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Highfield Resources Ltd: Busy quarter with new MD, SOP study and offtake

Published: 00:10 29 Jul 2016 BST

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Highfield Resources Ltd (ASX:HFR) has received a Buy rating from Foster Stockbroking, with a $2.30 share price target.

Highfield shares last traded at $1.43. The following is an extract from the report.


Event: June quarterly released.

Commentary


New Managing Director appointed as Muga approaches construction phase.

Peter Albert appointed as Managing Director and CEO, effective from 1 September.

Anthony Hall, HFR’s current Managing Director, will step down during a transitional period as Muga approaches the all - important construction phase, requiring a different managerial skill set.

We consider Peter Albert to be a high calibre appointment with international mining experience and importantly experience building mines.

His most recent roles were as CEO of Hong Kong-listed companies Jinchuan Group and G-Resources and most recently oversaw the construction of the Martabe Au mine in Indonesia (producing almost 300kozpa Au).

Anthony Hall will remain with the company in a full time capacity until 30 November 2016, and will thereafter serve a consultancy role.


SOP study adds further value, complements flagship Muga MOP Project and diversifies product offering.

During the quarter, results of a scoping study were released providing analysis of a staged 500ktpa Sulphate of Potash (SOP) operation which would convert 40% of Muga’s MOP output (430ktpa) into SOP.

SOP is used as a fertilizer typically for higher value chlorine intolerant crops such as turf and tobacco.

Key metrics of the scoping study included capex of ~US$150m and AISC opex of US$370/t which assumes the purchase of MOP from Muga at US$287/t.

The current spot price of SOP is US$800/t and currently trades at a ~US$400/t premium to MOP spot.

The scoping study considered the use of the proven Mannheim process to convert the MOP to SOP, which essentially uses heat and acid for the conversion.

Whilst early days, the SOP opportunity is clearly real and adds value to the HFR proposition.

The next steps will be to complete a more detailed DFS/BFS which will also consider the disposal of hydrochloric acid (by-product of Mannheim process), a not insignificant economic consideration.

Importantly, this SOP operation would be complimentary to the flagship Muga MOP Project, which remains the clear focus.


Offtakes signed for Phase 1 of Muga output.

Non-binding MOUs have been signed with three fertiliser traders for up to 600ktpa MOP, representing more than 100% of the projected output from phase 1 at Muga.

We also understand multiple discussions are taking place with major European fertiliser companies in respect of offtake, which will likely progress to binding arrangements as Muga nears first production.

Whilst the non-binding nature of the offtakes with the trading groups provides ‘optionality’ for HFR to deal with other groups (i.e fertiliser companies), it also achieves a key condition precedent required by the project finance lenders which is in the final stages of negotiation.


Resolution to Spanish election stalemate drawing closer, approvals for Muga permit most likely shortly thereafter.

Following the second undecided Spanish elections held in June (first one was held in December 2015) which failed to give any party an absolute parliamentary majority and has resulted in a political ‘paralysis’, we understand the key parties appear determined not to go back to the polls for a 3rdtime in 12 months.

It is understood a prime ministerial candidate will be appointed imminently and be tasked with forming a coalition government through a parliamentary vote of confidence.

The obvious PM candidate is Mariano Rajoy, head of the incumbent Popular Party (PP) that won the largest number of seats in June (although could not reach majority).

Notwithstanding that it is possible for the environmental declaration in respect of Muga to be awarded during a caretaker government period, we think more likely that HFR will be awarded a positive environmental declaration shortly following a government being formed in the coming 4-6 weeks.

The positive environmental declaration is awarded just prior to the formal mining concession – this of course remains the key outstanding piece of the puzzle for the project and catalyst for the stock.


Well-funded with >$90m cash in the bank.

The ~€220m (~US$240m) project finance facility being negotiated with 4 mandated banks is expected to be signed off once the mining concession has been awarded (HFR will start incurring project finance related fees as soon as signed, so does not make sense to do so until permit received and construction commences).

Together with the existing ~A$94m (~US$75m) cash at bank, this will go a long way towards funding the development of Muga which is US$450m across Stage 1 and Stage 2.

We model a funding gap of ~A$75m (on the basis that some cash flow from Stage 1 will fund Stage 2 development), which HFR has optionality in which to cover including equity from the market, project sell-down (either MOP or SOP), offtake and/or reduction in capex by contract mining (or a combination of these).

We also expect any such financing to be following the receipt of the permit and debt funding (i.e further de-risked).

Almost A$20m is estimated to be deployed during the next quarter, of which ~A$18m relates to development.


Recommendation:

BUY retained, no change to Price Target of $2.30/sh.

 

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