencel

Centrex Ltd

We talked with Centrex CEO Robert Mencel about the prospects of the Ardmore Phosphate Rock Project in northwestern Queensland, the fact that the demonstration plant is working much better than expected and the potential to grow sales from this plant that would replace Australia’s phosphate rock imports.

See full transcription below!

 

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Transcription

 

Stuart: Hello, and welcome to Stocks Down Under. My name is Stuart Roberts, and I’m one of the founders of our publication. And joining me on Wednesday, the 3rd of August, from the Adelaide Hills is the CEO of Centrex, Mr. Robert Mencel. Robert, good afternoon.

Robert: Good afternoon, Stuart.

Stuart: So Centrex, ASX: CXM, it’s a name we think investors will be paying more attention to. Robert, you’re actually isolating with COVID at the moment. You look perfectly healthy to me.

Robert: Thank you.

Stuart: But when you recover, your business is to get the Ardmore Phosphate Rock Project in Northwestern, Queensland, up and running. And you’ve already made great strides in the 18 months you’ve been running this company. Tell us about Ardmore and what’s happened up till now.

Robert: Yeah. Okay. So Ardmore is a good little project. It’s been around for a long time, since 19… or probably 1960s, 1970s. Centrex acquired it in 2014. It has spent…it’s been about $20 million developing the project up until about 2019. And then with the fall in the phosphate price, the project pretty much went care and maintenance. But the good thing about that $20 million and the time that was spent between 2014, 2015, is the previous management and Centrex did a lot of really good work, you know, to the point where they’d established a resource of 16 million tons, they’d established a reserve over 10 million tons, and had a mining lease granted. And in fact, sorry, the mining lease had already been around for a while, and they’d actually started building a demonstration plant. And what it really meant was when I joined the company back in June last year, you know, I almost had an instruction manual on how to do things. It was all pretty much laid out, and we just executed that. And we’re very lucky that it’s gone well to date. And to the point now where we’ve been mining there, well, full time since April, May this year.

We’ve demonstrated that the [inaudible 00:02:10] is performing well, the resource and reserve reconciliation is good. We’ve been crushing since then as well, and we’re getting good crushing rates throughout our contract crushing plant, so over 100 tons per hour going through. And then we commissioned in June, we commissioned our beneficiation plant, which is effectively just a washing plant, and very pleasingly, it’s performing very well. It had a nine-plate capacity of 70 tons per hour, but, you know, but we’re now sitting around 85 tons per hour. And, you know, we think we can get this plant up to around 120, 130 with a bit of work over the next 12 months.

So it’s a good little plan. It’s performing well. The product is being well received in the marketplace. You know, not only are we getting the upgrade and the uplift in grades, we’re getting from, you know, 31 or 30 P205. We’re getting a 34 or 35% grade, which is what people want to see. But more importantly, we are actually washing out some of those undesirables, the likes of aluminum and iron oxide, which customers don’t want, and the plant’s performing very well and bringing those levels down below a combined 3%. And that’s really what the market wants to see.

Stuart: Well, so it’s interesting, 2018, Centrex did a definitive feasibility study on the development of Ardmore. You used phosphate rock pricing about 135 a ton, which is half of roughly what it’s trading at the moment in international markets. And that gave you a valuation pretax of about 166 million on a modest kind of 10-year mine life. Feels like you can get there even before you initiate on the capital cost and that DFS just by building off this wonderful plant that you did for demonstration purposes.

Robert: Yeah. I gotta say demonstration plant is my new favorite thing, is this, you know, plant, which is really only ever built and designed to provide trial shipments for our customers so we could pre-qualify in readiness for the bigger plant. It is actually performing so well that it’s giving us early cash flow. It’s giving us great market acceptance. You know, we’ve had many customers out on site, they’ve seen the product, they’ve seen the plant. We’re getting good feedback to date. And it’s really allowing us to make cash early, and really take advantage of these high prices. I mean, I see today, the World Bank came out with, you know, around the 320 U.S a ton benchmark price. And yeah, that’s pretty good.

Stuart: Yeah. What’s impressive to me is that that plant you’ve got there at Ardmore is capable of supplying the entire Australian market for phosphate rock, all of which is presently imported, a lot of it from Morocco, which is a heck of a long way away from where we are.

Robert: Yeah. So, you know, we think that existing plant, at the moment, on the production rates we’re sitting out on can do 400,000 tons a year. And with some upgrades, we’ll do over half a million tons a year. And as you said, you know, the whole Australian market is only sitting around 400,000. So, you know, we’re in a really good position that we think either directly or indirectly, you know, we are dealing every major customer in this part of the world.

Stuart: Not only that, around the time of the DFS and post that, you started talking to potential offtake partners. Now, one of those was the original vendor, Incitec Pivot, who wants the first 30%. Then you got a couple of Kiwi farm cooperatives and Samsung up in Korea. You virtually sold out all the production, at least for the next three years and beyond.

Robert: Yeah. So we, you know, we’ve allocated 100% of our production for the next three years through agreements. And we’ve done that on purpose. You know, as you mentioned, certainly Ballance and Ravensdown, you know, who are two major New Zealand customers, we have agreements with them. And, you know, when we started talking to Samsung, you know, probably over a year ago now, you know, they would’ve taken 100% of the production.

But we’ve really done, you know, as I like to think, the George Castanza of the mining industry and we’ve gone and done the complete opposite to what most people do at this point where, you know, they’re so desperate to get some sales, they’ll commit 100% of production to a single customer for an extended period of time. And certainly, in my opinion, that’s one of the greatest ways of destroying shareholder wealth, because you cannot do better than having more and more customers and having a bit of competition for your product.

Stuart: Right. Now, a lot of investors may have discovered Centrex at the time you did the Samsung deal. Now, Samsung isn’t just the people who make consumer electronics. They’re a large trading company. And in this case, it’s the rights to five significant Asian users of phosphate rock. Talk to us about how that relationship can evolve over time.

Robert: Yeah. So Samsung’s a, you know… In one of my previous roles, I’ve dealt quite closely with Samsung and they’ve been a very strong supporter of what we were doing there as well. So they are one of the largest traders of fertilizer products in the world. And that’s great from our point of view because any product we can’t find a home for in Australia or New Zealand, you know, they’ve got the reach and the relationships to put that into Asia or possibly even elsewhere.

Samsung obviously, you know, they’ve got good cash flow and so that certainly helps when it comes to payments. And, you know, we hope that we can prove ourselves to Samsung to be a supplier, a reliable supplier of a quality product. And, you know, if that goes well, you know, there may be other opportunities

Stuart: Right. Now, the nearest port to where you are at Ardmore, roughly south of Mount Isa, is Townsville, head northeast about 300 or 400 kilometers if I read the map correctly.

Robert: Yeah, it’s about 700… It depends, from Duchess, it’s about 700 kilometers. You know, in a straight line, it’s probably about that to Mount Isa by rail. It’s probably just under a thousand.

Stuart: All right. So your export customers, you’ll probably ship the product from there. You’re still thinking about where to do a lot of processing for a dry version of the product you’ll ship.

Robert: Yeah. So, it’s a good dilemma to have. At the moment, you know, we plan to export via Townsville. We have a contract with Verizon, which is Australia’s largest logistics provider. At the moment, it’s very much a containerized solution where it goes into a half-height or a three-quarter height container, and then gets…using a retainer, gets emptied into the vessel. And that’s great place to start, and it’s obvious, from our point of view, doesn’t need any capital. It all sits with a contractor. But in time, we certainly want to move to a bulk solution.

You know, these are extraordinary times for the phosphate prices and that’s great and it may continue for some time, but long-term, you know, the price is likely to come back down and we wanna make sure we’ve got the lowest cost operation possible. And that means having a bulk logistic solution. So that means, you know, you gonna need a storage facility in Townsville and because obviously, the product, once it’s been prepared, it needs to be kept dry. So we’re looking at Townsville, you know, for a bulk storage solution. But the other thing, the point you raise, is, you know, potentially we could even do some processing or drying in Townsville.

And that’s important because if you do it on-site, you have to, you know, you’ve gotta provide your own power, your own gas, you’ve gotta provide your own water. You got your own camp. You got a [inaudible 00:09:56] workforce. It’s horrendously expensive to do that in Australia, to run a remote mine site these days. And we are in quite a unique position in that potentially, everything we process, we can sell. So, you know, we can sell our high-grade beneficiary product, but we can also sell our low-grade waste stream as well. And that means the project isn’t as sensitive to location and, you know, along that corridor. So we’re just having a look at operations options, where we will put that.

Certainly, early numbers suggest if you can build it in Townsville, that will really drop your cost base long-term. But you need to get approval to do that. And we’re obviously mindful of any delays.

Stuart: Right. Now, a lot of people who followed your story will be worried that these high prices for phosphate rock are temporary, having to do, in part, with the war that’s going on in Europe right now. You are not so concerned, because balanced against that is the supply chain issues that all sorts of countries are grappling with, and you’ve got a great supply chain solution for Australia’s consumers of phosphate rock.

Robert: Yeah, we do. You know, these are abnormal times, extraordinary times, I guess you’ll say, with what’s going on in Europe, but I really don’t think what’s happening in the Ukraine and Russia has really impacted the phosphate price. You know, not significantly or meaningfully wise. I think what you’ve got is a long-term trend for an increase in the world’s wealth. And as people get wealthier, they use more fertilizers. So you’re seeing that increase in demand for phosphate fertilizers, you know, that’s going about 3% per annum.

But what’s really moved the phosphate price is what Morocco does, one of the biggest exporters in the world and they are a price setter, and also what the Chinese do because China can export phosphate fertilizers quite cheaply if it chooses to do so. And what we’re really seeing is Morocco appears to have made a decision to, you know, go for price rather than quantity aAnd is not putting out additional production or significant additional production, and certainly the Chinese who historically, you know, never really exported fertilizers because they wanted to maintain it for their own country, their own farmers, you know, a few years ago, they did relax those export restrictions. But they’ve since really closed the door again on those, and just recently have imposed a quota system to limit the amount of fertilizers going out.

So, I think those three trends will continue. You know, we’re not expecting China to come out into the market and flood the world market with cheap fertilizer products. The Moroccans, you know, are showing no signs of them increasing production significantly, and the world continues to get wealthier. And I think all those things support the higher price. Maybe not the price level that it is now, but certainly higher than what it was maybe four years ago.

Stuart: Right.

Robert: And I think, you know, just your comment about logistics is true. I think a lot of our customers have been disappointed by some of their logistics suppliers or their phosphate suppliers in the past, and are really looking for a supply closer to home that, you know, is within Australia, follows the Australian legal system, and provides them with more security.

Stuart: Right. Now, Robert, many investors might not know you very well. But you’ve got a big competitive advantage in this game. Tell us about your experience running RONPHOS prior to joining Centrex.

Robert: Yeah. So I spent a couple of years with RONPHOS as the CEO. You know, RONPHOS is quite an amazing kind of company. RONPHOS and its predecessors, PPC, etc., have been mining phosphate in Nauru since 1907, so, you know, over 115 years. And, you know, many years ago, it was a very big producer. At one point, it produced I think over 2.7 million tons exported per annum. But since then, for a variety of reasons, you know, production has declined, it’s got more difficult. And I was certainly brought in, you know, to help reestablish RONPHOS and did some work there on the resource and the reserves, and once again, with customer relations and started building up business.

Stuart: And subsequent to coming back to Australia, the people at Centrex knew to get hold of you. It’s fair to say, in our part of the world, you are the man who knows more about phosphates than anyone else.

Robert: Yeah. Yeah, I guess, you know, I’ve now operated a few fertilizer companies, so yeah, I feel I have a reasonable understanding and certainly, Centrex approached me probably January, what, you know, 20 months ago or something like that. And you know, eventually, I agreed.

Stuart: Now, so looking forward, you’ve had the plant pretty much running at Ardmore since April, May, just started beneficiating only two months ago. So, it’s pretty much at a startup phase, but the September quarter will be the first beginning of that, and if things go to plan, I presume the December quarter will make the shareholders have a big smile on their face, right?

Robert: Yeah, I think…Yeah, we’ll start reporting earnings in the September quarter and also increase in the December quarter. And I think, you know, as you build a business, that’s a time when you’ve got a lot of cash going out with regards to building stockpiles, etc. But yeah, we think we’ll be in a really good position come the end of the year.

Stuart: Okay. Robert Mencel, thanks for joining Stocks Down Under, and good luck for the next six months.

Robert: Thank you. Thank you for your interest.