AMHPF.PK up 11% after 20% sell off yesterday
Verde Potash (NPK) has completed the Preliminary Economic Analysis
for its verdete slate to KCl (ie, Cambridge) process and has
published a press release this morning with key highlights.
- Based on the work of SRK, this process looks very attractive, with
an operating cost during the early years of production of US$274 per
tonne, ramping up to US$291 per tonne over the 30 year life of mine
as the stripping ratio increases.
- These opex numbers would appear to make Verde the lowest cost
producer on a delivered cost basis to the Cerrado region of Brazil.
Recall that Brazil was the largest importer of potash globally in
2011 at 7.5 million tonnes.
- These opex figures also compare favourably to the US$300 per tonne
figure we had used as a base case in our earlier work evaluating the
value of the Cambridge process to NPK shareholders.
- The scoping study proposes an initial plant with 600,000 tonnes per
year of KCl capacity coming online in 2015, which would ultimately
ramp up to 3.0 million tonnes of capacity per year.
- Capex for the initial 600k tonnes of capacity is estimated at $654
million (US$1,090 per tonne of capacity), while capex for the full
3.0 million tonne facility is estimated by SRK at US$2.4 billion (US
$800 per tonne). The US$800 per tonne figure is right in line with
our published assumptions and materially below the cost of greenfield
solution mining projects in Saskatchewan which tend to average closer
to US$1,081 per tonne (KRN: $928/t; Legacy:$1,136/t; WPX: $1,178/t;
Average = $1,081/t).
- SRK estimates an IRR for the project of 23.7% and an NAV at 10% of
US$2.3 billion for the full 3.0 million tonne facility. This works
out to an NAV of $64.76 per share. Note that this is an SRK figure -
we will need to update our own model with the data released today in
order to publish our own estimate (note that we have been using more
conservative assumptions Re: discount rate (12%) and potash price (US
$500 per tonne FOB Vancouver) than SRK seems to have employed.
- Recall that the company is hosting a demonstration of its verdete
slate to KCl process on Wednesday in Allentown, PA. We understand
there are 20 participants from the buy side and the sell side signed
up.
Bottom line: This PEA is a very positive event for NPK and implies
more value for NPK from the Cambridge process than we had been baking
into our $12.00 target previously. We need to update our model, but
at first glance, we expect the Street to begin valuing NPK on the
basis of its Cambridge process, as opposed to just the value of the
ThermoPotash process (which produces a low grade, slow-release potash
product). With a capex of $800 per tonne (ie, ~26% cheaper than a
greenfield solution mine), an opex at startup of US$263 per tonne
(and US$291 per tonne life of mine), and SRK's estimate of a $64,76
per share NAV, the shares are likely to react very positively today.
Its also worth noting that this PEA seems to focus on a slow ramp-up
schedule in order to fund expansion of the project from cash flow
generated by the intial phase of 600k toones of production. This
allows the company to minimize dilution. We expect that a
well-capitalized corporate buyer of this project though, couldemploy
a much quicker ramp-up, which delivers more cash flow sooner, thereby
having a material positive impact on the NAV
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