Tuesday 25th October 2016

Resource Clips

Investment equals capex

Private equity backs Western Potash’s upwardly scalable Saskatchewan project

by Greg Klein

A new Saskatchewan potash mine should have funding in place by about September 16, assuming exchange approval and lack of an even better offer, according to Western Potash TSX:WPX. On August 24 investors approved an $80-million deal that would transfer a 51% stake in their company to Beijing Tairui Innovation Capital Management, a Chinese private equity firm. The announcement follows last month’s revised preliminary economic assessment projecting an $80.6-million capex for Western’s Milestone project. Significantly downsized from its 2012 feasibility study but believed to have considerable expansion potential, the project could begin operation in about 24 months.

Tairui’s buy-in would come through the purchase of 238.26 million shares at $0.3358 for a total of $80 million. Western shareholders also approved the $720,245 purchase of another 2.14 million shares at $0.3358 by CBC (Canada) Holding Corp, leaving it with a 10.1% stake. CBC already has an offtake agreement for the lesser of 30% or one million tonnes of potash annually for 20 years.

Private equity backs Western Potash’s upwardly scalable Saskatchewan project

Assuming a potash price of $315 per tonne FOB Vancouver and using a 10% discount rate, the new PEA projected a net present value of $56.7 million and a 25.2% internal rate of return after taxes and royalty.

The mine life now comes to 12 years, a considerable drop from the 40 years calculated in a 2012 feasibility study. But that project called for capital expenditures of $2.44 billion and assumed Uralkali/Belaruskali cartel prices around $450 a tonne. Western now attributes much of the solution mine’s reduced capex to a new approach using directional drilling to extract the deposit selectively, eliminating the need for salt tailings.

Forecast to produce 145,600 tonnes of standard grade muriate of potash per year, the new plan’s smaller but scalable, emphasizes president/CEO Pat Varas. Should additional offtake offers come in the project could expand very considerably “utilizing the same methodology,” Varas says. “This is a first step. It’s a stepping stone. And it’s a good thing for us to do in these markets. By going into a smaller operation, a pilot project, Milestone becomes a much bigger attraction for investment.”

Eminently enviable is southern Saskatchewan’s infrastructure, Varas points out. “You can see multiple sets of power lines” from the 35,420-hectare property. “There’s roads every quarter-section. There’s major highways and two railway lines. The things you’d look for to develop a project anywhere in the world are right here.” The company also has an agreement with the city of Regina, 30 kilometres away, to supply the solution mine with treated waste water. All major permits are in place.

Once financing closes, Western estimates, development would take about two years. Varas doesn’t anticipate a feasibility study, although plans call for some further engineering. “It’s not a complicated engineering exercise,” he maintains. “It’s more about execution and keeping within budget and timelines. The way things are going in the commodities sector, I think it’s a good time because there are more people available with skills.”

Western’s in-house expertise includes project director Richard Lock, a De Beers veteran who joined Rio Tinto NYE:RIO to take the Northwest Territories’ Diavik diamond mine into production. Lock also completed an Alberta oilsands project for Canadian Natural Resources and served as project director on Resolution, an Arizona engineering wonder that could become North America’s largest copper mine.

Of course Tairui’s buy-in would dilute ownership. But Varas points to the opportunity. “We can do nothing and eventually run out of money and watch ourselves die like many other companies,” he argues. “Or we can move the project forward. This is the market we have.”

We haven’t closed, so anybody could still come in and make an alternate proposal. But I also like the prospect of what these fellows want to do.—Pat Varas, president/CEO
of Western Potash

“I don’t see any other deals out there, although one could come soon. We haven’t closed, so anybody could still come in and make an alternate proposal. But I also like the prospect of what these fellows want to do. They’re market people, not miners or fertilizer people. They look at the markets, see an opportunity and invest. And I think their vision is to take this company and dual-list it in Hong Kong. I think that could offer a tremendous amount of potential to boost value for our shareholders.”

He says other parties showed interest prior to last month’s Tairui agreement, which was signed within days of the revised PEA’s release. Not to be ruled out is the possibility of an alternative transaction or additional offtake without an ownership position. “Until the money’s in the bank, obviously, we don’t know what’s possible out there.”

As for the commodity, Varas sees continued opportunity. “I think there’s always going to be demand for potash,” he says. “The markets are very well controlled by the parties that are out there. But I think the world needs projects that can produce at low cost and I believe we can do that. What we envision as our cost to produce potash will be very competitive.”

Read more about Western Potash’s revised PEA.

Disclaimer: Western Potash Corp is a client of OnPage Media Corp, the publisher of ResourceClips.com. The principals of OnPage Media may hold shares in Western Potash.

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