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Neurizer (ASX:NRZ): Interview with CEO Phil Staveley
April 5, 2023
We spoke to Neurizer (ASX:NRZ) CEO Phil Staveley about the enormous potential value of the company’s Urea Project in South Australia.
We also talked about the cost competitiveness of the gas that will fuel it from In Situ Gasification of the Leigh Creek Coal Field, the vital support of Korea’s Daelim Group at both the financial and the engineering level, and the project’s strong ESG credentials.
See full transcription below.
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Stuart: Hello and welcome to Pitt Street Research. My name is Stuart Roberts, and I’m one of the co-founders of our firm. And joining me from Adelaide on Tuesday the 4th of April, 2023, is Mr. Phil Staveley, who’s the CEO of NeuRizer ASX:NRZ. Phil, good morning.
Phil: Good morning.
Stuart: Now, you’ve got a good reason to be smiling. The price of urea in Australia, I checked a moment ago, is still above $700 a ton. That’s well above the historic average for the last decade or so. And you’re potentially gonna be one of the…well, the only domestic producer of that once you get the NeuRizer urea project up and running in the next few years.
Phil: That’s right. We will be the only urea producer, and we’ll definitely be really cheap. We are in the bottom cost quartile worldwide. So, the only competition we have for the urea is the imported urea, which will be what it’ll be, about, let’s just say, I don’t know, 500 USD a ton. Whereas our production cost will be 100 AUD a ton.
Stuart: Right. And you’ll have some considerable cost advantages. For those folks who don’t know the map of South Australia very well, Leigh Creek’s about 500 kilometers north of where you are in Adelaide. But you’ll be able to reach most of Australia’s farmers with a quality urea product within either trucking or rail distance compared to the thousands of kilometers that the importer products that are gotta come from, say in Qatar or someplace like that.
Phil: Yeah. That’s not quite right because there won’t be any trucks involved, not from our end. The Leigh Creek, where it’s situated, it is situated directly on the rail. So, the rail actually terminates on the lease. The rail loop where the train turns around and goes back is about 100 yards from where our plant will be. Our product is on the rail. It goes down to Port Augusta. And Port Augusta’s reason for being is because that’s where the east-west rail meets the north-south. So, where we go for that, anyone can do. So, we take it down to Whyalla, we export 500,000 on takeoff-pay, long-term offtake agreement. That’s the offtake agreement that’s in place. Then we’ve got another 500,000 tons to sell in Australia.
So, we will, on the rail, go rail it to our depot in Whyalla, and rail it to our other depots, I don’t know, about Horsham, Wodonga, and then maybe one or two in New South Wales. We will rail it to each one of those warehouses. And, yeah, anybody who wants urea can come and pick it up. You’ve gotta recognize that 70% of urea is sold as bulk urea, about 30% is sold as NPKs, and so, nitrogen phosphate. But that’s not the segment of the market we’re after. We’re after the bulk urea because we’ve got a bulk product, so we treat it as a bulk product. And we will sell it just a bit cheaper than the prevailing price.
Stuart: Right. So, for those viewers who are not necessarily intimate with the way fertilizers work, talk to us about where urea sits on the spectrum. Like, you mentioned NPK, the three nutrients that we need. Urea is the N part, right?
Phil: Yeah. Yes. There’s phosphate and there’s potassium, and they all do various things for the plants. But the N is the urea. The N is absolutely the thing that makes ’em grow. I’ve talked to a few farmers, and I think their consensus would be that if they don’t have urea, they will get less than half of their crop.
Stuart: It’s a staple that farmers just cannot do without, what you’ve got to offer.
Phil: You just cannot do without it. And it’s really easily handleable. So, I mean, the urea, you could go to Bunnings, you buy fertilizer for your lawn, the little white pallets, you go around, you can throw ’em around with your hands, you throw ’em around when you get back, that’s urea. That’s what we’re selling.
Stuart: Right. Now, what’s very elegant about this, you talked about production cost in the order of 100 a ton when the spot price is currently 700. The basis for this is the Leigh Creek coalfield, which were partly responsible for keeping the lights on in South Australia for a long time, now decommissioned as other power producers came through. But a great source of gas that you intend to tap through, in-situ gasification, feed that into urea at the other side. And most of the carbon in the gas will then go into the urea. That’s a pretty elegant solution to keeping carbon out of the atmosphere.
Phil: It is. But, I mean, all urea for starters, so that people understand, all urea is made from gas. So, this is a typical example of why Gibson Island became too expensive, and why the gas works for us. Gibson Island used 40 gigajoules of gas to make one ton of urea. If your gas is, say, $10, they were using $400 for their feedstock. We’ll use 32 gigajoules because it’s, you know, modern technology. And that feedstock will cost us $1 a gigajoule. So, 400, as against 32. In summary, that is where our disruptive advantage comes from.
Stuart: Right. Now, you’ve also got some other very disruptive vendors. The ease with which you could potentially get this project up. The Daelim Group is a name not many people will know, but if you know the Korean business scene, Daelim is one of the Chaebols that are involved in various businesses. They’ve become very interested in helping you get NeuRizer up and running, both from a financing and from an engineering perspective. Talk to us about how that relationship evolved.
Phil: Well, we originally went out for the EPC contract a few years ago. You know, we went to, in fact, they were all international people. We only went to people who had done this before. We were only interested in people who’d built the plants, built the urea plants, built ammonia plants before, just from a risk mitigation perspective. We realized that being a small company, and this being a very, very big project, we were gonna have difficulty getting finance. So, we increased the EPC, it became an EPCF contract. So, we asked the EPC contractors to bring some finance with them. Now, as a result of that Daelim in their bid, they weren’t the cheapest, but they were the least risky. And they’ve got the project through bankable feasibility through the EPC, and they brought 1.5 billion of finance. 70% of the above-ground costs of the project are already done. So, it makes our financing task a lot easier.
I mean, since then, we’ve sort of got to know each other a lot better. And that resulted in, around about August last year, they took a 10% interest in the company, just shares. And then they followed that on by, we offered them a board seat, which they’ve taken on board as well. So, we’ve now got them, yes, they’re an EPC partner, yes, they’re helping us get with this finance, but they’ve got a seat on the board, and the 10% interest. Having a seat on the board, having the experienced Daelim on the board is invaluable.
Stuart: Yeah, that’s a very nice alignment of values there. Now, when readers look over the feasibility, there’s a lot to like. Some people might be freaked by the capital costs. And obviously, your friends in Korea have handled a lot of that. But that’s pretty much where we’re at the moment, is raising the rest of the capital to get this project up and running.
Phil: Yes, yes, it is. But how we raise that, you know, whether we do debt or equity, or a strategic partner is dependent on various ongoing negotiations. Our preference is to get in an industry player who knows what they’re doing, who’s obviously done it before. So, who’s got the experience that we haven’t got because we’re a small company. So, we have been engaged with various industry players, but we’re in an exclusivity at the moment with one industry participant who’s a really large participant. And if they come to the party, if we do a deal with them, then the financing will become a lot easier.
Stuart: Right. And the numbers speak for themselves. This project has got a net present value of about 3.4 billion on the most recent studies, at an 8% discount rate. So, the upside from where you’re sitting at the moment is incredible.
Phil: It’s huge. It’s huge. I mean, I think the market, they’ve constantly told us that we’ve got various barriers between us, and a reasonable valuation. I mean, like all MDs, I think we’re undervalued. But the thing is, we know where we are now, and whatever it is, it’s 100 million. We know by the time this thing’s built, it’s gonna be five or six billion worth. That’s just based on international multiples. So, between now and then, we are gonna get the uplift. Now, what is holding the thing back, and it’s been environmental, you know, and everything that was holding it back, has now been dealt with. You start off with the environmental, then it’s the funding, that’s 70% done.
I think now it’s the strategic partner, who we will get sometime this year, so by the third quarter this year. And that will really be the last piece of the jigsaw apart from actually building the project.
Stuart: Now, obviously, that’s gonna take a while, but you’re working with some companies that know their stuff in terms of your friends in the Daelim Group. Some people might be concerned that the price of urea is actually coming down. The peak in Australian Dollar terms was about 1,250 AUD, not long after the shooting started in Europe, which obviously jacked the price of anything that was related to energy and fertilizer. What impresses me is urea was a fairly stably priced commodity for about a decade before the events in Europe. How confident are you about that $400 a ton? Oh, I think $410 was the number you priced in the feasibility study. How confident you are that that’s the ongoing price moving forward?
Phil: I’m not. What’s the price? Well, I’m confident that the price will either go up or down unless it stays the same.
Stuart: All right. I’m with you on that.
Phil: Well, we used enough feasibility, 280 USD, which was 410 AUD. 280 USD is a historical low. So, we priced it off the bottom, and however much more is, is all upside. Personally, except for this short sort of things of supply and demand where it can go really low or really high, and you don’t try and predict them, but when everybody looks at the future of urea, they look at demand and supply. I don’t, because it’s not demand and supply that will determine the future price. And then you see the long-term marginal cost, and you see it moving towards the long-term marginal cost. Well, what that fails to take account of is the gas price. And the gas price is gonna be impacted by, as long as we have at the moment sort of fairly constricted investment in exploration in gas.
When that constricted exploration leads to the same with supply, which leads to less production supply and demand, the gas price goes up. As long as we are heading rightly, heading for the 20, 30, 40, 50, the zero-carbon thing, then the price of gas has to go up. So, many gas projects are not gonna get off the ground. So, when the price of gas goes up, either the price of urea goes up because it’s 70% gas cost, either the price of urea goes up, or some of the producers go out of business, which as a result, the price of urea goes up. So, that’s the way I see it. Yeah, yeah.
Stuart: Of course. The other big challenge is the world’s got a big problem with inflation at the moment. How concerned are you about your capital costs in that inflationary environment where they’ve moved into?
Phil: Yeah. But if they go by inflation, they’re not changing, are they?
Stuart: Yeah, that’s true. That’s true. But, obviously, they need to go and reprice things, obviously, that complicates your financing, right?
Phil: No, it won’t actually because we’ll finish the feed, and then we’ll go ahead and do the BFS, do the financing. So, yeah, I suppose when you look forward, it might complicate it a little bit, but hey, just the world doesn’t stop when there’s a bit of inflation [inaudible 00:15:34.737].
Stuart: Fair enough. So, basically, investors who are watching your stock have got a lot to look forward to. There’s a potential for a strategic partner, completion of the feed, and then commencement of a BFS, which you could get done, I’m guessing by about this time next year.
Phil: By about the middle of this year.
Stuart: All right. Good. Okay. So, we’re…
Phil: The feed has got all the elements of the BFS, you just gotta go out and confirm the pricing. So, the BFS is the feed plus pricing, really. One of the things we are really proud of is this ESG commitment because there’s a lot of things that are said about carbon commitments and ESG and blah, blah, blah, but recognizing that carbon is only one element of ESG, and it’s ESG that we’re doing, and we’ve been doing since we appointed someone into the role in 2018. But one of the reasons that we chose urea as a product we are gonna produce over ammonia was because 75% of the carbon produced is utilized in making urea.
You know, the urea is ammonia plus CO2, so 75% of it is utilized that way. And the other 25% is geo sequestered. We’ve had the feasibility studies done on that. We’re just waiting to get going and, yeah, we’ll sequester the carbon back where it came from, really.
Stuart: Yeah. That impressed me when I looked at that. Maybe I’ve been listening to too much propaganda from the Green Party, but in certain circles, people are a little skeptical of carbon capture and storage. When you look at the actual projects that are up and running, and in some cases, more than a decade, it’s a very effective way of being able to sequester carbon. Well, Phil Staveley, thanks for joining us at Pitt Street Research, and keep up the good work.
Phil: Thank you.