RBC ReportRBC COMPANY UPDATE | COMMENT
FEBRUARY 2, 2010
MagIndustries Corp. (TSXV:MAA)
Potash Framework PotentiallyPositive; Awaiting Additional Details
Sector Perform
Speculative Risk
Price: 0.57
SharesO/S (MM): 360.5
Dividend: 0.00
PriceTarget: 0.55
ImpliedAll-In Return: (4%)
MarketCap (MM): 205
Yield: 0.0%
Event
MagIndustries held a conferencecall to discuss its framework with China
National Complete Plant Import& Export Company Ltd. (COMPLANT).
Investment Opinion
• Maintaining Sector PerformRanking. While the recently announced
framework agreement with COMPLANTcould be potentially positive for
MagIndustries' shareholders, webelieve continued uncertainty surrounding the
potash project and terms of theframework agreement may limit the near-term
upside for the company's stock.Given the non-binding nature of the framework
agreement and uncertaintyregarding the financing arrangements, valuation of
the equity option granted toCOMPLANT and project construction costs, we
are maintaining our SectorPerform ranking at this time.
• Uncertainty AboutConstruction Costs. COMPLANT will be seeking a
secured construction loan of anamount up to US$1.2 billion, which is expected
to represent 100% of the cost ofthe EPC contract. We currently do not know if
the US$1.2 billion will besufficient to cover the total cost of the potash project
and are uncertain about theimplications of potential cost overruns. While we
had previously been under theimpression that Phases I and II of the project (i.e,
total 1.2 million tonnes ofcapacity) would be significantly higher than US$1.2
billion, management suggestedthere will be some upfront savings under the
proposed financing arrangementand COMPLANT will be seeking to lower the
overall cost of the project.
• Additional Details onFinancing Arrangement at a Later Date. Under the
proposed debt financingarrangement, a portion of the potash project's
production will be directed tothe service of the project debt and for an
additional period of time beyondthe repayment of the project debt to be
negotiated. We expectMagIndustries to provide additional details on the
arrangement in the future.
• Preliminary AnalysisSuggests ~C
.25/Share of Upside. Based on our
assumptions, our preliminaryanalysis of the framework agreement indicates
that the potash project couldpotentially add ~C
.25/share of additional value.
Given the uncertainty regardingthe potash project, it is not reflected in our
valuation at this time andrepresents potential upside to our target.
• Valuation. Ourtarget price of C
.55 is based on our net asset value analysis
of MagIndustries' MagForestry andMagEnergy business divisions. Our target
price reflects a modest discountto our estimate of MagIndustries' net asset
value.
Priced as of prior trading day'smarket close, EST (unless otherwise noted).