The following is an extract from the report.
On Balance PFS is Much as We Expected
ROC Potash Project PFS Supports Low Cost Mine - Finance Risk Still Key
Pre-feasibility Study (NYSE:PFS) indicates ~29% IRR vs. ~27% in the prior PEA on lower expected opex/tonne. The PFS proposes ~2.0 mln tpy of KCl production, up from 1.8 mln previously.
Estimated construction capex increased ~11% to $1.85 bln, below our prior ~$2.0 bln forecast. Offsetting this cost creep is a ~35% drop in opex to $80/t vs. our $105/t forecast, owing largely to scale advantages, improved metallurgical test results and reduced loading and mining costs (previously assumed contract mining and leased port facilities, but now infrastructure is assumed owned).
Full potash production is projected by Q1/17 vs. our prior Q1/18 forecast. Finally, the PFS shows after-tax IRR of 29% vs. the PEA's 27% estimate.
We make minor model revisions; NPV rises ~$0.1 bln to ~$1.2 bln. Our assumed capex is largely unchanged at ~$2.0 bln, but we push out initial production ~six months to 2017 as per management's revised expectation; this extra time allows management to introduce the higher-grade Hanging Wall Seam (HWS) potential into the FS due circa Q3/16.
We trim opex to US$89/t (was US$105/t). We trim the DCF WACC 25 bps to 13.25% reflecting the PFS' partial de-risking of the Sintoukola project. The net effect of our model adjustments bumps project NPV up to $1.2 bln.
Finance risk remains key concern, but we reiterate a $1.25 DCF-based target & OP rating, see ~$6.00 potential by 2017. Already a relatively low cost project, capex could move lower if management can a) secure third parties to fund/operate non-mining project infrastructure (comprise ~$580 mln of capex total) and/or b) successfully mine the high-grade HWS.
For now, however, the estimated fd, ff share count rises to 780 mln from 719 mln as we expect equity to be raised near term at a lower price than originally modeled, leaving our NAVPS (fd, ff) estimate largely unchanged.
We thus reiterate a $1.25 target, implying 0.23x EV/NAV, similar to current peer multiples. Longer term, should Sintoukola be financed and built, we see a ~$4.00-$6.00/sh trading range at 6x-8x EBITDA.