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Potash West Receives A$0.77 To A$3.87 Share Price Valuation

Potash West (ASX: PWN) has been assessed as being undervalued by New York based Arrowhead, on the back of potash production estimates from its flagship Dandaragan Trough project in Western Australia.

Based on production estimates from a local as well as a potential export plant, the research firm has estimated that the company's fair share value lies in the A$0.77 to A$3.87 bracket.

This compares with its current share price of A$0.25 with a 52 week range of between A$0.18 and A$0.35.

The following is an extract from the report.

Company presentation

The Dandaragan Trough project is located within the Dandaragan Trough, which is one of the world's largest glauconite deposits, close to good infrastructure.

Potash West holds the right to exploit potash and phosphate within fourteen exploration licenses and one licence application, covering a total area of 2,905 square kilometres.

The company recently defined a maiden JORC Resource of 244 million tonnes at 3% K20 and 1.6% P2O5 over the Dinner Hill Prospect after completing a 3272 metre drilling program.

In mid November, Potash West secured a Chinese cornerstone investor to invest A$3 million through a share placement.

Potash West Portfolio and Company Premiums

Potash West has a major landholding over the world's largest known glauconite deposit with previous exploration indicated glauconite sediments are widespread for more than 150 kilometres along strike and 20 kilometres in width.

The asset contains potassium-rich glauconite deposits together with phosphate minerals. The company also holds rights to by-products produced by processing these minerals. Significant progress has also been made on the processing flow sheet which has been developed to extract value from the glauconite within the greensands.

Australia has a long history of a favorable regulatory environment and the project is close to the local markets and connects to major roads/rails routes and export ports.

Corporate Strategy

Potash West's long-term strategy centers around consolidating prospective ground in Western Australia, reducing competing market interests, dominating the Australian glauconite resource market, defining cost effective extraction, maintain efficiency and cost profile, and advancing toward bankable feasibility.

The extraction of glauconite from greensands and its treatment to produce potash high Mg Potash (KMS) phosphate and iron oxide is based upon proven technologies. However, processing is yet to be tested on a meaningful scale outside of the laboratory.

The proposed flow sheet is based on the leaching of the glauconite to produce potassium in the form of potassium sulphate. The other components of the glauconite are also used to advantage and recovered as valuable by-products.
The company plans to concentrate on further drilling of identified areas and procurement of results to define bankable feasibility study by December 2013, followed by construction in December 2015 and production by mid-2016.

Markets

Potash production is limited to only 12 countries around the world, of which Canada (35%), Russia (19%) and Belarus (16%). None of this production comes from the processing of glauconite.

Potash is imported by more than 100 countries worldwide as over 80% of world potash production is exported.

Global potash production is estimated to increase to 41.4 million tonnes in 2012 compared with 2011 levels of 37Mt, and further rise to 45.9Mt by 2014.

About 30 new projects are expected to to be completed by 2015.

Potash demand is highly correlated to crop production, as it is an essential component of fertiliser.

With increased population, farm output is expected to rise by 70% by 2050, which will require higher crop yields as a result of decreasing arable land per capita.

In the medium term, potash demand is expected to increase from 37.0Mt in 2011 to 35.8Mt in 2014. In the long term, potash demand is expected to grow at a rate of 3-5%

In 2011, potash prices increased 25% year on year to US$425 per tonne due to higher demand (owing to increasing population and decreasing land availability). Prices are expected to increase as planting season begins in US, and settle at around US$520 per tonne by the end of 2012.

In the medium to long term, we expect the potash prices to be supported by demand recovery.

Value

The Fair Market Value for Potash West shares stands between A$64.2 million and A$324.3 million.

This Is based on the discounted cash flow from the Dandaragan Trough Project over a 187 month period (between 2013-2028).

Key variables

Variable 1: With Potash West still under pre-production stage, we expect that company will start the glauconite production from 2016, with a mining rate of 2.5Mt to 2.60 Mt per annum of potash with mine-life of 12 years.

Variable 2: As well as "local supply Plant", the company also plans to develop an export plant which will be used to export potash. The company is expected to start production from the export plant from 2018 with a life of more than 10 years.

Variable 3: Arrowhead believes that Potash prices should be firmly supported by demand recovery in the near term. As grain prices trend higher and farmer economics improve, potash demand is expected to sustain in the range of US$550-560 per ton in 2016.

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