Highfield Resources Ltd (ASX:HFR) has maintained its Buy recommendation from Foster Stockbroking while the 12-month share price target has been reduced to $1.43 from $1.56 based on the analyst’s risked valuation but still well in excess of the $A0.62 the company is trading at today.
Notably, Foster Stockbroking has highlighted the catalysts for the share price which include:
- Finalisation of financing;
- Award of town hall construction licences;
- Financial investment decision; and
- Commencement of construction.
Highfield’s recent revised feasibility study for the Muga-Vipasca Potash Project in Spain returned promising financial projections, including EBITDA of around €400 million per annum at full production.
The following are excerpts from the Foster Stockbroking research report.
Investment highlights
Updated Muga DFS only had minor changes to key metrics, with NPV €1.89b and IRR 25% (-4% and 0% vs 2019 DFS): The DFS revision was prompted by further derisking of Muga, post the grant of mine licence and ahead of finalising financing and requisite due diligence. At full production the DFS stated Muga could deliver EBITDA of €400M pa.
Lower average LOM potash production by -9% (917ktpa vs 1,300ktpa): was major reason for lower NPV due to both lower recovery (91% vs 94% prior) and K2O grade (10.5% vs 10.7%). There was also a rise in capex (up 5%), a reduction in potash production (-9%) and decline in C1 costs (-7%).
Quality of Muga Mining Inventory improved, even though contained K2O declined: The inventory now contains less proportion of exploration target and inferred resources as part of the total (33% vs 44%) and higher measured and indicated resources (67% vs 56%). This should improve confidence in the project's DFS. Project life remains unchanged at 30 years.
Stage 1 capex has increased by €30M to €398M: However, 86% of estimate is now based on signed contracts (mostly for process plant equipment), firm offers and updated prices vs 59% for 2019 DFS, improving confidence in the figure. Phase 2 capex is up only €1 million to €209 million.
C1 cost reduced to €76/t from €82/t: with higher salt credits offsetting higher mining and processing costs, keeping the project’s position in lowest quartile of the MoP margin curve. Salt prices assumed are now €36/tonne for de-icing and €55/t for vacuum, based on Argus, vs €27/t and ca. €40/t previously.
Construction expected to start 1HCY22: preparatory steps remain construction contract; procurement of long-lead items; award of local town hall construction licences; and finalisation of debt package. HFR states that following feedback on a draft term sheet by potential lending syndicate, it is targeting debt of around €300 million, compared to €185 million previously in 2017. The increase is a function of the derisking of Muga with updated studies, regulatory approvals and positive potash markets.
Earnings and valuation
Our risked share valuation (0.4x NPV10) of HFR reduces to $1.43 from $1.56 previously: This is due to a reduction in Muga MoP production, higher capex and lower valuation of Sierra del Perdon project, offset partially by higher salt credits and less dilutive equity raising, as we now assume 2/3 debt: 1/3 equity financing vs 50:50 previously.
Our risked valuation assumes equity raised near current share price, while unrisked valuation of $3.48 (1.0x NPV10) assumes equity raised without dilution.