This provides significant upside from the last traded price of $1.31 per share.
The following is an extract from the report.
Permitting catalyst approaching
Key milestones for HFR in 1HCY16 include the receipt of a positive environmental declaration and the granting of the mining concession for their flagship Muga Potash Project in Spain.
After lodging the application effective 24 November 2015, HFR had initially hoped approvals would be granted in February 2016.
However, the review continues and is now approaching the end of the six month assessment period (on 24 May 2016). Clearly it is hoped a positive decision will be announced in the coming weeks.
With this process taking longer than hoped, other milestones have also been pushed back, including closure of project financing and a likely construction commencement date.
In line with this we have revised our development assumptions for Muga as well as our forecast production ramp-up.
Potash market remains tough
Potash prices have continued to track down below US$300/t in 1HCY16 as demand in key markets of China and India has fallen.
Lower customer currencies, resulting in higher prices for farmers, have also dampened demand in markets such as Brazil.
This isn't all bad news for HFR, which under its forecast operating cost profile would maintain margins in all key markets despite these price drops.
The industry is also seeing production curtailments, with Intrepid Potash (IPI US) recently closing one of its US mines. As we have seen in other commodities, this can be a longer term positive.
Investment thesis - Buy (Speculative), Valuation $1.75
We continue to assume HFR receives its Mining Concession in a timely manner and leave our risk discount for Muga unchanged at 25%, consistent with the Feasibility stage of the project.
However, we do push our development timeline out ~6 months, now assuming construction commences in 1HFY17 and first production in 2HFY18.
Together with a lower assumed potash price this results in a cut to our NPV-based valuation to $1.75/sh. With only ramp-up production falling within our forecast period we make no material earnings changes.
Our Speculative Buy rating is retained.
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