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Highfield Resources Running With The Bulls

Small Caps | Dec 16 2014


-Operations ramping up
-Value catalyst in next 6 months
-Strong potash outlook


By Eva Brocklehurst

Highfield Resources ((HFR)) is running with the bulls. Canaccord Genuity upgrades its rating to Buy from Speculative Buy as a result of a visit to the company's Spanish potash assets. The broker visited two key projects, Muga-Vipasca and Sierra del Perdon, near Pamplona. There are a number of near-term catalysts which have potential to unleash the value in the stock.

The sites have good logistics and transportation options, surrounded as they are by infrastructure such has highways, power, water and rail. Moreover, the European market is in close proximity and the projects are less than 120km from an Atlantic port for shipments to Brazil. Mining approval is expected to be forthcoming at Muga in six months and a resource upgrade is expected in the current quarter. A definitive feasibility study is expected by early 2015 and this will lead into project financing.The next nine months should materially de-risk the project.

The broker has observed the advanced stage of the assets and forecasts a production profile at Muga of up to 800,000 tonnes per annum. This number will be reviewed following the updated resource. The broker has revised pre-production capital assumptions for Muga down to US$310m from US$325m. Given the exchange rate is moving favourably for Highfield, and the company's pre-production, pre-feasibility estimate was US$250m, the broker suspects its estimate may still be be conservative. The equity component of the Muga project capital is expected to be completed in the June quarter 2015 for $125m, previously forecast at $115m. The broker has upgraded this estimate because of a lower Australian dollar exchange rate forecast in 2015 of US88c, versus the prior US93c.

A maiden JORC resource for Sierra del Perdon is due this year as the company had previously deferred a resource estimate to concentrate on Muga-Vipasca. Sierra del Perdon is a brownfields project which was mined from 1963-1996. The site is 40km from Muga-Vipasca and both historical construction and operating approvals remain in place for 500,000 tpa of potash. The mine was closed in 1997, when potash prices reached US$110/t and new mine infrastructure was required. Potash price estimates are US$350/t for 2016-2018 and the broker expects Highfield to be producing 121,000t in 2017, rising to 379,000t in 2018. The asset is expected to become a renewed priority for Highfield in 2015/16 and the scoping study is now progressing. Canaccord Genuity has reviewed the project and now firmly believes the asset has clear latent value.

Canaccord Genuity upgrades its target for Highfield to 98c from 94c. Highfield Resources, is an Australian-based potash exploration company and acquired the Javier, Pintano and Sierra del Perdon assets, located in the Ebro Basin in northern Spain, in 2012.

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