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First of all, let's be clear what his skill set is. He is absolutely NOT a contact hitter as you claimed (as evidenced by the kigh K rate you mention). He is the opposite- a big guy who is looking to cream the ball as opposed to merely putting it into play. Furthermore, neither BA or Jason Churchill for that matter consider him merely a fourth outfielder. Both of them view him as starter material. Toolswise he is perfectly capable of hitting 30 homers.
Second, he has been showing significant improvement despite being advanced quickly. At age 19 in low-A ball, he had an ISO just over .100. The next year in hi-A, his ISO jumped to .174. The following season in Double-A, in a more pitcher friendly park and league, it climbed to .196. This year, he went nuts and hit 5 home runs in his first 6 games back from injury and his ISO is over .300.
The issue with Saunders is not one of upside. It's simply a matter of whether he will make enough contact to reach that upside. Considering his age, talent and batting approach, his eye ratio has been fine the last few years so he's not in a high risk category like, say, Greg Halman. He actually reminds me a lot of Jason Bay, not only in terms of his size and skillset, but also the fact that he is Canadian. There's a theory that baseball players from colder climates develop later than normal because they can't play year round in high school. Bay wasn't a big time prospect before he exploded at the age of 24 (he was rated lower by BA just before he broke into the majors than Saunders is now) and Michael seems to be following a similiar path, except that he has reached Triple-A a full two years ahead of Bay.