We are initiating coverage on Western Potash Corp. (TSE:WPX) due to its attractive risk/reward profile. The company’s Milestone Project is one of the most attractive greenfield (in-development) potash projects in the western world.
Yesterday on February 19, Verde Potash PLC (CVE:NPK) reported to receive more than $100 million USD to develop its Cerrado Verde Potash Project into a mine. The funds are provided by the Brazilian Government via the Brazilian Development Bank and/or FINEP (Financing Agency for Studies & Projects). This latest transaction strengthens our confidence that the depressed state of the potash market is history – we anticipate the potash price to start recovering now. Our research report on Western Potash Corp. (TSE:WPX) also includes a look into the fundamentals of the potash market and why we expect it to become one of the most profitable markets for investors to participate via advanced-staged exploration and development projects that are ready to be brought into production once a price recovery has become obvious. Verde Potash PLC (CVE:NPK)’s stock has tripled its market value in the last 7 days only rising strongly from around $0.30 CAD to more than $1 CAD on the TSX. We are confident that similar appreciation will occur with Western Potash as well, whereas its stock has been successfully breaking out of a triangle price formation lately – which is a bullish sign:
Live Chart (15 min delayed): http://scharts.co/1jlPwDE
Western Potash Corp. is focused on building an environmentally-sustainable solution-extraction mine at its Milestone Potash Project, which is located in southern Saskatchewan. A prospectively world-class 2.8-million tonnes-a-year producer, Milestone has an anticipated mine life of at least 40 years. Among its peers, it hosts an unrivalled “proven and probable” reserve of 137 million tonnes of net recoverable high-grade potash (KCl). This makes it an unequivocally world-class asset – one that has an after-tax net present value (NPV) of $2.44 billion CAD.
Other key value drivers include the following catalysts for success:
- The project has been technically de-risked, which means that there are no meaningful impediments to the construction of a world-class potash mine at the heart of the world’s richest potash fields in Saskatchewan, Canada.
- The company has formed a strategic alliance with a Chinese government-owned fertilizer manufacturer, China BlueChemical Ltd. (HKG:3983) By leveraging this emerging business relationship, Western Potash is committed to seeking out the necessary project financing to build and commercialize the Milestone Project.
- Milestone compares very favourably with the nearby Legacy Potash Project, which is being developed into an environmentally-sustainable potash-extraction mine by the German fertilizer company, K+S. This reality bodes well for the realization of a commercially successful potash mine at Milestone, which promises to benefit from project metrics that are equally as attractive as those at Legacy.
Milestone vs. Legacy: How These Regional Peers Match-Up
Comparable industry transactions provide a useful valuation benchmark for junior potash developers. In particular, we believe that the $434 million CAD acquisition of the Legacy Potash Project by the German fertilizer manufacturer K+S in November 2010 offers the most relevant comparison. For context, Legacy and Milestone are geologically similar in size, grade, and amenability to solution-extraction mining. Most other logistical metrics, as well as the availability of necessary project infrastructure, are likewise similar. K+S is currently developing Legacy into a mine and is on schedule to start production in 2016. With an update of its feasibilty study in 2013, K+S has increased Legacy’s CAPEX to $4.1 billion CAD, thus the numbers in below ta- ble, which represent initial feasibility economics of both projects, are even worse for K+S now putting Mile- stone in an even better light.
In order for Western Potash Corp. (TSE:WPX) to gain up to a comparable market capitalization of $434 million CAD, its stock must rise to $1.95 CAD; an appreciation of 457% from its current share price of $0.35 CAD.
Investment Highlights/Value Drivers
- WPX has defined a world-class, high-grade deposit of at least 137 million tonnes of potash as proven and probable reserves at the heart of the world’s richest potash fields in Saskatchewan;
- The Milestone project is an advanced-stage project that is technically de-risked;
- A positive feasibility study (a detailed blueprint for a mine) for Milestone was completed in early 2013 demonstrating robust project economics for a solution-extraction mine;
- The study confirms that the reserves are of sufficient size and grade to support potash solution mining for at least 40 years at an ultimate production rate of 2.8 million tonnes of potash (KCl) per year. Current resources could add another 180 years of mine life;
- Measured, indicated and inferred resources add another 761 million tonnes of potash as KCl;
- After tax, the project is estimated to have a net present value of $2.44 billion CAD, with an 18.6% internal rate of return (IRR) and a payback of 5.6 years;
- With a projected operating cost of $62.28 CAD per tonne, Milestone enjoys one of the lowest projected operating costs among all the world’s potash developers;
- A major Chinese fertilizer company, China BlueChemical Ltd. (HKG:3983), has indirectly completed a $32 million CAD strategic investment in WPX;
- The financing arrangement includes an off-take agreement that allows China BlueChemical Ltd. (HKG:3983) to purchase the lesser of 30% or 1 million tonnes of potash annually from WPX for a 20-year term;
- Milestone offers an environmentally-sustainable business model that has received full governmental environmental approval;
- Milestone is located in a supportive, mining-friendly jurisdiction at the heart of the world’s most prolific potash mining territory. This makes it well-suited to support a large-scale mining operation;
- Solution-extraction mining has a variety of advantages, first and foremost reduced capital costs, shorter payback (higher IRR), faster timeline to production, well-established methodology, lower safety risks, and being environmentally-sustainable;
- Ideal geological conditions (a deep deposit and a desirable heat gradient) exist for what could prove to be one of the world’s most energy-efficient and therefore cost-efficient potash mines;
- WPX has a healthy cash-on-hand position ($26 million CAD) with sufficient working capital for 2-3 years.
The Key to Success: Strategic Partnering
In June, 2013, WPX received a strategic equity investment in the company by CBC (Canada) Holding Corp. totalling $31.98 million CAD, giving CBC a 19.9% ownership stake in WPX. The majority partner in CBC is China BlueChemical Ltd. (HKG:3983), one of China’s largest fertilizer manufacturers, with sales of approximately $12 billion USD per annum. China BlueChemical is also a majority owned subsidiary of China National Offshore Oil Corporation (“CNOOC”), the largest offshore oil and gas producer in China.
Further to taking an indirect equity stake in WPX, China BlueChemical is seeking project financing for Milestone in