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Market: TSX-V
Sector: General Mining
Epic: WPX
News: Latest news
Web Site: Western Potash Corp
Other Articles: 03-06-201014-04-201010-03-2010 
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Western Potash Corp

Western Potash Corp

Western Potash is a junior mining company engaged in the acquisition, evaluation and exploration of potash mineral properties in Western Canada. The Company's objectives are to define and develop a world-class potash deposit while providing its shareholders with a unique opportunity to participate in the blue-chip dominated potash mining industry.
CLICK HERE FOR FULL ANLAYSIS OF WESTERN POTASH CORP
Wednesday, March 10, 2010

Western Potash: Red, Hot and maybe Cooking with Gas

by Jackie Steinitz company news image

February was a bumper month for Western Potash.  On the 2nd the company announced the maiden resource estimate for its flagship potash project at Milestone, Saskatchewan which is sandwiched between two major railway lines, lies astride the Trans Canada gas pipeline and is located just 30km from the provincial capital.  The estimate demonstrated that the deposit is large, good grade and potentially amenable to solution mining, which can be set up more quickly, flexibly and cheaply than hard rock potash mines. Crucially it also showed that the deposit is deep and hot, with a minimum formation temperature of 60-65°C. The heat anomaly could give Western a significant competitive advantage as solution mining is energy-intensive; the energy required to heat the water to dissolve the potash prior to pumping to the surface and then to evaporate away the water can account for up to 70% of total operating costs. 
 
But there could be even better news to come. In an announcement on February 17th Western confirmed the identification of the hydrocarbon potential at the project. If work currently underway proves that the project contains sizeable natural gas pools this could be a further huge boost to the economics of the project.  It could enable Western to produce its own energy for mining and processing, reducing energy costs by up to 90%, and possibly even generating revenue if there is any surplus which can be supplied to the Trans Canada pipeline.  The company is hoping that the gas pools could give it the lowest operating costs of any potash mine on the planet.

In late February the Management team had a successful visit to London; eight investor meetings yielded eight significant investments in the company. Meanwhile Western, which has no debt and cash of C$17.4m, has saw its share price rise more than 50% during the month - from 47 to 72 cents, increasing the market capitalisation to C$74M.

Background

Western Potash has a straightforward story.  It was set up in 2007 as a private company by director, financier and venture capitalist Patrick Power in order to capitalise on both the favourable outlook for the potash market and on an opportunity to acquire prospective ground adjacent to known potash deposits in Manitoba. Its strategy from the outset was to acquire, evaluate and explore greenfield potash deposits in Western Canada. To date that is precisely what it has done.  The current tally stands at 2 exploration projects permitted (545  square km of permits in Russell, Manitoba and 500 square km in Milestone, Saskatchewan), 900+ line km of 2D seismic data analysed, and 18 wells drilled, resulting to date in three potash discoveries, (including two distinct deposits in Manitoba), and one NI 43-101 resource. 

The success of Western’s exploration has been made possible by the strong management team, who have an impressive track record in finance, project management and exploration, and by the company’s success in raising C$45m even in the difficult economic climate of the last 3 years.  About half of this was raised in the IPO on the Toronto Venture Exchange in May 2008.


But before looking in further detail at the company, a look first at the fundamentals and prospects for potash.


Potash:  Fundamentals and Outlook


The term potash refers to a group of potassium bearing salts, especially potassium chloride.  Potassium, which is the seventh most abundant element on earth but one which is too reactive to be found on its own, is needed as one of the three critical nutrients besides nitrogen and phosphorous in fertiliser. Potassium helps plants to retain water, to produce and transport sugar and to fight disease, stress, weeds and insects.  It stops wilting, strengthens roots and stems, and protects plants from extreme temperatures. There is no substitute for potassium in fertiliser which accounts for 95% of potash demand.  The remainder is used in a myriad of minor uses including livestock feed supplements, computer screens, water softeners and soap.

Potash has been described as “first cousin” to table salt (sodium chloride) which is normally found close by.  It occurs in topsoil and sea water, but the major commercial potash deposits were laid down millions of years ago when seas and lakes evaporated.  For the most part these deposits are buried at least 400 metres below surface, though there are some surface brine deposits such as the Dead Sea in the Middle East and the Great Salt Lake in the USA.
 
Underground potash deposits can be mined either by hard rock methods or by solution mining.  The latter, in essence, involves drilling a borehole well to the ore body, injecting heated water to dissolve the ore to form brine and then pumping the brine to the surface where it is processed to separate out the commercially important products. The depleted brine is then re-injected into the deposit. Production costs depend on the grade, depth, thickness, continuity and consistency of the deposit, and on the amount of insoluble material contained in the ore body.


Potash is currently produced in some 45 operations spread across a dozen countries, though Canada is top dog, typically accounting for almost a third of annual world production and 40% of known reserves. Ten of the eleven potash operations in Canada are in Saskatchewan which has flat, consistent and extensive reserves which allow the use of efficient mining techniques. Manitoba is also known to have extensive beds near the Saskatchewan border though there is no mine there as yet.


It takes time and a large budget to build a potash mine and there was considerable underinvestment in the industry during the lean years of the 1990s. Indeed the majority of the world’s current production capacity of potash is more than 25 years old. The industry was therefore not able to keep pace with the growth in potash and fertiliser demand which has taken place over the last 8 years or so driven by the conjunction of several key trends notably:


·    Rising population (especially in the BRICs) with 75 million more mouths to feed worldwide each year.
·    Increasing incomes, urbanisation, and an accompanying change in the world’s diet towards increased consumption of meat, yet it takes 7kg of grain to produce 1kg of meat.
·    Increased production of biofuels
·    Land and water constraints resulting from the impact of urbanisation on the availability of arable land. The world’s arable land is decreasing by over 40,000 square kilometres each year.
·    Rising agricultural prices, which have incentivised farmers to invest in fertiliser in order to produce as much as possible.


Potash prices therefore, which hovered at the $100/tonne mark for the 20 years to 2003 rocketed skyward, peaking at some $850/tonne in 2008 at which point the market had clearly overheated, the economic crisis was gaining momentum and the farmers backed off fertilising for a year. The price fell, along with crop yields, which restimulated demand; the price has now recovered to some $350-$400/tonne. Meanwhile the need for fertiliser is increasing inexorably as the food requirement per acre of arable land continues to increase.  Most commentators assume that the price will at worst stabilise at current levels and more likely recover further in the medium to long term. Western believes that the economics of Milestone will be robust even if prices were at the lower end of consensus projections as Milestone’s costs are likely to lie at the lower end of the cost curve, particularly if natural gas is proven at the project.

Western Potash Projects:  Current Status and Next Steps

Western acquired 5-year exploration permits for Milestone in May 2008.  It began its exploration program with the acquisition and analysis of 283 line km of 2D seismic data which demonstrated the existence of potash beds and enabled Western to define drill targets.  The first hole was drilled to a depth of 1776 metres.  Coring began at 1640 metres and the Prairie Evaporite Formation, which hosts the potash beds, was intersected at 1657 metres.  Since potash demonstrates more continuity than many other deposits the resource definition holes can be more widely spaced than those required say for copper or gold deposits.  Just four holes, each some 3-4km were required to establish the maiden resource of 262 million tonnes of potassium chloride, comprising 32 Mt indicated and 230Mt inferred, grading above 28%.   The resource demonstrated that mineralisation extends for at least 12km



Western has since drilled a further five wells at Milestone which will be used in conjunction with 3D seismic analysis to improve the resource estimate, update the NI43-101 technical report and assist in the scoping and pre-feasibility studies which should be complete by the end of 2010.  The environmental baseline study and impact statement is also underway. If all goes according to plan Western could be conducting the feasibility in 2011/12, beginning mine construction in late 2012 and in production by 2014.  Western will also shortly be embarking on a 4 well drill program to test for the interpreted hydrocarbon zones, (though the timing may be interrupted by the spring thaw – typically April is the only month in which drilling can’t take place).  Nonetheless it is expected that results should be announced within a few months.
 
Western have also conducted a similar exploration program at Russell Manitoba but the company has recently taken the decision that the exploration budget should focus totally on Milestone.

Analysis

There are compelling reasons for believing that potash demand will continue to rise, given the requirement to feed a rising population from a declining bank of arable land.  All the factors which have been driving demand – the rising population, rising incomes, changing diets and decreasing availability of arable land - seem likely to continue into the future.  Meanwhile although there are ample known reserves of potash, albeit in a limited number of countries, there are also significant barriers to entry.  The required capex investment is high and the lead time is long. Extraction comes at a price which will favour projects at the lower end of the cost curve.

Western could be well positioned to be at the lower end of this cost curve for a number of reasons.  Firstly Saskatchewan offers a number of advantages. The province, home to potash mines for almost 50 years, has been described as the epicentre of global potash production.  Geologically the province is estimated to hold 40% of world reserves in flat, continuous beds.  The region offers excellent infrastructure, favourable policies and a skilled labour force.  Potash is known as the “red gold” of the province.


Milestone’s particular location within Saskatchewan is also advantageous, with its proximity to Regina (30km), the Canadian National and Canadian Pacific railway lines which lie either side the project and the Trans Canada gas pipeline which lies underneath.  The US border is around 170km away and Milestone has the potential to be the closest major potash mine to the US, which is the largest market in the world for potash.   Indeed transport options from Milestone are excellent, as the potash could be transported by rail to the US, to Europe via the port of Churchill on the Hudson Bay or to Asia via Vancouver.  Geologically the depth of the deposit at Milestone and its heat anomaly represents a huge advantage in the economics of the project as it will reduce energy costs and increase the solubility and hence yield of the potash.  Moreover the potential size of the deposit, at 72 square miles, is potentially advantageous compared to its neighbour, Mosaic’s Belle Plaine mine, which is the largest solution mining potash operation in the world and has been mined for the last 40+ years from an area of just 12 square miles.

The gas, if proven, will also be a massive competitive advantage.  Milestone could become the first potash mine to generate its own power, reducing energy costs by up to 90% and possibly generating revenue. 
Milestone could also benefit from the advantages of solution mining including lower capital costs and quicker construction time, the absence of flooding risk (which has been an issue for hard rock mines), the ability to access deep reserves, scalability and flexibility.


The Western team have not developed a mine before as a team – but many previously worked at Rio, and individually they have a strong track record in finance, development and exploration.  Indeed the four geologists on the board/management team have clocked up at least five discoveries between them (including the Diavik diamond mine, the Lihir gold mine in PNG, the Santa Domingo Sur iron oxide/copper/gold deposit in Chile, the Maverick zone uranium discovery in Saskatchewan and the Bunder kimberlites in India.).  Western’s financial position of no debt and cash resources of C$17.4m should be sufficient to see the company through the pre-feasibility study.  If gas is proven, possibly within the next three months, the company may have a further cash injection from the warrants which could kick in.


On the other side of the coin there are, of course, still plenty of risks. Further financing and substantial investment would be required to build a mine and there is always commodity price risk with the possibility that increased global potash supply could impact on the level and volatility of potash prices.  Meanwhile all the usual exploration and development risks apply, and Western will always be competing against other firms for labour and resources.


Nonetheless in the medium to long term Western’s focussed well-financed approach must be increasing the odds of the company either successfully developing the project on its own or in a JV, or becoming a takeover target for one the majors in the industry (Canadian production is currently dominated by three producers Mosaic, Potash Corp and Agrium). Short term the key milestone for Milestone will be the announcement about whether or not the deposit, which is already known to be red and hot, is also “cooking with gas”.  

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