Consensus community valuation
I think the announcement this morning was positive in that the ratio of sylvinite to carnallite has improved for Project O.
Large amounts of sylvinite are great for room and pillar underground mining, but carnallite is more brittle and a geotechnical challenge to deal with, meaning recovery rates are lower. The ratio is broadly 5:1 sylv/carn, which means that mining is straightforward from a geo-technical perspective as the wall/roof structural integrity will be intact from higher density/less brittle sylv. This should be the same for Project Muhlhausen.
At a price of $420 US/t MOP, Cenkos modelling yields an NPV for Project O of $1.5 billion USD, which equates to $2.23 billion AUD (at an FX of 1:1.49). Assuming that is a fair long-term pricing input, SHP trades on 2.2% p/NAV.
I've bought some here in real life. May re-enter on Strawman also.
And confirmatory drilling results are in! It is a wider/thicker seam (7.5m v 5.5m) (and the hole was 148m west from the historical intercept), but overall the team seem to be happy with it and the average grade is very strong at ~14.4% K2O (compared to the historical result at 15.7% K2O). Overall, I'm happy with this, and I've bought more at 18c IRL. With drilling de-risked, we are set for a bumper resource upgrade and scoping study over the coming months and one would have to imagine that investors will start to form positions prior to that news dropping. Other investors will wait for the scoping study itself to drop, to have a clear view of project NPV, which should drive a further leg up. Based on the Cenkos NPV estimate of A$1.5b for this first starter project (at long term MOP prices of ~$350USD/tonne), at a 10% p/NAV ratio, we are looking at a fair value market cap of A$150m minimum. At a 20% p/NAV, which isn't out of the question, fair value market cap would be as high as A$300m versus $90m today at 18c. And these figures are for Ohmgebirge alone, which is the 1st (and smallest) of 4 projects that SHP owns (with no royalty attached). My hope is that volume on this news and upcoming announcements flushes out the remaining option sellers and Delphi's remaining position. Alternatively, it would be great if Delphi now stopped selling given the significance of this news, but I won't hold my breath on that.
- OHM-01 completion (second hole): Mid May
- Mineral Resource Estimate Update: Early Q3 CY22 (i.e. July)
- Scoping Study: Q3 CY22 (estimating Aug)
Unfortunately, for various reasons, 19c chart support on SHP has broken today, with a close at 18c. For me, this is now a sell on technicals (but remains a buy on fundamentals). I've locked in some profits by selling half of my SHP holding and will look to re-accumulate around the next support level, which is 13c.
The fall through support, which breaks the short and medium-term uptrend, is possibly due to two key factors. Firstly, Delphi (German-based fund) continues to sell alongside Euroz Hartleys option sellers. They are in sizeable profit and are perhaps offsetting losses elsewhere as they have been underperforming of late. Secondly, OHM-02 drilling results appear to be delayed relative to previous company guidance. This is due to lab delays according to company management. There is the risk that these results will deviate from historical drilling although I consider this unlikely personally.
Following the OHM-02 and OHM-01 drilling results, the major upcoming milestones remain the resource upgrade and the scoping study. These were previously scheduled for May and June respectively, yet are likely to now be delayed to June and July respectively, due to the assay results delays. In the short term, SP momentum has been lost, but in the long term, the intrinsic value of this company should still be dictated by the quality of these announcements (or otherwise).
I suspect the share price might re-trace to near 13c in the short term, where it should find new support.
Note: As a full-time private investor, I have an active approach to the markets. Being active in the markets has both strengths and weaknesses; I certainly don't believe it is the best approach for everyone.
All, please see below for some more detailed modelling on a fully diluted basis: please do your own research and due diligence. Although all due care has been taken to build this model, I can't guarantee that it is perfectly accurate. I'd be very interested in any feedback such that we can collectively sharpen our knowledge of the SHP investment case. By all accounts, it looks like there is significant upside should SHP validate the resource as expected and continue to execute on the upcoming milestones. I also can't guarantee the accuracy of the Cenkos NPV calculations, although I have reason to suspect they (Cenkos) have done a very thorough job.
It appears that SHP is set to join the Strawman index, in the next week or two, reflecting the increasing interest in the company and the bullish share price trajectory.
I bought more at 19.5c IRL, on confirmation of the clear break of resistance (on massive volume) and the move into blue sky (essentially new all-time highs). This is a stock that I am very happy to average up on. With everything happening in the world right now, nothing else in my portfolio has as much near term potential as this.
The sensitivity table in the Cenkos broker report (see below) highlights that a 20% increase in the long term MOP price assumption from $300 USD/t to $360 USD/t, leads to a 77% increase in the price target to 46c.
And, that analysis disregards the other 3 SHP assets (which are all larger than the starter project: Ohmgebirge). In my opinion, given that the spot price is now above $800 USD/t, and the macro environment is showing a structural change in potash supply, it is only a matter of time before Cenkos update their broker report with more realistic price assumptions.
Further, once the market starts to price in more than Ohmgebirge alone, this could get really interesting, because at that point, we are looking at a multi-billion NPV (possibly $6b NPV+) and even a small 10% p/NAV valuation factor on that leads to a market cap of $600m versus $100m today.
A sleeping giant.
Excellent move today so far, on strong volume. Still witnessing some selling pressure around the 19.5c resistance level (which is normal and to be expected), but the company is valued at merely $100m at 20c compared to what is likely to be a multi-billion NPV, even at conservative MOP prices and with further dilution necessary.
That level of FA strength and level of value, combined with the extraordinary macro environment we find ourselves in, should be the ongoing catalyst to send SHP up into the high 20s and probably 30s, in the coming handful of months, with the scoping study on the horizon.
Each time the share price makes a run, like today, the battering ram is making hits at that 19.5c door, and in my opinion, it is only a matter of time before it opens and we move into blue sky (new all-time-high) levels.
Once that happens, that 19.5c level will become a very strong support level (given the nature of it acting as a resistance level historically) and there's no going back. The window/opportunity of being able to pick up shares in the teens is closing fast in my opinion. DYOR etc.
The bounce today has meant that chart support at 13c for SHP has once again held. This continues to appear to be a major support level on the daily chart with 19.5c a key resistance level that needs to be pushed through to see a move higher into the 20s on news of confirmatory drilling and/or the impending scoping study.
(Bloomberg: 24.02.2022) -- More price hikes for fertilizer are on the horizon as the Russia-Ukraine crisis adds to fears of global shortages, stoking concerns about rising food costs. Russia is a low-cost, high-volume global producer for all major fertilizers, and it’s the world’s second-largest producer after Canada of potash, a key nutrient used on major commodity crops and produce. The conflict in the region as well as sanctions on Russia could hurt trade flows. U.S.-based Mosaic Co., a major fertilizer producer, warned of potash shortages in a call with analysts Wednesday.
Occasionally, macro & company developments align in a potential investment. It’s one of those take note moments, akin to the alignment of TA with FA or the twin-turbo drivers of an earnings upgrade with an earnings multiple re-rate.
Right now, food insecurity is one of Earth’s most significant challenges, exacerbated by climate change and the COVID-19 pandemic. Fertiliser costs have been surging, with prices driven by surging energy costs, supply curtailments, and trade policies.
Most fertilizer prices increased sharply in 2021Q3 and continued rising in early November, reaching levels unseen since the 2008-09 global financial crisis.
Around the world, Governments are acting fast. China announced the suspension of fertilizer exports until June 2022 to ensure domestic availability amid food security concerns. China’s exports of DAP (diammonium phosphate) and urea account for approximately one-third and one-tenth of global trade, respectively.
In addition, Russia recently announced restrictions on nitrogen and phosphate fertilizer exports for six months, effective December 1, 2021. Moreover, across Dec 2021, the US, EU, UK and Canada announced new sanctions on Belarus, amid ongoing pressure campaign on President Alexander Lukashenko, restricting financial dealings with state-owned Belarusian potash fertiliser producer, OJSC Belaruskali, the world’s second-largest potash supplier.
Following these disruptions, Muriate of potash (MOP) contract prices are forecast to surge in 2022 following significant increases in spot prices, in which there is already a growing divergence between spot and contract prices for MOP.
Potassium is one of the three key nutrients required for plant growth, along with nitrogen and phosphorous. As soil quality around the world declines and the global demand for produce increases, potash will play a vital role in the expansion of the world’s food supply.
Another key driver of the potash market is that it is a finite resource, with no known substitutes in agriculture. Most of the world’s supply comes from only a few countries with Canada being the world’s biggest supplier and exporter, producing over one third of the word’s global output. This is followed by Belarus, Russia, China, Israel, Germany and the rest of the world.
Further, due to climate change, arable land per person globally continues to dramatically decrease – from 4,500m2 in 1960 down to just 1,800m2 in 2050, which will significantly increase the need for potash and other fertiliser constituents.
Forecasted Arable Land Per Person Globally Across 1960, 2005 & 2050
Enter South Harz Potash (ASX:SHP) building Western Europe’s largest potash inventory
It is against this backdrop, that South Harz Potash (ASX:SHP) enters the mix, with a market capitalisation of $80 million AUD at a share price of 17c. Listed on the ASX in 2017 (as Davenport Resources), South Harz Potash Ltd is set to become a world-class producer and a major supplier of potash in Europe by developing its large potash resource in the South Harz region of Central Germany.
The South Harz Potash District, located in the heart of Germany, was one of the world’s most important Muriate of Potash (MOP) producing regions, with a history of Potash mining going back over 120 years. SHP’s portfolio of German licences represents Western Europe’s most significant potash resource, comprised of high-grade Muriate of Potash (MOP) Inferred Mineral Resources (JORC 2012) and valuable potassium and magnesium sulphate minerals at relatively shallow depths.
The former German Democratic Republic produced approximately 3.3Mt of K2O annually from mines within and around the South Harz Potash District and communist East Germany (GDR) was one of the top three producing countries in the world. Historically, both Sylvinite and Carnallitite potash ores have been mined in the South Harz Potash District by conventional underground room and pillar mining.
However, the last active mines and potash processing plants were decommissioned in 1991 and 1993 during the reunification of Germany. At its peak, the region employed 45,000 mine workers back in the days of GDR. With reunification in the early 1990s, most of the mines were closed and 15-20,000 miners lost their jobs. The government went to sell off the mines, but the pricing was unrealistically high, so they sat on the shelf until SHP (formerly DAV) successfully bid €1.3m, completing the acquisition in early 2018.
Today, Potash is produced in the South Harz Potash District only from the BWE Kehmstedt and Kehmstedt-NW owned Kehmstedt operation via solution mining techniques, at a production rate estimated at just over 100,000 tonnes MOP per year.
Thus, the company has seized at the opportunity to capture an already established and inferred potash resource of more than 5 billion tonnes at a grade of 10.8% potassium oxide across 4 deposits that can be developed independently within its asset bases in Germany – a rarity generated due to the unique socio-political history of mining in the area.
The opportunity ahead for South Harz Potash is immense and unlike many other ASX early-stage development companies, the upcoming planned work programmes should allow a rapid and low-cost route to a JORC compliant potash resource.
South Harz is among the lowest market capitalised potash hopefuls on the ASX, at $80 million AUD at 17 cents/share. Most of the other companies are capitalised at or above $100m, but admittedly these more expensive companies are further down the path of development with some of them having achieved offtake agreements and finance.
Part of the reason the sector trades at low multiples is that fertiliser stocks, principally those in potash and phosphate, have never been of mainstream interest to Australian investors. Very few people have an intuitive feel for the sector, so when we see companies and projects being promoted ASX investors have to go back to square one and reacquaint ourselves with industry fundamentals and the necessary project parameters required for operational success.
Moreover, the last time there was widespread interest in phosphate companies was in 2008/09, when the phosphate price jumped from a price of about US$42/tonne to peak at US$430/tonne. It subsequently collapsed back to US$85/tonne, then rallied to more than US$200/tonne, only to fall to a long-term steady trend around US$100/tonne.
Back then several Australian companies began promoting and working on phosphate projects, including Aguia Resources (Brazil), Arafura Resources (Nolan’s Bore), Nupower Resources (Arganara), Korab Resources (Geolsec), Minemakers (Wonarah), Phosphate Australia (Highland Plains) and Rum Jungle Resources (Amaroo), with many unsuccessful due to the boom-bust nature of the phosphate price. This has left a sour taste in investors mouths, which presents another reason for why valuations of players in the space are currently low (trading at significant discounts to NPV).
Also, these “comparables” are not actually comparable with $SHP. Most of the companies are looking at brine extraction methods of mining with a strong WA contingent. Moreover, these operations are producing (or seeking to produce) sulfate of potash (SOP) not muriate (meaning chloride) of potash (MOP). The only directly comparable company is Highfield Resources with an underground mining proposition in Spain, and that is currently capitalised at $295m at 80 cents (10/01/22). The current lack of appropriate reference points on the ASX and industry knowledge/awareness of large scale MOP projects presents an opportunity for SHP at the current low valuation.
Cenkos Securities Plc, in a 1st of November 2021 research note, revealed a base-case NPV10 for the three main assets of US$1.28bn. Their sum-of-the-parts valuation gives a current fair value of A$0.27/FD share, based on modelling at long-term US$300/t MOP and a 0.25x NPV multiple to account for the current stage of development. I consider this a conservative long term pricing scenario given current pricing north of US$800/t MOP.
As the company progresses along the development pathway, the company is expected to trade at a higher percentage of NPV, to reflect reduced levels of risk. Cenkos expect a NAV multiple of 0.25, 0.40, 0.60, 0.80 and 0.95 during the scoping study, feasibility, fully-funded, commissioning and production stages, respectively, for the Ohmgebirge flagship asset.
In light of this, I have personally taken a meaningful position in ASX:SHP for the TEP Investments personal portfolio at 14c, with the view towards gradually taking profit out as the share price approaches the $200m valuation mark (c.42c share price), as the company moves post scoping study (Q1-CY22), through to the completion of the definitive feasibility study (DFS).
Full blog: https://www.tepinvestments.com/blog/south-harz-potash-asxshp-becoming-a-tier-1-producer-of-potash-in-europe-amid-a-rising-tide-of-food-insecurity-and-sky-high-fertiliser-prices