Australian Potash Ltd (ASX:APC) is in a good position to make a final investment decision on its Lake Wells Sulphate of Potash Project (LSOP) in Western Australia during the 2022 financial year, and to ramp up to full production in the 2024 calendar year.
This, combined with all-time high potash prices and the company’s performance against peers, has led Shaw and Partners to place a buy recommendation on the company.
Potash supply under threat
Around the world, there is a concern about potash supply in the wake of Russia’s invasion of Ukraine.
Russia and its ally Belarus are usually responsible for 35-40% of global potash supply.
“There is a view emerging in the industry that long-run SOP prices will permanently re-rate post this spike to more than US$650 per tonne,” said Shaw and Partners’ report. It said this indicated that its price deck was conservative.
Factors coming into play include an increase in potassium chloride (MOP) prices, mine maturation and the switch to regionalisation from globalisation and increased energy costs.
Tracking well against peers
The report cited two other potash companies, Kalium Lakes (KLL) and Salt Lake Potash (SO4), which have encountered difficulties with brine abstraction, production of harvest salts and project execution.
“We note the technical veracity of these type of solar salt projects has been proven by numerous operations globally for many decades,” it said.
In its quarterly update on Friday, KLL stated harvest (potassium salt) volumes were expected to increase substantially during June 2022 quarter. This indicates that APC’s peers appear to be progressing towards steady-state operations.
Less technical risk in production
The analysts observe that LSOP appears to be progressing and de-risking as early site works continue.
“In our view, APC’s resource base is higher quality than its peers and the approach from management is more conservative,” the report said.
APC has the largest JORC-compliant measured SOP resource at 18.1 million tonnes of SOP and it uses brine borefield abstraction, which attracts less technical risk than salt-lake trenching, which is the method used by most of the company’s peers.
An EPC (engineering, procurement and construction) contracting style is used for more than 75% of the construction contracts by value, which ensures cost, schedule and performance guarantees.
Buy, says Shaw and Partners
“Our long-term realised SOP price forecast is US$600 per tonne,” the report said, noting that standard north-western European SOP prices are currently US$1,200 per tonne, an increase of 130% since July.
“We have a buy recommendation and $0.21-per-share price target on Australian Potash. Our view is backed by excellent commodity fundamentals, solid Lake Wells financials, a high-quality resource and a risk averse approach from management.”
“We believe the LSOP project is net-present-value (NPV) positive at realised SOP prices of US$380 per tonne,” the analysts said. “Using our base case realised SOP price deck of US$600 per tonne (2022 real) the project has a post-tax NPV10 of $305 million and an internal rate of return (IRR) of 19%.”
Key assumptions
The assumptions built into Shaw and Partners’ modelling include:
- A 170,00-tonnes-per-annum SOP operation over 35 years;
- Total capital expenditure of $292 million and competitive capital intensity of $1,720 per tonne; and
- Opex of US$251 per tonne over life-of-mine, which is first quartile.
The analysts further noted that APC has announced full environmental approval, has 90% of offtake secured and is funded to the tune of $140 million from Northern Australia Infrastructure Facility (NAIF), along with $45 million from Export Finance Australia.