The broker has increased its target price to A$2.00, which is more than five times the last traded price of A$0.33.
The following is an extract from the report.
We maintain our BUY recommendation but increase our TP to A$2.00, from $A1.50/sh, due to our new commodity price forecasts and changes to our model.
Highfield plans to start production initially from Javier in 2016, at around 750-850ktpa KCl and 1.5-2Mtpa NaCl. We have conceptionally forecast that Sierra del Perdón is likely to follow in 2017/18 and Pintano in 2018/19, with peak group production at 1.9Mt KCl and 4.7Mt NaCl in 2022.
We forecast cash costs of $140-150/t, in line with global averages. While of modest grade, the projects have IRR's of +40% and are relatively shallow, amenable to underground mining with decline access.
Highfield's projects benefit from strong infrastructure, easy access, close proximity to European markets, no native title and a supportive, developed country with a large skilled workforce with potash expertise.
The projects potentially have an extremely low capital intensity of $430/tpa, half the global average.
We see plenty of upside with our assumptions far more conservative than management targets. Our best case target price is A$3.50/sh, assuming larger operations at Javier and Pintano, MgCl sales and lower capex in line with management targets.
We expect plenty of share price catalysts over the next year, including drilling updates, JORC resource estimates, PFS results and project updates.
Our TP is based on 1x NAV at $1.02bn (A$2.00/sh post-financing), based on conservative prices and assumptions and heavily risk-weighted up to 75%.
As the projects are de-risked towards production we expect to see further value realised, increasing by 65% over the next 2 years.
We believe potash to be an excellent investment with strong fundamentals in a strained fertiliser market, where supply is struggling to keep up with demand growth of 3-5% pa.
Demand drivers include increasing population, decreasing arable land, dietary changes and biofuels. Despite some uncertainty over BPC, we forecast prices remaining buoyant over the short to medium term at c.$300-350/t KCl.
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