Small Caps | Jan 27 2015
-Resource upgrade expected
-Financial close likely mid 2015
-FX movements favourable
by Eva Brocklehurst
Highfield Resources' ((HFR)) update and subsequent definitive feasibility study (DFS) on the Muga-Vipasca potash project are eagerly awaited. The resource update is expected this month and the DFS is due in March.
Ahead of the DFS, Canaccord Genuity has reviewed estimates and lifted its price target to $1.30 from 98c, retaining a Buy rating, having upgraded last month from Speculative Buy. An assay of 10m at 14% potash has been noted within a very broad 40m intersection. The broker considers the result exceptional and highly likely to spur an increase in the total resource estimate.
Canaccord Genuity expects financial close on the project in mid 2015 in conjunction with mining approval. The broker expects the equity component of project capital will be completed in the June quarter for a total of $140m. This estimate has increased from the prior estimate of $125m because of lower forecasts for the Australian dollar. The broker has not changed its expectations of an equity raising at 55c per share but believes this is a conservative estimate on the back of the anticipated positive news flow.
The company has also signed an Memorandum of Understanding with the Port of Pasajes for a minimum of 440,000 tonnes per annum. The port has confirmed available capacity over over 1.0mtpa and provides direct access to the Atlantic as well as north-west Europe. Gaining access to the port was critical in de-risking the logistics chain. The company is also negotiating a similar MoU with Port of Bilbao. Other positives for the project include proximity to power and water as well as existing road and rail infrastructure. The deposits also have the advantage of a depth suitable for conventional underground mining. Moreover, the company highlights the potential in nearby markets for by-products, which helps in overall profitability. Canaccord Genuity expects construction will commence by the end of the year.
Adjusting for a significant movement in exchange rates and increasing the forecast production rate, the broker upgrades its valuation of Muga-Vipasca. Since the company released its pre-feasibility study in May last year the euro has depreciated against the US dollar by more than 14%. The broker notes most of the capital items will be sourced in Europe and transacted in euros, and the movement is therefore favourable as orders are placed for long lead items. The DFS will now consider twin declines and increased throughput of 1.0mpta of product. Canaccord Genuity has increased its overall capital estimate to US$320m to allow for the additional decline, with the cost partly offset by the favourable moves in the exchange rates.
The company's three potash projects are located in the Ebro Basin in northern Spain. The Muga part of Muga-Vipasca is the initial focus in terms of development timelines and the dominant mineralisation is sylvinite. The second, Sierra del Perdon, includes two former operating mines but was closed in 1997. The company has stated it is currently completing a scoping study assessment targeting a sylvinite-carnallite operation. Canaccord Genuity suspects the asset may become a renewed priority in 2015/16. Highfield Resources is currently exploring Los Pintanos and ultimately expects the project to provide scale upside to the adjacent Muga-Vipasca.
See also Highfield Resources Running With The Bulls on December 16 2014.
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