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Mexican Government Endorses Marine Phosphate Mining

|Includes: Odyssey Marine Exploration, Inc. (OMEX)

Even better than "endorsing" marine mining of phosphate, the Mexican government practiced the trade itself - implicitly endorsing the activity.

This fact is not widely known. Not only have most investors overlooked the Mexican government's involvement in mining marine phosphate, they don't think that marine phosphate dredging has been done before by anyone.

Take a look at this article from dredge.com (originally appeared in the Engineering and Mining Journal) published in the early 1980's. I think that I ran into it last year, but upon rereading it a number of things jumped out at me as important in the context of where Don Diego stands today. The article points to both the high interest the Mexican government has shown in building a large domestic phosphate source, as well as the attractive economics offered by Don Diego.

In the mid/early 1980's Rofomex, a Mexican state-owned company, dredged phosphate sands directly from the Bay of Magdalena. Those who have claimed that offshore phosphate mining has never been done before, and is somehow impossible, are obviously off the mark. Not only has phosphate mining/dredging been practiced in ocean waters, but it has been done in Mexico (the mine was eventually abandoned because of difficulties penetrating below a layer of calcium carbonate (note that Don Diego doesn't face this problem)).

More important, the fact that the Mexican government was mining phosphate within the highly sensitive Bay of Magdalena tells us a number of interesting things. It tells us that the government at that time viewed the benefits of mining in the bay to outweigh the environmental damage caused by the operation. Note that the Bay of Magdalena is considered one North America's most biologically sensitive areas. The bay is known for whale calving and is a nutrient rich protected area that attracts a highly diverse group of species. The Mexican government would not choose to mine here if it wasn't very serious about establishing a strong domestic source of rock phosphate. The government also likely viewed the environmental damage as relatively minimal since the process is a simple mechanical operation that doesn't introduce any contaminants to the water. Dredging happens every day, all over the world, with relatively little environmental impact.

It also tells us that Rofomex decided the most economic method of mining this very large resource was by using a dredge, and extracting phosphate sands from underwater. Much of the Santo Domingo claim lay above the water line, but Rofomex did not try to mine on dry ground. This point would support the claims made by OMEX management, and which are supported by independent due-diligence, that dredging phosphate sands is less expensive than land-based extraction (even in this case when the land-based resource had little or no overburden).

The Rofomex example took place approximately 30 years ago, and of course much has changed in the intervening period. All the same, anyone who claims that this project only went forward because the environmental movement didn't exist at the time in Mexico should read this document. It speaks to the point that the Mexican environmental movement in the 80's and '90's was actually stronger than it is today. Also, the idea that environmentalists wouldn't challenge the government over a plan like this is a lie. A number of government projects have been challenged and defeated by environmental groups in Mexico. Just look at this one, that was first rejected in 1995.

I won't go into great detail because so much has been said already, but Don Diego's environmental costs won't come close to those of the Mexican government's operation in the Bay of Magdalena. This is primarily due to the fact that Don Diego is approximately 30 km offshore. Further, the benthic environment in the mining area is known specifically for its lack of biological diversity. Some scientists have hypothesized that the lack of much sea life in the mining area is specifically due to the very high levels of phosphate concentrations in the sand. Phosphate in such concentrations can be toxic to organisms. The operation is relatively small (one or two dredging vessels) and isn't in the path of whale migratory routes.

Another interesting point is that this operation leaves very little doubt about the attractive economics associated with Don Diego. Rofomex dredged phosphate sands with an average concentration of approximately four percent. The Don Diego sands average almost 4.5x higher concentrations at around 18.5 percent. It also appears that the Don Diego claim contains a rich streak of rock that is concentrated at higher levels which can be mined for years. Those concentrations may be in the 22-26 percent range.

Higher concentrations mean vastly lower costs. Much less material has to be mined and processed, and the processing is much less involved to generate a ton of marketable ore when dealing with higher concentrate rock. Rofomex's Santo Domingo operation had to use a multi-step floatation process to beneficiate its ore to marketable concentration. While the cost of dredging at 30 meters is going to be somewhat greater than at 5 meters, the length of the dredging hose and the horsepower of the pumps are not major cost factors. The impact on costs due to differing concentration levels would overwhelm cost differentials created by the varying depth of the two operations.

While the costs of mining Don Diego should be far more economic than those of Santo Domingo, what may be even more meaningful is the price at which the ore would be sold. In the mid 1980's, when Rofomex was operating the concession, the sale price of rock phosphate averaged around $35/ton. Today, the wholesale price of rock phosphate is $115/ton, and the landed cost in Mexico is approximately $140/ton from Morocco. If Rofomex could economically mine four percent rock into a $35/ton market, Don Diego will do much better with 18-26% rock sold into a $115/ton market. Even were we to adjust for inflation, Don Diego's economics would be meaningfully superior.

As a further point, the dredge.com article notes a number of other land-based phosphate deposits in the Baja area. All of these potential mines show lower concentrations than Don Diego. The two known claims that may approach Don Diego levels of concentration are buried under 30-80m of overburden. The San Juan de la Costa mine (18% concentrate) that operates on-again/off-again is mostly underground, is said to be very expensive, dangerous, and environmentally questionable. A worker died in an explosion in the mine and several more were injured not long ago. This mine feeds Grupofertinal's Lazaro Cardenas processing facility which is said to be close to bankruptcy. Fertinal's uncompetitive cost basis probably originates at the San Juan de la Costa facility. GrupoFertinal's difficulties would likely pressure the Mexican government to secure more cost competitive domestic rock phosphate feedstock for the security of the country.

All of this underlines why Don Diego makes sense -- not only to OMEX investors, but also to the second largest mining company in Mexico. Ahmsa has virtually taken over the Don Diego environmental application process. In the public hearing earlier this month, there were no OMEX people or even Oceanica people on stage (or in the room), only the environmental chief for Ahmsa. Thanks to Ahmsa's heavy involvement, that hearing was said to have run very smoothly, and those in favor of the project outnumbered those against by 6-to-1.

Don Diego will benefit the people of Baja California, and the people of Mexico (especially the poor and hungry) at very little environmental cost. This idea was not lost on the crowd at the hearing. The sole disruption came when a woman rushed the stage, grabbed the microphone from the speaker, and began shouting down the opposition. She said that her family had lived in the area for many generations and that they supported the dredging operation because it would bring jobs and economic growth to an area that desperately needs both. She claimed that opponents were interlopers, she didn't recognize any of them, and many of them were high-school students who would go home to a wealthier area and not have to worry about the economic opportunities that might be missed.

It's also interesting that there were no big name protestors at the public hearing. This would certainly be the venue for the high profile NGOs to make their presence felt. Where was the National Resources Defense Council that has been so protective of Mexico's oceans? Where was the Environmental Defense Fund? Greenpeace? Even Cemda, the most legitimate and respected NGO in Mexico, hasn't opposed the project (only asked for more information). Legitimate NGOs have not actively opposed Don Diego because the science behind the project supports the fact that its environmental impact will be limited, while the benefits it will provide the nation of Mexico are substantial.

The Mexican government was a pioneer in marine phosphate dredging. The government valued the phosphate mining opportunity so highly that it was willing to operate inside the sensitive Bay of Magdalena. Don Diego won't do a fraction of the damage that was acceptable to the state of Mexico in the 1980s, but it will create greater benefits because of its low cost and high concentration.

Disclosure: I am/we are long OMEX.