MBAC Fertilizer Corp. Buy Target $5.35

MBAC Fertilizer Corp.  MBC ( TSX)  $ 3.15

Sept. 14

Investment recommendation

Although preliminary in nature, the PEA highlights a robust project, the result of a very high grade REO deposit that is at surface and adjacent to existing infrastructure. Due to the risk surrounding the timeline and the financing of the project, we have applied a discount rate of 20% on Araxa. Given that the company will be looking to finance the Santana project in H2/13, estimated for initial production in 2015 at a cost of $445 million (our estimate), MBAC will likely require a financial partner for the Araxa project if it expects its timeline to be met. Initial discussions with potential financial partners (which consist of Japanese and Korean electronics companies – the end users of REOs) have identified several entities that are interested, but would prefer a further de-risking of the project through feasibility studies and pilot plant testing. To that end, given that MBAC intends to conclude both its pilot testing and PFS during Q2/13, followed by a bankable feasibility study expected by the end of 2013, we should be provided with greater clarity on financing options and better timelines and cost assumptions at that time. Given the metrics provided by the PEA, coupled with our own assumptions, and assuming a 20% discount rate on the Araxa project, our NAVPS estimate for the company increases by 15% as a result of the PEA release.

Investment highlights

Production planned fro Q1 2016 – increased capacity over time .

 PEA estimates Phase I CAPEX at US$406 million (which includes US$105 million in contingencies) with an additional US$214 million for the Phase II expansion (a sulphuric plant upgrade) for a total forecast CAPEX of US$620 million.

Valuation

We continue to rate the shares of MBAC a BUY, but have increased our 12-month target price to C$5.35 from C$4.70, based on 1.0x our NAVPS estimate of C$5.37.

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