Gustavson Associates, LLC (Gustavson) was commissioned by IC Potash Corp. (ICP) an American company that holds the Ochoa Project, to update the previous Preliminary Economic Assessment (PEA) for the Ochoa Polyhalite Project in southeastern New Mexico.
This updated PEA is compliant with Canadian National Instrument NI 43-101 reporting guidelines. ICP has retained several chemical and process engineering consultants who are highly experienced in potassium mineral processing to contribute to this report. These people include: Donial Felton, Chief Process and Chemical Engineer; B.Sc. Chemical Engineering; Richard Chastain, Principal Process and Chemical Engineer; B.Sc. Chemical Engineering; Thomas Neuman, Principal Process and Chemical Engineer, M.Sc. Chemistry; Deepak Malhotra, PhD Metallurgical Engineer and Qualified Person (Member AusIMM, SME and CIMM); and Patrick Okita, PhD, Principal Economic Geologist is an international expert on evaporite deposit geology, and President of Upstream Resources. Dr. Okita is responsible for geologic aspects of this report. Gustavson also retained INTERA for opinion of hydrologic conditions and sources of water. Gustavson also retained British Sulfur, a division of CRU, for the price forecast. Arthur Roth, M.Sc. Chemistry, is a potassium fertilizer marketing expert and has provided opinion and plans for introducing ICP's SOP into the potassium market.
Three developments have occurred since the original PEA was published (NI 43-101 Technical Report on the Polyhalite Resources and Preliminary Economic Assessment of the Ochoa Project in Lea County, Southeast New Mexico, dated August19, 2009) that materially affect the company's value requiring an update of the prior PEA.
First, the phase I and II drilling programs were recently completed thereby providing 13 new holes that were cored, probed with a variety of geophysical tools, logged descriptively, and assayed. With this new drilling, mineralogy, and chemical information, the inferred mineral resources in the earlier PEA have been converted to measured and indicated mineral resources as show herein, and additional inferred resources have been defined. Polyhalite grade, thickness, and continuity have been validated and correlated to historic data.
Second, the proposed methods of processing the polyhalite to Sulfate of Potash (SOP) have changed significantly, resulting in simplification of the process flowsheets. Originally ICP planned to calcine and then leach the polyhalite, and then to precipitate the SOP from the leach solution using anhydrous ammonia. Additional analysis revealed the project will have better economics by recovering the SOP after the leaching step using crystallization ponds and solar evaporation. This significantly reduces the complexity of the process, and lowers capital and operating costs.
Finally, ICP has obtained additional mining leases that significantly adds to their mineral lease position, and consequently increases their mineral resource holding.
The Ochoa polyhalite property comprises 13 existing federal potassium prospecting permits and 17 potash mining leases totaling about 113,000 acres, located about 60 miles east-southeast of Carlsbad, New Mexico and less than 20 miles west of the Texas-New Mexico state line.
Drilling, sampling, and analytical programs were prepared and conducted by ICP's senior geologic staff during the period from August 2009 to September 2010. Evaluation, synthesis, and interpretation of the work program was undertaken by Dr. Patrick Okita of Upstream Resources LLC (Upstream) from September to December 2010. Gustavson has independently audited and verified the work done by Upstream including the geologic interpretation and polyhalite thickness estimate and has estimated polyhalite grade. Polyhalite grade was estimated by Gustavson into the gridded model using an inverse distance (1.5 power) logarithm.
Geophysical data from oil and gas wells drilled in and around the Ochoa project area were combined with ICP core drill data, correlating and authenticating the geologic interpretations and polyhalite thickness. A two dimensional gridded model of the polyhalite thickness was generated by Upstream using the Petra® software package. A tonnage factor of 11.43 ft3/ton was derived from core hole density tests (Chemrox and Gustavson, 2009, p. 66).
The estimate of the polyhalite mineral resource within the Ochoa Project is shown in Table 3-1.
Gustavson created a 40 year mine plan for a portion of the Mineral Resource based on two different production scenarios. The first scenario is based on an SOP production rate of 660,000 short tons (600,000 long tons) per year, and the second scenario envisions 990,000 short tons (900,000 long tons). Gustavson focused on an area of the deposit that has few producing oil and gas wells, thick polyhalite, homogeneous polyhalite grade, and flat lying polyhalite beds. Gustavson developed the mine and process manpower requirements, capital and operating costs using the 2010 version of Mine and Mill Equipment Costs: An Estimator's Guide (InfoMine), verbal quotes manufacturers and providers of some of the major equipment items, and the personal experience of Messrs Foote, Felton and Chastain.
A detailed, computer model of the process was created using METSIM Process Simulator software by Mr. Felton a highly experienced Chemical Engineer. This computer model added in the formulation of the process flowsheet and equipment specifications. The metallurgical model section of Mr. Felton's simulation was vetted by Tom Neuman, a chemist who has also worked in evaporite mineral chemical processing for 30 years. Gustavson estimated the General and Administrative cost with input from Mr. Foote. The pre-tax economic evaluation includes royalties owing to the federal government, state government, and private royalty holders.
Annual full production mining capacity from the underground room and pillar mine is 3.15 million tons per year for the base case and 4.7 million tons for the higher production scenario. The mine will operate 350 days per year for a full daily production tonnage of 9000 tons base case, and 13,500 for the second case.
All costs are stated in 2010 US dollars. Full capacity operating cost per ton of mill feed estimates are shown in Table 3-2.
Total estimated initial capital cost for the mine and plant are shown in Table 3-4:
The estimated exploration, engineering and permitting costs total $12.0 million, as shown in Table 3-6, brings the total preproduction expenditure to $673.7 million for the base case and $815.1 for case two.
The project has the potential to produce three fertilizer products, potassium sulfate, magnesium sulfate, and polyhalite. The potassium sulfate product is readily marketable as a highly desirable premium fertilizer, and is the only product considered in this study. The sale price forecast was provided by CRU/British Sulfur.
A 2.5% gross royalty will be imposed by the federal government. A $1/ton potassium product produced is included as well as a 3% net profits royalty (NPR) is due after capital payback. The NPR can be reduced to a 1.5% NPR with a one-time payment of $9 million.
The 660K ton per year base case 40-year life project gives a pre-tax IRR of 25% and NPV of $1.43 billion with a 10% discount rate. NPV at other rates are listed in Tables 1-7 and 1-8.
The base case project has a payback period of 5 years from the start of production.
Sensitivity analysis was completed for the project to illustrate variation in the three main areas: operating cost, capital cost, and product price. Figure 3-1 shows the project sensitivity for the base case 600,000 long tons (660,000 short tons) at the discount rate of 10%. Figure 3-2 shows the same information for the 900,000 long tons (990,000 short tons) case. The graph shows 80% to 120% of base case values (i.e.; minus 20% to plus 20% operating cost, capital cost, and SOP sale price).
Based and the results of this PEA, Gustavson believes the Ochoa polyhalite is economically viable and recommends continued development of the project. Gustavson recommends additional drill programs of sufficient size to collect sample for pilot scale metallurgical tests, and complete infill drilling at an appropriate spacing to convert current indicated resource to additional measured resource. Gustavson also recommends the project proceed to a prefeasibility study, bench scale metallurgical tests with currently available sample, and that the company begin baseline environmental programs to initiate the permit process.
Gustavson recommends the following:
- Proceed with a bulk sample drill program in order provide sample for metallurgical test work, define resource within the mine area, and to perform geotechnical testing.
- Bench scale metallurgical testing followed by a pilot scale test run on bulk sample drill core
- Acquire surface rights of proposed surface facilities area.
- Initiate permitting and baseline data collection for environmental permits.
- Hydrology studies will need to continue in order to determine where water will be obtained in the region and how it will be delivered to the plant.
- In depth market study in order to better understand the market conditions and price forecast, this study should also include Kieserite.
- A prefeasibility study should be initiated based on the findings in this report, and should incorporate data gathered in the above programs.