Highfield Resources Ltd (ASX:HFR) has received a $3.47 per share price target from broker Taylor Collison, which maintains is Speculative Buy.
Highfield last traded at $1.65. The following is an extract from the report.
SITE VISIT: Muga Update & Sulphate of Potash Look-through
Key Points
- Highfield Resources Limited (“Highfield” or “the Company”) is a potash development company with five 100%-owned projects, covering 550km2, in the potash and halite producing Ebro Basin in northern Spain.
- Flagship Muga Project (Reserves 253Mt @ 11.5% K2O; Capex US$434.5m / €412.7m; 6.3Mtpa sylvinite run-of-mine for 1.02Mtpa K60 muriate of potash “MOP”) rapidly progressing towards construction in Q2 CY16 (subject to permitting). Optimisation of the Muga DFS continues, further strengthening already strong economics.
- Funding of Phase 1 Capex (US$281.1m / €267.0m) for Muga secured following A$101m share placement in July 2015 and indicative non-binding term sheets for a €222m project financing facility with European commercial banks in August 2015.
- Final major milestone for Muga prior to full construction is Mine Concession permit, anticipated in 1H CY16.
- Muga represents only 10% of wider tenement portfolio. Strategic land holding estimated to have the potential to support group potash production of ca. 1.8Mtpa by 2020 and in excess of ca. 4Mtpa by 2025.
- Company also evaluating potential for production of sulphate of potash (“SOP”) and capitalise on its close proximity to the same high-priced markets it is targeting for MOP sales.
- Our high-level valuation of a SOP project in Highfield’s portfolio highlights favourable economics.
- The Company’s projects have strong economics, underpinned by location, infrastructure and cost advantages making Highfield potentially the highest margin potash producer in the world.
Our View
During our recent site visit, we observed how current optimisation studies for the Muga Project are continuing to further enhance its already strong economics.
The Muga project likely stands alone in the current mining market with respect to NPV/Capex.
A positive Environmental Impact Determination and awarding of Mining Concession remain the final milestones and are imminent.
The Company is fortunate to have several other opportunities in its portfolio which have the potential to add additional value to the Company.
Our first-pass look at a generic SOP project highlights that such a project would also have outstanding economics.
High margins would be generated for the same reasons that they are at the Muga Project – low input costs and close proximity to high prices markets.
Our unlevered, risk weighted, post-tax DCF valuation for the Company, based on the Muga Project, Muga by-products, Sierra del Perdon and SOP production is A3.47/share (fully dil. on 413.6m ords.).
Our levered, risk weighted (0.7xNPV) valuation for only the Muga Project is A$1.84/share (fully dil. on 433.6m ords.).
Our blended NPV / forward earnings valuation (70:30 split) for Muga is A$2.96/share (fully dil. on 443.6m ords.).
We continue to maintain the view that there is considerable unrealised value in Highfield Resources and maintain our Speculative Buy recommendation.
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