Scotia Capital has initiated coverage of Verde Potash(TSE:NPK) with an ‘outperform’ rating and a C$9.75 ashare price target – which is more than three times the stock’s current value.
In his note to clients, Scotia’s top-rated fertilizer analyst Ben Isaacson says Verde offers the best domestic solution for Brazil’s potash deficit.
The company has perfected a process that creates the potassium chloride that occurs in sylvinite from a potassium silicate rock that is found in abundance and at surface on its Cerrado Verde project, in Minas Gerais State.
The finished product is identical to imports from Russia or Canada.
The technology used to make it, developed by Cambridge University professor, Derek Fray, requires nothing more complicated than a rotary kiln used in the cement-making process and the addition of something found in every larder cupboard – salt.
This technique of turning rock into potash has been tested and perfected in the lab, as well as being trialed all the way up to the semi-industrial pilot production stage.
Verde’s resource being easy to extract makes it less capital intensive than conventional potash mines, even with this technological flourish of cooking the ingredients.
The initial phase will cost US$598 million to bring into production, which is currently slated for the second half of 2015.
Starting with 600,000 tonnes a year, Cerrado Verde will add a further 1 million tonnes, with the output eventually hitting 3 million tonnes.
Expansion will be financed via a mix of debt and cashflow.
The mine gate cost of around US$300 per tonne makes Verde’s product look horrendously expensive when compared to its Canadian counterparts, which is usually extracted for a cost of around US$80-$120 per tonne.
However this is an industrial mineral.
And for industrial minerals the key component of the cost equation is transportation, which can add between US$174 and US$249 a tonne to the delivered price, Verde estimates.
Scotia’s Isaacson also believes Verde capex will be significantly lower than rival projects at $780 a tonne, or close to half of what it costs some existing Canadian producers to develop brownfield expansion projects.
The giant of the sector, PotashCorp (TSE:POT) (NYSE:POT), estimates that the current cost to develop a 2 million tonne greenfield conventional potash mine in Saskatchewan is greater than $3,000 a tonne of installed capacity.
Meanwhile, brownfield projects, such as Agrium’s (TSE:AGU) (NYSE:AGU) Vanscoy expansion project, are more than $1,500 per tonne.
The difference between the estimates is entirely due to the mining process: strip mining in the case of Verde and conventional underground mining in the case of Agrium and PotashCorp, Isaacson points out.
He also predicts that Brazil will remain a huge importer of fertilizer such as potash through to 2035.
On financing the project, the analyst says local development banks are keen to get behind the project, though there is the capacity to fund later phases of development from cash flow.
If Verde is able to bankroll the $600 million price tag for the first 500,000 tonnes of capacity, it could begin selling potash in 2015/2016, the Scotia analyst predicts.
Separately, he points out that the price target he has set for the stock is roughly half the company’s net asset value, meaning the stock offers huge potential if management led by Cristiano Veloso can deliver.
Isaacson said: “We have conservatively attributed no value to Verde’s other projects, which are not currently a focus for the company.
“Accordingly, if the company successfully progresses its secondary projects, there could be further upside to our valuationof the company.”
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