SHP.ASX Developing Europe's Largest Potash Asset: Price Breakout
Exec Summary
SHP has pushed through 19.5c resistance, on the highest weekly volume since early 2021. In my opinion, it is highly likely that the 19.5c level will now become strong support. After a half-year range-trading between 13c and 17c, we are now welcoming SHP to the 20s and beyond.
Fundamentals
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.
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 and the Russia-Ukraine crisis, Muriate of potash (MOP) contract prices have been surging in 2022 following significant increases in spot prices, in which there is already a growing divergence between spot and contract prices for MOP.
Valuation
Ohmgebirge alone at a $380 US/tonne MOP pricing scenario leads to an NPV estimate of $1.2 billion USD based on Cenkos modelling. On a P/NAV ratio of 20%, (which is the middle of the ballpark for PEA/PFS stage companies), that's a fair value estimate of $240m USD or $333m AUD, which equates to a 68c per share target based on SOI of 490m. Although, it should be noted that some further level of dilution will be required to validate the 3 other assets.
If the market starts to price in some success of the other 3 assets: then the valuation could start to get really interesting. Ohmgebirge is actually the smallest of the 4 assets and is merely the starter project. I'm holding tight: a market cap of $120m doesn't reflect the potential of the asset (the largest potash deposit in Western Europe), the management team and the macro environment that we find ourselves in.
Lastly, Merchant Funds Management (Andrew Chapman) in a Chris Judd podcast (Talk Ya Book: from the 23 min mark onward) clearly stated: "we think this is a $1 stock": I'd have to agree.
SHP has pushed through 19.5c resistance, on the highest weekly volume since early 2021. In my opinion, it is highly likely that the 19.5c level will now become strong support. After a half-year range-trading between 13c and 17c, we are now welcoming SHP to the 20s and beyond.
Fundamentals
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.
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 and the Russia-Ukraine crisis, Muriate of potash (MOP) contract prices have been surging in 2022 following significant increases in spot prices, in which there is already a growing divergence between spot and contract prices for MOP.
Valuation
Ohmgebirge alone at a $380 US/tonne MOP pricing scenario leads to an NPV estimate of $1.2 billion USD based on Cenkos modelling. On a P/NAV ratio of 20%, (which is the middle of the ballpark for PEA/PFS stage companies), that's a fair value estimate of $240m USD or $333m AUD, which equates to a 68c per share target based on SOI of 490m. Although, it should be noted that some further level of dilution will be required to validate the 3 other assets.
If the market starts to price in some success of the other 3 assets: then the valuation could start to get really interesting. Ohmgebirge is actually the smallest of the 4 assets and is merely the starter project. I'm holding tight: a market cap of $120m doesn't reflect the potential of the asset (the largest potash deposit in Western Europe), the management team and the macro environment that we find ourselves in.
Lastly, Merchant Funds Management (Andrew Chapman) in a Chris Judd podcast (Talk Ya Book: from the 23 min mark onward) clearly stated: "we think this is a $1 stock": I'd have to agree.