Australian Potash’s solar powered SOP project secures A$0.30 price target from Canaccord Genuity

The company is progressing towards a final investment decision for its Lake Wells Sulphate of Potash Project and has secured a NAIF $140 million loan facility.

Australian Potash Ltd (ASX:APC) has secured a SPECULATIVE BUY rating and a price target of A$0.30 from Canaccord Genuity analysts James Bullen and James Farr – the company’s share price is currently A$0.165 per share.

The analysts based their valuation modelling off the back of a definitive feasibility study (released in August 2019) for the company’s 100% owned, 150,000 tonnes per annum, Lake Wells Sulphate of Potash (SOP) Project in Western Australia, which is closing in on a final investment decision.

They said: “With sector tailwinds, compelling thematic, NAIF support confirmed and front-end-engineering-deign (FEED) expected to be completed in the coming weeks, the project has momentum leading into a targeted final investment decision late in the March quarter 2021.

“We initiate coverage with a SPECULATIVE BUY and a A$0.30 DCF-based price target.”

DFS highlights low-cost long-life project

The Lake Wells SOP Project is in one of the world’s superior locations for solar evaporation operations, offers a low-cost, long-life development opportunity as the demand for premium grade fertiliser products like SOP continues to rise in Asia and the rest of the world.

Definitive feasibility study (DFS) results released in August 2019 indicate life of mine (LOM) operating costs of US $262/t, placing LWSOP in the first quartile of the SOP cost curve.

Canaccord said: “With ideal evaporation rates and low annual rainfall, we believe the Lake Wells SOP Project is located in one of the world’s premium locations for solar evaporation operations.

“With a JORC-compliant mineral resource of 18.1 million tonnes drainable SOP, evaporated through sun and wind, APC will look to supply both overseas and domestic markets with up to 150,000 tonnes per annum of SOP for at least the next 30 years.”

The company is currently in the process of finalising its front-end-engineering- design work with results expected in the coming weeks.

Capex and opex forecasts

The analysts said: “While we expect capex to increase as a result of this work (renewable power, growth capex) we expect this to be offset by higher capacity and lower opex forecasts.

“We have taken a more conservative view on capex (CG 13% higher than DFS), WACC, forex, SOP pricing and start-up timing.

“We expect to update this valuation work when the results of the FEED study are available.

“We have used a discount rate of 8.5% and a risk weighting of 75% to derive our DCF valuation of $0.30.”

The 75% risk weighting was used to reflect additional uncertainties around timing, funding and capital requirements.

Canaccord noted upcoming potential catalysts include:

Delivery of FEED outcomes for Lake Wells (with capacity expected to increase and cash costs to decrease, partially offset by higher capex);
Debt funding approval from EFA and commercial banks; and Final investment decision at Lake Wells.

NAIF funding and FID

The analysts said: “While the March quarter 2021 target for FID is aggressive in our view, and we would be unsurprised by a small delay, the company has clearly achieved a number of milestones in a relatively short space of time.

“Critical path items to FID include EPC award and credit approval from all senior lenders.”

Notably, in a major milestone for APC, on March 2, the Northern Australia Infrastructure Facility (NAIF) made a positive investment decision for a $140 million loan facility with a 17-year tenor following a comprehensive due diligence process.

This sets a positive precedent for APC’s negotiations for additional senior debt facilities with Export Finance Australia and commercial banks.

Importantly, NAIF is taking on the tail risk of the project, with the facility being interest-only until other senior debt providers are paid back.

Canaccord said: “This is a large vote of confidence in the project and bodes well, in our view, for a positive decision lending decision by Export Finance Australia (due diligence commenced in October 2020) and commercial banks.”

In addition, the company has locked in offtake for 150,000 tonnes per annum via five binding term sheets which include take-or-pay provisions and a level of price protection.

Global outlook for SOP

The Canaccord report discussed the growing rate of food consumption ahead of population growth due to a rising middle class (particularly in Asia) as a driving factor behind the positive outlook for SOP.

Canaccord stated: “The UN estimates that food production needs will increase by 70% by 2050 to fulfill the needs of the world population.

“With this food growth likely to be weighted toward chloride-sensitive crops like fruit and vegetables, and with arable land per capita falling, the case for premium fertiliser products like SOP (a 7 million tonnes per annum market which is growing at 3-5%) has never been stronger, in our view.

“Additionally, we note that agriculture fundamentals have continued to strengthen over the last six months, with the likes of corn +40% and soybeans +33%.

“This has created upwards pressure on fertiliser prices.

“While SOP demand is relatively inelastic, and consequently the NW Europe benchmark was flat, we do note that standard SOP pricing is currently US$526/tonne which is modestly above our forecasts.”

Source: proactiveinvestors