Amazon Mining Holding Plc (TSX-v: AMZ; C $9.28)
Potential NAV of $125.85 per share
Recommendation TOP PICK (maintained)
12-Month Target Cdn$11.50 (maintained)
How Blue is the Sky at Cerrado Verde?
We have begun to sharpen our pencil recently regarding the
potential upside of Amazon’s Cambridge process. The Cambridge
process could allow the company to produce a conventional
potassium chloride (KCl) or potassium sulfate (SOP) and could
potentially generate up to four billion dollars of value for
Amazon shareholders.
We have previously put forward an NAV of $42.12 per share
in the event the Cambridge process is successfully scaled up.
Based upon recent meetings with Amazon management in Belo
Horizonte, Brazil and conversations with staff tasked with the
scale-up of the Cambridge process, we believe this figure could
materially understate the potential of the project.
Our original Cambridge NAV was based on a two million tonne
per year operation at an operating cost of US$250 per tonne. We
are coming to the view, though, that a successful Cambridge
process could result in a plant designed to satisfy all domestic
potash demand in Brazil and that cash costs could be closer to US
$200 per tonne vs. our more conservative US$250 per tonne
assumption.
In a world where the Cambridge process scales up well and
runs as efficiently as Amazon’s engineering team believes it can,
the project has the potential to generate more than US$1 billion
of free cash flow per year. Assuming a five million tonne per year
project and a cash cost of US$200 per tonne, we arrive at an NAV
of $125.85 per share. Fantástico.
This figure is the blue sky scenario where everything falls
into place in Amazon’s favour and is by no means our base case
assumption. Our $11.50 target assumes a 10% chance of success with
the commercial scale-up of the Cambridge process. We note though
that Amazon’s in-house engineering staff believe their odds of
success are closer to 75%. We continue to rate the shares a TOP
PICK with a 12-month target price of $11.50 per share.
Analyst Coverage: Jaret Anderson