AGR report out...300% undervalued and on the move

Highlights​

Valuation update: We have upgraded our AGR valuation to $0.64. The bulk of the upgrade is due to the AUD weakening to the USD since we published our initiation report in late June. We have updated our model with the new assumptions from the PEA and added in several potential optimisation steps that allow AGR to further improve project economics. Our optimised valuation of the Três Estradas project is AUD$283m however we have chosen to conservatively value the Três Estradas at a post-tax NPV of USD$187/AUD$255m as this represents the mid-point between our optimised NPV and the SRK post tax NPV of USD$167m. We have therefore risked the optimisation upside by 50%.
 Recommendation: We retain a Speculative Buy recommendation and update our valuation to $0.64 a share. We have used a 10% discount rate to reflect the risk of developing a project in Brazil. AGR currently had $0.56m in cash at the end of the June quarter and will more than likely have to raise capital to fund the next part of its forward work program. In order to account for a potential equity raising we have assumed a raising of $5m in the next financial year and as a result our valuation is based on a fully diluted basis taking all options, performance shares and new shares into account.

​

Brazil is the world’s fastest growing fertiliser market: Brazil is the worlds’ 4th largest consumer of phosphate fertiliser and has already established itself as an agricultural powerhouse. But Brazil is very reliant on imports to meet its nutrient needs. The federal and state government agencies have recognized the need to support further agricultural development.
 Brazil has the largest availability of arable land: Brazil has the highest available arable land area of any developing country and is forecast to significantly increase its cropped area over the next few decades. The use of SSP is particularly important in Brazil where increased land preparation, a predominance of small but intensely farmed holdings and soil deficiency in available Sulphur renders SSP use ideal.
 Well defined Phosphate deposit close to key markets and infrastructure: AGR’s flagship Três Estradas phosphate deposit is an advanced carbonatite-hosted project with an established JORC resource. The project is sited close to vital infrastructure such as road, rail, port and SSP production facilities in southern Brazil, a region that relies heavily on the agricultural industry. In addition, the regions entire phosphate requirement, of 1.1Mt, is imported as there is no local source of phosrock feed, in spite of fertiliser blending plant capacity.
 Recommendation: We maintain our Speculative Buy recommendation on the basis that the updated PEA has determined a viable project with a number of opportunities to drive further value from the Project. We note too that our sum-of-parts valuation doesn’t attribute contributions from some of the other projects in the portfolio. We believe there will be a period of high news flow for the company over the next 12 months from new exploration programs over the other assets that could demonstrate the additional value growth potential; additional metallurgical test work to optimise recoveries; infill drilling programs and further news on the emerging large deposit at Cerro Preto.

Our optimised valuation of the Três Estradas project is AUD$283m however we have chosen to conservatively value the Três Estradas at a post-tax NPV of USD$187/AUD$255m as this represents the mid-point between our optimised NPV and the SRK post tax NPV of USD$167m. We have therefore risked the optimisation upside by 50%.