Potash prices in September were 26% lower than a year earlier and at their lowest levels since the beginning of the early 2000s cyclical upswing
Potash prices in September were 26% lower than a year earlier and at their lowest levels since the beginning of the early 2000s cyclical upswing. The huge variation in prices illustrated in the chart challenges investors to make a judgement about what to assume in valuing an existing or prospective producer of potash. The example of Highfield Resources is illustrative of the implications flowing from this decision. In a feasibility study released in May 2014, the company estimated that its Spanish potash development could be generating EBITDA in 2018 of $234 million based on a potash price of $435/tonne. At recent market prices, however, the profit would be nearly halved. The project valuation would be cut by 60%. Using the PortfolioDirect valuation model, the base case assumptions in the feasibility analysis imply a potential share price in 2020, once the company is comfortably in production, of $2.20-2.80. The same valuation framework using the lower price assumption implies a price target below the current share price of 60 cents.
John Robertson is Chief Investment Strategist for PortfolioDirect a provider of resource sector investment stock ratings and portfolio strategies for mining and oil and gas investors. He has worked as a policy economist, corporate business...
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