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Canada’s Aspiring Potash Miners Not for Sale?

By Marc Davis,
In spite of a flurry of headlines in recent weeks heralding a game-changing consolidation of the world’s lucrative potash mining industry, Canada’s two small aspiring potash miners are standing firm.
Both Western Potash (TSX.V: WPX) and Potash One (TSX: KCL) say they are committed to building mines that will be in business for decades. In other words, they’re not for sale. (Well, at least not at current market valuations).
Athabasca Potash Inc. was the only other Canadian mining junior that also benefitted from a sizeable potash deposit in potash-rich Saskatchewan. It was bought out earlier this year by BHP Billiton Ltd. (NYSE: BHP), the world’s largest mining company. In a deal worth $341 million, Athabasca Potash shareholders were able to cash out at $8.35 a share.
Another takeover is also in the works. And this time BHP Billiton has set its sights much higher. Currently, the world’s largest potash producer, Potash Corp of Saskatchewan (TSX: POT) (NYSE: POT), is trying to fend off a hostile takeover bid by BHP Billiton. With a record-setting $39 billion offer already on the table, industry analysts speculate that the potash-hungry mining giant may yet come up with a grander offer that Potash Corp’s shareholders will find too tantalizing to refuse. 
The world’s second largest mining company, Brazil’s Vale SA (NYSE: VALE), has also been moving aggressively into the potash mining industry as of lately, having publicly proclaimed that a boom in the potash prices is on the way. Not surprisingly, it already has a strategic foothold in Saskatchewan. This is where it is developing a ‘solution extraction’ potash mine-the-making near Regina.
Vale’s project actually borders Western Potash’s Milestone project, with both deposits exhibiting similar geological characteristics. Ones that are likely suitable for the realization of energy-efficient and therefore cost-efficient solution extraction mines.
So the big question is why are Western Potash and Potash One predisposed to spurring any advances from the world’s two biggest mining companies and any other deep-pocketed potential suitors? The answer is in the financial projections that attest to both deposits becoming lucrative money makers.
And neither player wants to pass up on the opportunity to cash in on an emerging long-term boom in the global fertilizer business. It’s one that favors the two mining juniors, especially since their projects are situated at the heart of the world’s richest and most prolific potash fields – which already supply a third of global demand. More on this later. 
Western Potash’s decision to stay the course is now underpinned by an important validation of its business model. Specifically, the company recently published a preliminary economic assessment (an initial blueprint for a mine) for its Milestone deposit. It suggests 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 2015.
This independently calculated scoping study also attaches a net present value (the risk adjusted value of the deposit once all the borrowed capital costs are repaid) of $5.2 billion for this project. Due to low anticipated operating costs, an internal rate of return (the average annual total return over the life of the mine) of 27.3 per cent is also forecast. Such a figure is “very healthy” and would bode well for the bottom line of any solution extraction mine, according to a Canadian investment industry mining analyst who is not authorized to speak to the media and asked not to be identified.
With a projected output of 2.5 million tonnes a year at an average operating cost of $63 per tonne, there’s plenty of scope for robust profit margins, according to Western Potash’s president, Patricio (Pat) Varas. This is especially the case with potash prices trading at around $350 a tonne and with the likelihood of prices trending higher as the global recession subsides. (They were as high as $1,000-plus before the economic meltdown caused a slump in demand).  
Meanwhile, Varas says his company’s potential to be extraordinarily successful has not yet been factored-into its share price. And that alone is a compelling enough reason for not putting Milestone on the auction block, he adds.  
 “The markets have not paid attention to the value that has been created in this world-class potash asset that promises to generate as much revenues as some of the world’s biggest and richest gold mines,” Varas says.
“So if our market capitalization doesn’t reflect our net present value, then we need to ensure that we do what is necessary to fully realize the project’s true value. And that’s why we’re now embarking on a pre-feasibility study, which will get underway imminently,” he adds.
Having just returned from China, where Varas and other company directors met with some deep-pocketed mining companies and government-backed investment funds, Varas is in an upbeat mood about his company’s ability to control the future of its prized Milestone asset.
“China has made no secret of the fact that they are willing to buy our potash. And they’d love it if we allow them to own some of the Milestone deposit,” he says. “So they may want to proceed by partially financing the mine’s construction costs, starting with the pre-feasibility study.”
“All told, there are all sorts of different financing mechanisms that have been proposed to us, including ones from Chinese state owned enterprises that have access to very big sums of capital,” he adds. “So we may end up giving up an interest in either the project or the company.”
The Milestone deposit benefits from a resource of 174 million tonnes in the highly reliable ‘measured and indicated category.’ By comparison, Potash One’s Legacy deposit hosts 251 million tonnes in the same category. Both deposits have much larger additional resources outlined in the more approximate ‘inferred category.’
Potash One already has a pre-feasibility study in place for its Legacy deposit and a full feasibility study is nearing completion. The company says its deposit, which is amenable to solution extraction, has a net present value of US $4.47 billion. And it has a projected internal rate of return of 30.1 per cent, based on an annual production of 2.5 million tonnes and a minimum mine life of 40 years. Commissioning and startup of the mine is planned for late 2013.
A spokesperson for Potash One, Joel Kitsul, says he is unable to comment on the company’s decision to become a producer, instead of opting to sell its much-coveted Legacy deposit to the highest bidder. And’s efforts to reach the company’s president, Paul Matysek, were unsuccessful.  
However, the race to build up Canada’s potash supplies because of a heightened need to maximize global crop yields is turning all of Saskatchewan’s potash fields into key strategic assets. All of which are destined to becoming increasingly valuable. This explains why the world’s major mining companies are now jostling for position to access these rich potash reserves – against a backdrop of rising crop prices and an additional 75-80 million mouths that need to be fed each year.
Western Potash and Potash One still face the daunting challenge of finding up to around two and a half billion dollars each to commercialize their ‘company maker’ projects. But as long as global demand for potash continues to rebound, then both of these ambitious upstarts know that a very prosperous future beckons them in mining’s big league.  

Disclosure: No positions