The bank reiterated its 'Buy Recommendation' with the target more the four times higher than the last trade of around $0.63.
The following is an extract from the report.
PFS Results And Potential To Shed Some Costs Makes Sintoukola A Gem In The Potash World; Reiterate BUY
Excellent NPV and IRR but Project Start Slips to Q3-2016:
The PFS assigns an after tax project NPV of US$ 2.97 billion at a 10% discount rate, 2.0 million tonnes per year production, 23 year mine life and US$579/tonne MoP delivered to Brazil. The after tax IRR is 29.3% with a payback period of 3 years.
The IRR is an 8.5% improvement on the economic assessment released in August of 2011, which assumed 1.8 million tonnes per year and a 12% discount rate. On the downside, production slips further into 2016 with first year MoP production of 467,000 tonnes versus PEA estimate of 1.2 million tonnes.
Potential to Improve Results with Infrastructure Opportunities and Hangingwall Mining:
The benefits of mining higher grade potash (38% K2O) from the Hangingwall seam and capturing yield and cash flow improvement early has not been incorporated into the PFS.
In our opinion, this scenario remains an attractive option that management is wise to pursue. Furthermore, management success in garnering signed expressions of interest from international infrastructure groups to undertake the infrastructure Capex, in return for Opex charge, is commendable.
The potential for Capex reduction at US$580 million (31% reduction in construction cost) is meaningful.
Low Cut-Off Grade Allows Resource to Reserve Conversion:
The quality and sharp grade boundaries of the Sintoukola Upper and Lower Seams have allowed for an interesting exercise in converting resource tonnes to reserves. The geological cut-off grade of 10% K2O is higher than the economic cut-off grade used in establishing the reserves.
All of the measured and indicated resource from these seams was considered for reserve conversion, attesting to the quality of deposit and ease of economic reserve estimation.
Streamlining Construction Capital:
Savings on Capex were realized while increasing production rate and project scale. Capex is estimated at US$1.85 billion in 2012 dollars versus PEA estimate of US$1.69 billion in 2011 for 1.8 million tonnes per year.
Capex improvements were the result of a number of trade off studies completed last year. In total, Sintoukola cost is at US$925/tonne of MoP production capacity.
Seeking Clarity on OPEX:
Opex of US$79.71/tonne is in line with the PEA figures of US$80.77/tonne, until we consider the transportation and sales and marketing portions. The press release did not disclose these items; however, the Opex breakdown itemized "Haul Road and Road Trains", which may account for the transportation costs; rendering another cost saving measure.
We would also seek guidance from management regarding the potential Opex increase if Infrastructure Capex is outsourced.
Looking Forward: ELM is to continue exploration work in Dougou with more drill hole results to come. Milestones are:
- Complete feasibility study in Q3-2013;
- Full construction implementation commences Q4-2013;
- Mining commences Q1-2016 - 2 year construction period; and
- First product shipped Q3-2016 with nameplate capacity achieved in Q1-2017.
We remain bullish on Elemental and the additional de-risking from the PFS keeps us eager to see more on the financing and off-take side.
Sintoukola is the best project with conventional mining, conservative engineering and cost estimates, highest grade potash deposit and logistical advantage for accessing the world's fastest growing agricultural economy - Brazil.
We reiterate our BUY rating on Elemental and our 12 month target price of $2.70 based on a P/NAV multiple of 0.8× on our 14% discounted cash flow Net Asset Value per share of $3.44.
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