National Bank Financial's Report is summarised.
With mineralization ~265 m below surface and at average grade of ~20% K2O, the Kola deposit compares well with world-class Saskatchewan deposits that generally lie ~1,000 m below surface at grades of ~18%-26% K2O.
As a result, we believe Kola will have favourable capital and operating costs when compared with other large-scale greenfield KCl projects.
Strategically located near the coast of central Africa, the Sintoukola project offers a transport cost advantage to the vast Brazilian and Asian fertilizer markets. The Kola deposit is ~30 km from the ROC coast, which is ~3,000 nautical miles closer to Brazil than the next closest potash producer, offering Elemental a potential material transport cost advantage.
Brazil is estimated to have imported ~7.5 million tonnes of potash (~90% of domestic consumption) in 2011, and this is apt to increase in time as more arable land is developed. Sintoukola is also relatively close to India, another of the world's top potash importers.
A PFS due in Q3/12 could help de-risk Sintoukola and provide a solid foundation for the FS expected to be completed circa H1/13. Elemental's Prefeasibility Study (NYSE:PFS) is expected by Q3/12; a favourable report is apt to help de-risk the project and potentially allow ELM shares to positively re-rate. Management also aims to deliver a Feasibility Study (FS) by H1 2013, which should allow the Company to meet our H2 2016 initial production assumption.
DCF drives Cdn$1.10 target (or ~0.23x EV/NAV), with a potential Cdn$4.75 share price by 2017 on 8x fwd EBITDA; initiating with Outperform rating.
We calculate 762 million fully diluted, fully financed shares assuming future debt & equity raises (65/35 D/E split). Our NAVPS (fd, ff; 13.5% cost of capital) estimate is Cdn$1.38, implying 0.23x EV/NAV, in line with peers at 0.19x.