Australian Potash Ltd (ASX:APC) saw its high conviction BUY recommendation re-iterated by Shaw and Partners with the wealth manager’s investment thesis predicated on solid Lake Wells financials backed by a high-quality resource and a risk-averse approach from management.
Shaw believes potash market fundamentals are strong, supported by a 20% increase in potash prices since July and BHP’s Final Investment Decision on Jansen.
The following is an extract from Shaw’s research update titled ‘Muddied waters don’t change the thesis; reiterate BUY’:
APC’s peers are potentially polluting the waters – SO4 and KLL (not covered)
- In our view one of the reasons institutions are hesitant to buy into the Australian Potash Sector – despite the 20% re-rate in potash prices since July – is the difficulties at Salt Lake Potash and Kalium Lakes Ltd (ASX:KLL). Each company is in the final stages of development / commissioning their respective Sulphate of Potash (SOP) projects.
- Both Kalium Lakes and Salt Lake Potash have encountered difficulties with brine abstraction, production of harvest salts, and project execution. We note the technical veracity of these type of solar salt projects has been proven by numerous operations globally for many decades.
- We believe APC’s approach for a Lake Wells development is conservative given:
- APC is factoring in two summers of pond evaporation prior to commissioning. This is to ensure there is a sufficient quantum and quality of harvest salts to feed to the process plant.
- Brine borefield abstraction is used, which we believe carries less technical risks compared to salt lake trenching (most of its peers).
- An EPC (Engineering, Procurement and Construction) contracting style is used for more than 75% of the construction contracts by value, which ensures cost, schedule and performance guarantees.
BHP’s Jansen Final Investment Decision is indicative of positive commodity fundamentals
- Earlier this week BHP took a Final Investment Decision for the US$5.7B 4.4Mtpa Jansen Phase 1 Muriate of Potash (MOP) project.
- BHP gave a detailed analysis of MOP markets at its June potash briefing (90% of global potash sales). BHP believes long run cost curve support for FOB Canadian MOP production is mid-US$300s/t. Consensus inducement greenfield project costs are in the US$300-500/t range. We conservatively model US$270/t for long run FOB MOP prices.
- BHP refers to SOP as an ‘MOP derivative.’ The long-term SOP/MOP pricing differential is ~US$200/t due to the marginal SOP tonne derived via the Mannheim Process.
- BHP’s view of MOP prices implies an APC valuation of A$0.38ps (vs Shaw 0.32ps). Every $50/t in SOP realised pricing adds A6cps to our APC model.
APC well placed relative to existing producers – Compass Minerals (not covered)
- In our view Compass Minerals’ Great Salt Lake Project is the closest analogue to the Australian SOP developers. It continues to have operational difficulties.
- The evaporation pond resonance time at the Great Salt Lake is 3 years, compared to ~7 months for APC’s :Lake Wells (once at steady state operations). The difference in resonance time is primarily down to Australia’s climate being much hotter, drier, and evaporation season (summer) being longer.
- Pond resonance times being ~20% of Compass’ is one of the reasons we forecast cash operating costs for APC to be ~US$260/t (~50% of Compass’ 2Q21).
We maintain our Buy recommendation and A$0.32ps valuation on Australian Potash.