In a research note to investors, Perth brokerage, Hartleys, commented that APC remains an attractive Speculative Buy with a price target of 20 cents per share (current price: 8 cents).
Hartleys noted that the company’s recent offtake agreement with Tier 1 chemical distribution company Redox for 20,000 tonnes per annum of sulphate of potash for a 10 year period as well as NAIF’s recent decision to commence due diligence on the Lake Wells project are both key indicators that APC is on track to make its Final Investment Decision in quarter three 2020.
Following is an extract from Hartleys’ research update:
First off-take executed, NAIF to commence DD
Australian Potash Limited (APC) recently executed its first off-take term sheet with private company Redox Pty Ltd (Redox) for the supply of sulphate of potash (SOP) from the 100%-owned Lake Wells Potash Project (LSOP), WA.
The offtake is subject to formal documentation and ultimately subject to the development of the LSOP project, with funding and approvals currently being progressed. The agreement contains commercial terms of “take or pay” supply of 20ktpa of SOP (branded K-BriteTM) over a 10-year period. Redox is also expected to have the sales and distribution rights on an exclusive basis for Australia and New Zealand. Pricing is anticipated to be on a net realised price basis, and designed in such manner to maximise returns for both supplier (APC) and buyer (Redox). The SOP offtakes and permitting are seen as the key precursors to the finalisation of a project funding package with further offtake arrangements progressing well. We would anticipate that having over 70% of the planned production of +150ktpa SOP secured in product offtakes would be good result for APC, but a higher-level of offtakes maybe required to secure more favourable funding terms. The LSOP DFS (Aug’19), highlighted a pre-production capital requirement of A$208M, and the attractive financial metrics implied a higher gearing ratio is possible.
The LSOP is also eligible for some infrastructure funding from the North Australia Infrastructure Facility (NAIF), which has now given the green light to progress through to the due diligence (DD) phase. While there are no guarantees that NAIF funding will be provided, if it were, a facility could be made available for road upgrades, installation of a power station, airstrip and accommodation village. Non-process related infrastructure on the DFS was listed at A$19M, and when some other indirect costs are included, funding of over A$30M could be provided through a NAIF facility (assuming a favourable result from the DD).
Final permitting still on track for Q3 CY20
The LSOP is expected to be developed over ~24 months from the final investment decision (FID). We see potential for FID during the course of CY20, assuming additional offtakes and project financing can be secured. We model first production from mid-late CY22. The LSOP has potential to be a long-life (+30 years), potash operation designed to produce 150ktpa SOP. LOM operating costs of US$262/t (~A$391/t) are also expected to be highly competitive (first quartile) and translate to solid margins for capital payback in under 5 years on post-tax earnings estimates. An estimated all-insustaining cost (AISC) for the project is ~US$285/t (~A$425/t), which implies healthy margins at current spot SOP prices. The capital intensity of the project also appears attractive at ~A$1,387/t SOP, which is below the peer average, and ~30% less than some recently constructed brine projects globally. Final licensing (permitting) for the project is anticipated late Q3 CY20.
Maintain our Speculative Buy, funding seen as key risk
We maintain our Speculative Buy on APC, with a price target of 20cps (from 30cps). APC’s current cash position is estimated to be ~A$1.6M, but also has a CPA in place which could deliver standby equity of up to A$5m (subject to shareholder approval), which provides some funds for FEED activities and for ongoing offtake and project development funding discussions.