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Western Potash: Lowest hanging fruit

Western Potash’s Milestone Project in Saskatchewan is now the most advanced undeveloped potash asset in the world. Which makes the company ripe for an acquisition, or a joint venture partnership, with a potash-hungry Chinese government-funded corporate suitor.

So says Fadi Benjamin, a Toronto-based mining analyst for the Canadian brokerage house and merchant bank, Northern Securities.

His upbeat remarks are encouraged by the fact that Western Potash was recently granted environmental approval from the Saskatchewan government to build a mine on the site of its 226-million-tonne Milestone potash deposit.

“This important development is the final step in technically de-risking the project,” Benjamin says.

Milestone is located 30 kilometers southeast of the city of Regina and is at the heart of the world’s richest and most prolific concentration of potash mines and in-development deposits. In fact, Saskatchewan hosts about half of the world’s potash reserves and currently produces about a third of global output. 

Furthermore, Western Potash also benefits from an independently-validated feasibility study (a detailed blueprint for a mine) that attests to the robust economic viability of a future mine. This pivotal benchmark development also clearly demonstrates that Milestone is a “world-class asset,” according to Benjamin.

Specifically, he’s referring to the fact that Milestone is capable of yielding up to 2.8 million tonnes of potash per annum at pre-tax mining costs of around $62 per tonne for at least 40 years. This would generate approximately $1 billion a year in revenues, based on current potash prices (which are in the range of $400-$450 per tonne). This also computes to a projected payback within six years on the mine’s anticipated $3.3 billion in commissioning costs.

Additionally, the project is amenable to “solution-extraction” mining methods. This means that large amounts of water can be used to flush deeply-buried potash to the surface, instead of mechanically excavating it. In so doing, Milestone is expected to become the first such mine in the world that uses treated effluent, rather than fresh water, to extract this salt-based mineral.

Besides facilitating an environmentally-sustainable mining operation, this solution-extraction process will also offer key competitive advantages, according to company spokesperson John Costigan. For instance, it will translate into significantly lower mine construction costs than is the case with conventional potash mining. And a solution-extraction mine is expected to be faster to build and commercialize.

“All told, this project is essentially a low-risk, high-volume mining operation,” Costigan says. “It’s also a project that carries very limited political risk, given our geography. We also own our property outright. Because of this we have successfully avoided the development uncertainties associated with having a property that encompasses any parkland or is under First Nations jurisdiction.”

”In essence, these various dynamics make Milestone very attractive to anyone who wants to get into the potash mining business without any barriers to entry other than capital expenditure costs,” he adds.

“On this last note, it’s worth noting that Milestone is very similar in terms of its size and its commercialization costs to the Legacy potash deposit, which is now under construction. This  is significant because this potash asset was acquired from one of our peers in the exploration sector  by the German fertilizer giant K+S Ag for around $430 million a couple of years ago.”

The odds in favor of a lucrative potash mine being commissioned at Milestone are also supported by its close proximity to the largest solution-extraction potash operation in the world, the Belle Plaine mine. Owned by the potash giant, The Mosaic Company (NYSE: MOS), it has been in business for over 40 years and is still going strong at around 2.8 million tonnes of output per annum.

This is particularly encouraging for Western Potash, which believes that its own deposit exhibits similar geological features — ones that are also suitable for the realization of a mine that is both energy-efficient and cost-efficient.

Costigan says one of Milestone’s biggest selling points is that this solution-extraction mine in-the-making promises to become the lowest-cost operator of its kind in North America. It is expected to open for business in late-2016.

Such a scenario now makes Western Potash especially attractive to a diversity of deep-pocketed mining companies or end users. Benjamin singles out Chinese state-owned enterprises (SOEs) as being the most obvious candidates. 

“Supply security is particularly important to the Chinese, who have been circling around opportunities in Saskatchewan for some time,” he says. “Now that Milestone is technically de-risked, Western Potash’s low share price valuation must make the company look like a bargain in terms of an acquisition or a joint venture.”

In fact, there’s a clear consensus of opinion among investment industry mining analysts who follow the potash and fertilizer sectors: They assert that the Chinese are very anxious to lock-in access to future Canadian potash supplies at reasonable prices.

By way of explanation, all of China’s potash imports are purchased from Canpotex— the marketing arm for Canada’s three dominant potash producers. And Canpotex has a reputation for being inflexible with its pricing. Hence, this “take it or leave it” mindset can be problematic with Chinese state buyers, who feel they are not always able to negotiate reasonable long-term pricing.

Moreover, potash has become an increasingly strategic asset for China’s burgeoning agriculture sector. This is because it’s an indispensible ingredient in fertilizers. Not only does it significantly boost crop yields, but it also ensures meaningful cost containment.

China’s need to ensure supply security at cost-efficient pricing is being presaged by the fact that its booming economy is affording its 1.3 billion citizens a better standard of living. In turn, most Chinese are now demanding more feed-intensive animal protein in their diets. In which case, farmers need to significantly increase their use of potash-based fertilizers.

But China isn’t the only overseas player that wants to muscle-in on Saskatchewan’s lucrative potash business. Some of the world’s largest mining companies are now jostling for position to access rich potash reserves — against a backdrop of rising crop prices. Indeed, food staples have resumed an across-the-board upwards trend now that the global economic recovery is underway. This bodes especially well for potash prices for the foreseeable future.

It also means that Western Potash is sitting on an increasingly valuable asset, according to Benjamin.

“The fundamentals for the potash business suggest there will be very healthy future growth,” he says. “And even in the present environment of lower potash prices (than several years ago), this merely means that higher volumes will be used on agricultural land around the world. Which should boost demand.”

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