AUSTRALIAN POTASH LIMITED (APC)
Lake Wells – Long Life, Good Margin SOP Project
Australian Potash Limited (APC) recently completed the Scoping Study on the development of its 100%-owned Lake Wells Potash Project in WA.
The study confirms the strong technical and economic viability of the project, and highlights potential for a long-life (+20 years), staged sulphate of potash (SOP) operation with modest initial capital costs of A$175M (includes a contingency of A$24M). Total operating costs are also highly competitive and expected to translate to high margins for quick capital payback.
APC now plans to undertake optimisation studies prior to the start of a Feasibility Study (FS), which is expected to commence in Q2 CY17, and will include building pilot harvest ponds. Mining licence applications and permitting approvals are also being progressed, with potential for early works to commence in late CY18 for first SOP production in early CY20.
We remain of the opinion that APC is best positioned for early market entry. The proposed project development has a simple brine extraction and processing flowsheet, adjustable production rates, highly favourable logistics and the lowest capital hurdle to reach first production.
We maintain our Speculative Buy recommendation with an upgraded 12-month price target of 42cps (up from 29cps). APC’s current cash position is just over A$4m. Our latest price target reflects the Scoping Study inputs and has been fully diluted for project funding (assumes a 60:40 D:E mix).
Staged development 150ktpa SOP up to 300ktpa SOP
The Company proposes to develop the project in two stages. The Stage 1 development consists of 35 bores extracting brine to evaporation ponds, simple processing to crystallise the SOP for transport to markets.
The processing plant has been designed in such a manner to include a muriate of potash (MOP) to SOP conversion circuit, which increases overall SOP production. The MOP to SOP conversion is using the excess naturally occurring sulphate in the brines, and involves no sulphuric acid use (not the Mannheim Process). The initial production rate of 150ktpa of SOP (includes 50ktpa of imported MOP to SOP conversion). Stage 1 opex is estimated to be A$368/t SOP, which at the SOP prices (US$612/t/A$795/t) used in the Scoping Study provides capital payback in less than 3 years.
Internal cash flows are expected to fund the vast majority of the Stage 2 expansion capex of A$163M (includes a contingency of A$23M), which in year 5 duplicates Stage 1 to double production to 300kpta SOP (includes 100ktpa of imported MOP conversion). After expansion, opex improves to A$339/t SOP, with LOM sustaining capex expected to be less than A$3Mpa.
APC trading at a discount to peers – better value, more upside
APC’s immediate ASX brine peers (RWD, AMN, SO4) are trading at market capitalisation premiums, some 2.5-3.4x higher than APC, which in our opinion is unjustified. APC has a higher capital intensity (A$1,126/t SOP) when compared to peers with completed Scoping Studies, largely a reflection of production levels but there also appears to be a degree of conservatism with some estimates which will be refined as development studies progress.
Revenue to cost ratios are comparable to peers AMN and RWD, but APC on the key metric of EV/Production tonne SOP metric is by far the cheapest, with similar total opex to peers AMN and RWD but with better logistics.
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