Bidding War Over Western Potash On The Horizon?

In the wake of a recent flurry of buying action in Western Potash Corp., investors are left wondering whether the advanced-stage potash developer is in the crosshairs of a deep-pocketed suitor.

We have reason to believe that this is likely the case. And we believe that smart investors are merely positioning themselves ahead of a potential takeover bid or the signing of a joint venture partnership with a mining industry giant.

Weighing in Western Potash Corp. (TSE:WPX)’s favor is the fact that its world-class Milestone project in Saskatchewan boasts a projected annual production of up to 2.8 million tonnes of potash. As we laid out in our Initiating Coverage on February 19, 2014, Milestone has an anticipated minimum 40-year mine life with one of world’s lowest projected production costs.

Recently on March 1, 2014, the Deccan Herald – a leading English-language daily newspaper in India – propelled M&A speculation to the next level in an article titled Roping in Canada for food security”:

“In the future greater potash supplies from Canada will also reach Indian shores via investments being made by companies like Rashtriya Chemicals and Fertilisers Limited which is looking to acquire a 40 per cent stake worth a billion US Dollars in a joint venture with Western Potash Corp for a new mine in Saskatchewan.”

Dr. Didar Singh, current Secretary General of the FICCI (Federation of Indian Chambers of Commerce & Industry) and former Secretary to Government of India in the Ministry of Overseas Indian Affairs, emphasized in his article for the Deccan Herald that Canada is in a unique position to play a “significant role in aiding India generate enough food for its populace… through its supply of pulses and fertilizer.”

He noted that “India after all imports a major share of its potash requirements from Canadian entities like the Potash Corp./Saskatchewan Inc. (TSE:POT) (NYSE:POT) which is incidentally the world’s largest producer of potash.”

R.G. Rajan, Chairman of Rashtriya Chemicals & Fertilizers Ltd (NSE:RCF)  (BOM:524230) (India’s second-biggest state-run producer of fertilizers) announced already in 2012 that it “plans to buy into potash mines in countries including Canada to secure supplies”, or as Bloomberg put it:

“Owning stakes in potash deposits overseas may help the Mumbai-based company shield many of India’s 235 million farmers from rising costs when the annual monsoon is deficient, as the past years have shown that a lack of rain is threatening to crimp agricultural output… India is a large importer of potash with no domestic supplies. It is logical to secure supply of potash particularly if the acquirer thinks that potash prices will rise more than generally expected.”

So who would be the most obvious candidate to acquire Western Potash Corp. (TSE:WPX) or to enter into a strategic partnership to build a mine at Milestone?

The answer to this question is not simple, as there are multiple parties around the globe probably having a real interest, especially at current low market prices and valuations.

To start with, sovereign wealth funds (SWFs) in India, Brazil, Middle East and Asia all would have an interest in getting involved and seeing Milestone going into production as it is their mandate to ensure security of supply for their countries food production.

There are political motives behind the motivation of SWFs to feed their respective populations – they want security of supply more than there is a concern over price.

China BlueChemical

At first glance, Western Potash appears well-suited to a Chinese end user. Such speculation is fuelled by the fact that the company received an indirect $33 million financial infusion in 2013 from a consortium led by China’s largest state-owned fertilizer producer, China BlueChemical Ltd. (HKG:3983) (OTCMKTS:CBLUF).

This strategic investment was accompanied by the signing of an off-take agreement. This means that China BlueChemical – a subsidiary of China National Offshore Oil Corporation (CNOOC) – will be sold potash for at least 20 years, assuming it secures financing for the $2.9 billion needed to build a mine at Milestone.

However, the Chinese are not the only players on the world stage with deep pockets and a hunger for potash. In fact, China BlueChemical’s involvement with Western Potash may not be the catalyst for the recent pronounced uptick in the company’s share price.

Though the share price has since settled down, the rumor mill continues to suggest that Western Potash is being courted by at least another power player.

John Costigan, an official company spokesperson for Western Potash, declined to comment on such speculation. So too did David Ovington, Rio Tinto plc (ADR) (NYSE:RIO) (LON:RIO)’s London-based investor relations spokesperson.

However, my research suggests to me that there are several possible suitors, some of which are actively developing their own potash projects in Saskatchewan among the world’s richest and most prolific potash fields. They include the global mining heavyweights Potash Corp. of Saskatchewan, BHP Billiton, Rio Tinto, Vale Inco and the German fertilizer producer K+S.

These companies would not want to see a new potash mine being developed and advancing to one of the world’s lowest cost producers as it would mean losing considerable market share, especially during current times of low market prices and increased supply from Russia.


According to K+S, the acquisition of the Legacy Potash Project in Saskatchewan was an “important strategic step”. This is mainly due to the fact that K+S’s mines are typical high-cost operations, whereas in 2016 Legacy will be one of the few potash mines of the world that can glory in itself of being among “lowest-cost”. Without Legacy, K+S would face serious concerns of staying profitable in a potash market that is as depressed as today.

Despite its seemingly high price, the $434 million acquisition of Legacy has erased a lot of pressure from K+S as their average cash costs of production will be decreased substantially.

In our Initiating Coverage piece on Western Potash, we presented the extreme similarities between Legacy and Milestone. Considering that K+S paid more than $400 million for Legacy and that Western Potash’s market capitalization stands at around $100 million today, the market would perceive a take-over as a relative bargain, especially when considering that other major competitors have a strong interest in taking Western Potash out as well.

There are distinct advantages for K+S developing Milestone into a mine while Legacy is being put into production successfully in the next 2 years, as this would bring a doubling of good effects for K+S’s share price within a relatively short period of time (or intentionally at a later time when strategically needed which would make Milestone a powerful ace up K+S’s sleeve.

Potash Corp. of Saskatchewan

In order to remain the world’s largest fertilizer company by capacity and to keep its ties strong with India, acquisitions of undeveloped potash deposits represent best practice. With operations and business interests in 7 countries, Canadian operations supply around 20% of the company’s global capacity. As per its corporate vision to “play a key role in the global food solution while building long-term value for all stakeholders”, the mission to keep that vision alive must be only through acquisitions.

According to Potash Corp.: “In particular, we emphasize

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