Could this be the cheapest exploration expense ever, in terms of upside potential?

Hard to quantify such a thing, but the two holes that () is about to drill 800 meters into the ground at Ohmgebrige in East Germany could end up providing a resource of 325 million tonnes at a cost of just over AU $ 2 million.

And it’s estimated that just seven more holes will bring the total resource on the company’s three licenses to 5.3 billion tonnes.

How is it possible?

The answer is that the resource has already been modeled, but according to the old Russian method.

Some consider the Russian system to be equal, if not superior, to the Australian system, but in any event, the Joint Ore Reserves Committee requires a number of checks.

In the case of potash projects, which tend to be uniform and consistent, two drill holes will meet the bill, and it is likely that in the next few months the South Harz will be able to say with certainty that it has a very important resource in the category, with material also falling within the measured category.

But it’s not just the confirmation of the size of the resource that’s at stake here.

The successful drilling at Ohmgebirge is likely to trigger a whole series of events that will quickly move the southern Harz on the path to construction and production.

A scoping study is scheduled for March which, as time goes on, is now less than six months away.

And this study will require “a lot of rigor,” said Chris Gilchrist, managing director of South Harz.

“We expect a pretty impactful IRR. “

The reason he can say this, of course, is that internally the South Harz already has a good idea of ​​the economy based on the internal work already done in Ohmgebirge based on existing Russian data, which have also classified a large part of the deposit as a reserve.

It remains to be seen, of course, what exactly the numbers will look like when South Harz reruns the rule on them using the new data, but it is illustrative that as it stands, broker Cenkos alone believes Ohmegebirge has a net present value of US $ 500. mln, and that the NPV of the whole project is $ 1.3 billion.

We’re not talking about small potatoes here, which makes it all the more remarkable given that South Harz initially acquired the project very cheaply just a few years ago.

At the time, the company was snooping around in Germany, trying different things, and when all of the potash assets came to its attention, there was some doubt that it was even real, or really available.

But there is no doubt now.

In fact, everything is in place to make the project great again.

It is located in a former mining area, three mining licenses are already in place, infrastructure is available including the ability to fill old work sites with new tailings, the government is keen to rebuild jobs in an area that has been decimated after the collapse of the East German regime thirty years ago, and the South Harz itself has the people to make it all happen.

Gilchrist himself worked in potash for many years, President Ian Farmer was the head of Lonmin, the world’s third largest platinum miner, and non-executive director Len Jubber was managing director of Bannerman Resources.

They are serious players in a market that is becoming more and more strategically important day by day.

Because the other factor likely to play an important role in favor of the South Harz is its proximity to the markets. This not only means that shipping costs for what is typically bulky material will be kept low, but also that the carbon footprint associated with the product can be kept to a minimum.

The basic plan is to produce around one million tonnes of potash per year and ship around 800,000 tonnes to key markets in Europe, including Germany, France and northern Italy, the 200 Another 000 making a longer overseas hike to the booming market in Brazil during the winter months when European markets slow down.

In part, this Brazilian component is a function of the seasonal nature of the demand for potash, which is used at specific times of the year in connection with agriculture and harvesting.

As the world’s population continues to grow, so will the demand for food and fertilizers that help it grow. And with the increase in resource nationalism as a whole, security of supply will become increasingly important.

So, in the immediate future, the German government could have an eye on all the jobs that the South Harz will create. But in the longer term, he is also interested in the security of his own food supply.

The results of this kind of dynamic? – Chinese stocks are low and the price of potash is skyrocketing.

“We expect the price to go above US $ 500 per tonne, but then settle at US $ 300-350 per tonne in the longer term,” said Gilchrist.

The company’s own modeling previously used a price of US $ 250, so there is already wiggle room built in.

But how does South Harz actually plan to build a mine in Ohmgebirge?

First of all, he will have to do the relevant economic studies. But while they continue, it is quite possible that the company is looking to be listed in London, in order to broaden its access to potential capital.

Since a mine built in this area would look more like brownfield than virgin land due to the surrounding infrastructure, it would be realistic to expect that a mine of this size would cost no more than about 500-600 million US dollars to build, as demonstrated by his peers. Highfield and Emmerson.

Considering the many attractions of the project, there should be a lot of interest.

“We think our capital efficiency will be very good,” says Gilchrist. “And we expect our opex to be in the lower quartile.”