IC Potash: The World’s Most Advanced Junior SOP Pr Stifel analyst stated that ICP is their favourite of the junior potash names and has a $2.40 target on ICP.
ICP is trading at 14% of NAV, IC Potash has six other analysts covering the stock with favourable recommendations, one wrote IC Potash could drive $8+/share, stating that ICP is trading at a significant discount relative to its peers and believe ICP should trade at a premium to the group.
|  | | | | | July 6, 2012 | | IC Potash Corp. | | ICP – TSX
Buy | | | | Agricultural Products & Services | | | | | Company Update | | | | Maintaining Buy - Highlights from the AGM | IC Potash (Buy,
.75, intraday) is our favourite of the junior potash names we follow. IC Potash has sufficient cash to see it through the definitive feasibility study (expected August 2013) following Yara International’s US$40 million investment in April for 19.9% of the company. IC Potash targets a niche market (SOP instead of MOP) with a low cost mining plan in a relatively politically stable location (New Mexico). IC Potash remains Buy-rated with a target price of $2.40/share. | | | | | | Quick Background: oICP’s Ochoa Polyhalite Project is located in New Mexico and is focused on mining SOP (sulphate of potash). SOP is a small slice of the overall potash market which is 95% dominated by MOP (muriate of potash). oEstimated capital cost for the project is approximately US$706 million. oOn March 30, 2012 Yara International (third largest global distributor of fertilizer) purchased 19.9% of ICP at $1.32/share for $40 million in cash. Highlights from IC Potash’s Annual General Meeting: oWe attended IC Potash’s AGM on Thursday June 28, 2012, and we were very impressed by the candid presentation made by President and CEO Sidney Himmel. oHe talked for 45 minutes about the company's progress and mapped out in detail the steps planned to get the project into production. oWith a cash balance of $60 million at the end of April and a cash burn rate of $2.5 million a month there is sufficient cash to see IC Potash through the completion of a definitive feasibility (expected to be out by August 5, 2013) and the environmental permitting process. oProduction is expected to start in 2016 which is 3.5 years from now. Production is planned to ramp up from 10% of full production at the end of 2015 to 80% by year-end 2016. IC Potash is a real company. - It employs 25 full time employees and 15-20 full time consultants engaged in engineering.
The key challenge is financing: IC Potash has a well thought out plan. oICP’s project has a low projected capital cost of US$706 million which is well below the $3 billion plus cost of a typical large MOP potash project. This arguably makes IC Potash's project easier to finance; however, it will still be an arduous process. Fortunately, Sid Himmel has experience with financing as at one point he worked in project financing at TD. He knows that the banks will stress test the project modeling in cost escalation and lower possible SOP prices. Therefore the project must be technically solid and this is why such effort is being put into the engineering work. oThe banks will also have to be convinced that the mine's output will find buyers. There is no futures market for potash so having off-take agreements in place and a marketing deal with a large distributor in place for the balance will be helpful. Yara has signed a 15 year off-take agreement for 30% of production at then market rates, and IC Potash over the next year would like to sign another off-take agreement. oIt is too early to know the exact form of the financing of the mine, but it is likely to be at least 50% debt leaving about $350 million of equity needed. Assuming that a year from now IC Potash has two large shareholders willing to contribute their share of the needed equity this would leave IC Potash responsible for raising $175 million of new equity. Before the company gets to this point it may have to order some long lead equipment and this may require the issuance of $50 million of new shares. CEO Sid Himmel said that the company must always act as if it intends to complete the mine by itself regardless of the possibility that it may be acquired (which we believe is possible once the feasibility study is complete). oIC Potash's shareholder base is more institutional than for most junior miners with two major investors in the United States and two in Europe. Yara owns 19.9% (as a strategic investor) and Resource Capital owns 16.5% (as the manager of an early stage mining portfolio). Conclusion: - We calculate that a share price of
.75 is reflecting a 14% discount rate. With no need to issue stock in the near term there is little risk of dilution at this time. We expect the company to do further financings in a year's time, or be sold. Our one-year target of $2.40 is based on a NAV10. A 10% discount rate is used to reflect the lower country risk for a project located in North America. | | Target Price Methodology/Risks | | We use a one-year target price methodology that incorporates a NPV10 for 100% of the Ochoa Project (derived using a discounted cash flow valuation methodology) a year from now plus the estimated value of other assets and expenses to arrive at a target price of $2.40. We believe the DCF valuation best captures the timing of expected future production, growth, and cash flows as well as makes it the most suitable method, in our opinion, to value a mine that is not yet in production. We believe the key investment risks include: regulatory/political risks, financing risk, execution risk, tax/foreign exchange changes, lower realized potash prices, geological risks, and environmental risks. | | | | |