10 bucks target According to Cantor Fitzgerald:
July 31, 2013
KARNALYTE RESOURCES
Uralkali dampens potash price expectations; Lowering target price to $10.00
Recommendation: BUY
One-year target: C$10.00 ↓
Target return: 229%
EVENT
Yesterday, Uralkali announced it is pulling out of BPC, one of the world’s two largest potash trading partnerships which combined accounts for around 70% of global potash trade.
BOTTOM LINE
This move breaks the potash duopoly with potash prices most certain to fall in the near term. With added uncertainty, we reduce our long-term potash price and valuation. We reiterate our BUY rating with a revised target price of C$10.00 (from C$14.00).
FOCUS POINTS
▪ We expect Uralkali’s move will result in a near-term potash price decline from about $400/T toward $300/T. We reduce our long-term potash price assumption to $425/T (from $450/T) assuming a rebound in the coming years as mega-projects (Jansen) are shelved and pricing discipline slowly returns. Notably, we estimate Karnalyte’s Opex to be ~$208/T (allin).
▪ We revise our target price down to C$10.00 (from C$14.00) but reiterate our Buy recommendation given potential upside. Our target is based on a 0.5× price to project NAV multiple plus cash.
▪ The company currently trades at an astonishing 1% of the NPV determined in its feasibility study (albeit the study assumes a higher $480/T potash price).
▪ Karnalyte Resources is more advanced versus all of its peers (having completed feasibility, gained EIS approval and attracted a strategic investor) and stands to be a prime beneficiary of a turnaround in potash prices. Its balance sheet remains very strong at C$62 million (as of March 31, 2013).