to assist project understanding

Extract from Broker report
Investment Thesis:
· Three 100% owned potash projects covering ~300km2 located in the Ebro Basin,
Northern Spain: In June 2012 HFR acquired, via scrip (including performance
shares) a portfolio of potash project in Northen Spain. The brownfield Sierra del
Perdon and advanced greenfields Javier and Pintano Projects are all located in the
Ebro Basin, a proven potash producing basin in which four mines have all previously
operated via decline access and underground mining. A substantial amount of
historical data was acquired as part of the transaction (incl. 16 holes drilled in the
80’s) and HFR have since drilled an additional 18 holes which have corroborated the
historical information. The Javier Project is the most advanced asset within the HFR
portfolio, with a PFS imminent and expected to demonstrate extremely robust
metrics including 800ktpa production, US$300m capex and US$170/t FOB opex.
First production is expected in 2016.
· Drilling continues to impress. HFR was fortunate to get access to significant data at
the time Javier was acquired, with 10 historic holes having been drilled during the
80’s together with additional seismic work. HFR has since drilled a further 9 holes,
growing the resource and reinforcing management’s belief that the mineralisation
can be mined via underground operations and accessed via a decline. Recent
drilling indicates potash mineralisation extends into the south east of the Javier
Project area. A seam measuring 4.5m at a depth of less than 300m indicates
continuity for more than 5kms from historic drilling. This hole is being prepared for
assay and will therefore not be included in the pending JORC resource upgrade. It
will also not be included in the PFS, providing upside through the DFS phase.
· Underground mining via decline access, carries significant advantages over shaft
and solution mining: HFR is the only ‘non-producer’ of potash we know of that that
is proposing an underground mining operation at Javier accessed via a decline. The
majority of other aspiring potash producers globally all require either shafts or
solution mining to access mineralisation at their deposits, both of which are
associated with higher capex/opex and technical issues (e.g. potential aquifers).
· Spain a first world country with infrastructure advantages and close proximity to
key markets in Brazil and Europe: Significant infrastructure is already in place (i.e
rail and port) which is expected to lead to lower relative capex, opex, enhances
margins (~US$200/t) and efficiency to market. The location of HFR’s projects in
Spain and proximity to key market Brazil provides a freight advantages estimated at
~US$80/t compared to Canadian producers. Spain are making a concerted effort to
stimulate their economy given a ~25% unemployment rate, and the recent changes
to the environmental approval process timelines (reduced from 18 months to 6
months) is testament to this.
· Sierra del Perdon and Pintano offer additional optionality/blue sky: Whilst Javier is
the most advanced project within HFR’s portfolio, the brownfields Sierra del Perdon
(previously produced 10mt KCI) and greenfields Pintano (which abuts Javier, is
higher grade but deeper) offer additional optionality for HFR via either JV’s, asset
sales and/or staged production funded via cash flows.
· Supportive cornerstone shareholder. One of the key issues for junior resource
stories in recent times has been limited access to finance. We consider HFR to be
differentiated in this instance, given the capex competitiveness and robust project
economics at Javier. Moreover, HFR’s largest shareholder is Owen Hegarty’s private
equity resources fund EMR Capital (~30% undiluted, ~17% diluted for performance
shares), that we understand is very supportive of HFR’s development plans and is
unlikely to want to be diluted.
· Formal research initiation to follow. This commentary is designed as an
information piece. We hope to complete a thorough valuation of the company in
due course that will result in a target price.