Canadian Research Upgrade

Cut from Canadian Research this morning - increasing target to C$1.50/share.   Great summary


Event
Aguia Resources released an updated resource estimate for its flagship Três Estradas (TE) project.
Highlights

•   Resource Upgrade | AGRL increased the resource estimate to include a total measured and indicated (M&I) resource of 83Mt grading 4.1% P2O5 and an inferred resource of 21.8Mt grading 3.7% P2O5. Included in the M&I resource is an estimated 5.3Mt of saprolite ore grading 8.8% P2O5. The average fresh rock grade improved slightly from 3.5% (June 2016) to 3.8%. The company was able to convert 67Mt of resources to the M&I category and increase the total resource (measured, indicated and inferred) by 36.7%.
•   Additional Mine Life | Although the company has stated in the release that it will be able to mine the oxidized saprolitic rock for five years followed by 15 years mining the fresh rock, we believe with the new resource estimate this is understated. By our estimates, and assuming a 300Ktpa phosphate concentrate production rate, the mine life would extend a further 11 years, for a total mine life of 31 years.
•   Project Valuation | Accounting for the additional nine years of mine life (our original estimate was 22 years), we estimate the project NPV12 has improved by $20M or $0.17/sh. The project IRR is unchanged at 51% as we had already assumed 4.5 years worth of saprolite ore which is confirmed by this press release.
•   Next Steps | AGRL expects to be awarded the preliminary license permit in early 2018 and apply for the installation license thereafter. Also in Q1/18, the company will release the Três Estradas Bankable Feasibility Study (BFS), which is expected to confirm our assumptions around the mine and update the project economics based on the new two-phased mine plan. Another significant de-risking event for the project is signing off-take agreements with fertilizer manufacturers. These agreements are expected in early 2018.
  Valuation & Conclusion
  Aguia Resources has been effective in incrementally improving the TE economics as it advances the BFS. For those of us reading between the lines, the TE project is shaping up to be a valuable asset and prime take-over target as the likes of Mosaic, China Molybdenum and other large-cap mineral companies seek further investment in Brazil’s strong fertilizer market. Revising our model with the updated mineable resource and life of mine, our project NPV increases to $221M (was $200M) and our company NAV to $2.03/sh (from $1.85/sh). Using a 0.75x NAV multiple, we are increasing our target price to $1.50 (from $1.40). We maintain our Speculative Buy recommendation.