Fundamental Research Corp took a closer look this month at Western Potash (TSE:WPX) (FSE:AHE) after the potash explorer recently released a positive feasibility study for its Milestone project in Saskatchewan.
Fundamental's analyst, Nicole Engbert, notes that the feasibility study showed attractive economics, and that the company is ready to seek a partner.
The study, completed by AMEC Americas last month, confirms the asset is of sufficient size and grade to support primary and secondary potash solution mining for more than 40 years, at an ultimate production rate of 2.8 million tonnes per year of potash - a key soil nutrient for growing crops.
The company has said, however, that the proven and probable reserves alone are enough to support mining at the same rate for almost 50 years - well beyond the mine plan in the current study.
The solution mine has several benefits when compared to conventional potash mines, including a shorter construction timeline, a lower capex and a faster rate of return versus conventional potash mine construction.
After tax, the project, which is due to come online in 2016, is estimated to have a base case net present value of C$2.44 billion, with an 18.6 per cent internal rate of return (NYSE:IRR) assuming a discount rate of 10 per cent. Pretax, the project yields a net present value of C$3.6 billion, and an IRR of 21 per cent.
The NPV estimate dropped from the pre-feasibility study primarily due to a 20% drop in the potash price estimate, but all the other major inputs, such as the operating cost, mine life, production commencement / ramp-up period, etc., had little to no changes, the analyst took note.
"Although this is a decrease in NPV from the Pre-Feasibility Study, the project's economics, we believe, continue to be very attractive," says Fundamental's Engbert.
Late last year, the Vancouver-based company also inked a definitive agreement with the city of Regina, securing a long-term source of process water for its Milestone project. Under the agreement, the company will have access to 60,000 cubic metres per day of treated effluent for the first six years, and 42,240 cubic metres for the remaining 39 years.
Engbert looks at this deal as a positive, as potash mining has "high water requirements", and this agreement will ensure a secure water supply for the life of the project.
Meanwhile, the environmental impact statement for the project has been submitted to the Saskatchewan Ministry of Environment, with a review process currently ongoing. Western expects environmental approval in the first quarter.
The analyst notes that the primary catalyst over the next six to 12 monhts will be the potential for an acquisition or joint venture agreement for the project with a fertilizer company in India or China, as potash projects are capital intensive.
Indeed, the company's VP of corporate development, John Costigan, told Proactive Investors in December: "We have already hired a financial institution to help us with the future structuring of potential partner agreements."
"The ideal partner would be a very large player that has the capital to build the mine, that has access to the potash market, and could bring some technical savvy to the project."
The area in which Milestone is situated has seen plenty of activity in the potash sector, as along with junior miners in the planning stages, both BHP Billiton (LON:BHP) and K+S AG have recently started work on potash mines in Saskatchewan. The region is also home to Potash Corp (NYSE:POT) (TSE:POT) - the world's biggest producer of the crop nutrients.
Initial capex for the mine is pegged at C$2.91 billion, 5% higher than the pre-feasibility study - with deferred capex of $0.39 billion, and operating costs estimated at $62.28 per tonne at full production capacity. The payback period is projected at just over 5 and half years.
At the end of September last year, the company had cash and working capital of $2.78 million and $3.42 million, respectively, and it closed a $9.6 million private placement last October.
Engbert kept her buy rating on Western Potash, but lowered her fair value estimate from $2.90 to $2.19 due to a higher Capex estimate and share dilution since Fundamental's previous report.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.