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Ellis Martin Report: And Then There Were Two- Potash Companies in Saskatchewan

Ellis Martin Report: And Then There Were Two- Potash Companies in Saskatchewan

Author: Ellis Martin (Ellis Martin Report)
Posted: December 13, 2010

Last week Potash One (KCL-TSX) agreed to a friendly takeover by a the German fertilizer company K+S AG, in a deal valued of $434-million or C$4.50 per share - a 31% premium over the 10-day weighted average.

There are now only two potash juniors left in the Saskatchewan potash basin: Western Potash (WPX-TSX) and Encanto (EPO-TSX).

Potash is a potassium-rich organic product mined from deposits left behind when ancient sea beds evaporated.  95% of the global potash production is used for fertilizer in the agriculture industry.

The world population is currently increasing at the rate of about 75 million people per year. The majority of this growth is occurring in the developing nations.  China and India have a soaring middle class.  Higher incomes, better diet.   Bigger cities, less farmable land.  All this is having a dramatic effect on the demand for potash.

 

The current potash market is around 50 million tons annually and projected to increase radically in the next decade. 

Canada has about half of the world’s potash reserves.  Western and Encanto are attracting a lot of interest, as speculation increases about potential future buyouts. 

Western Potash is the more advanced of the two companies.   They already have a significant NI-43 101 resource, with a scoping study with a 40 year mine life at 2.5 million tonnes per year, employing solution mining extraction which uses hot water to dissolve the potash into solution through directional or vertical boreholes. 

Benefits of solution mining in comparison to conventional mining include lower CAPEX requirements, operation scalability, quicker timeline to production, lower technical risk and environmental impact.

 

Western Potash is currently raising money for project advancement by issuing 36 million units, each consisting of one share and a warrant to purchase half of a share, for about $1.08 each, equivalent to a 32.3% stake in Western Potash.

Encanto Potash is currently working towards their maiden NI-43-101 resource but news from their current four-well exploration program indicates that grades and thicknesses are right on trend.  EPO’s Muskowekwan property lies in the heart of the prolific Saskatchewan potash basin which is the center of global potash production. 

On December 8^th, Encanto released the final 2 holes of their 4 well delineation drilling program on its Muskowekwan property.  President and Chief Executive Officer Jim Walchuck stated: 

“Consistent grades and thicknesses have been demonstrated by these five wells to extend laterally at least six miles.  Combined with the responses seen on our 64 square mile 3-D seismic survey, we are optimistic that this will results in a significant resource in our upcoming NI 43-101 report.  We expect the NI 43-101 report to be completed by late January/ Early February 2011.  It is encouraging that our assay grades and thicknesses are similar or better than the published grades from other Canadian producing mines."

 

Three of the world's leading producers---Mosaic (MOS-NYSE), Potash Corp (POT-TSX) and Agrium (AGU-TSX) have operating mines in this region.  Infrastructure, government policies and a skilled labour force compliment the geological riches.

Many junior exploration companies hit roadblocks with local stakeholders, but Encanto is developing these properties with the full community support of First Nations. It has 100% potash mineral title to all of the properties and the First Nations have a 3% GORR (Gross over Riding Royalty) upon production. With all the stakeholders’ interests aligned, the path to production appears relatively smooth.

And potash has rock solid demand drivers. 

• Growing world population
• Rising incomes in the developing world
• Decreasing availability of arable lands
• Lack of commercial substitutes
• Supply/demand imbalances

With Potash One Inc. now taken over by K+S Ag, the focus is swinging to Western and Encanto.

Now there are only two.