We have initiated coverage on the common shares of Verde Potash
plc (Verde) with a 1-Sector Outperform rating. Verde is developing
the Cerrado Verde potash project, a 3 million tonne per year
scalable potash project in the heart of Brazil's agricultural
region. If Verde is able to finance the $600 million price tag for
the first 0.6 million tonnes of capacity, it could begin selling
potash in 2015- 2016. Our one-year target price is C$9.75 per
share, representing a 50% discount to our NAV of $19.75 per
Several positives. (1) Sustainable transportation advantage; (2)
Brazil in a net deficit position for potash through at least 2025;
(3) local development banks seemingly eager to provide financing;
(4) capacity growth partially funded from cash flow; and (5) a
patent pending for the production process.
Stock catalysts. Over the near term, we are focused on (1) the
release of a definitive feasibility study; (2) a potential salt
agreement; (3) the Q1/13 approval of an environmental impact
); and (4) progress on equity and debt financing.
Valuation. To arrive at our $19.75 per share un-risked NAV, we
use a long-term real-dollar weightedaverage potash price of
$654/tonne (DEL Cerrado), which on an FOB Saskatchewan basis is
close to what producers are earning today. We estimate that Verde
Potash requires an equivalent potash price of $275/tonne (FOB
Saskatchewan) to break even. We see our un-risked NAV rising by at
least 8% if Verde Potash is able to move to its upside scenario of
a 4 million tonne project.
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