Merger Cash To Help Potash One Advance Legacy

As many juniors deliberate over doing financings amidst the market turmoil, Potash One (KCL-T, KCLOF-O) president and CEO Paul Matysek is getting ready to coast through the next year once his company completes a merger with cash-rich Potash North Resource (PON-V, PTNHF-O).

Potash North will bring more than $30 million to the table, and when the deal is complete, Potash One will have more than $50 million in the bank. That will be enough for it to complete a feasibility study on its Legacy project in 2010.

“The reason we’ve done this deal is we want to provide certainty to our shareholders that we have enough cash to take us right through feasibility,” Matysek explains.

Otherwise, Matysek says the company would be going to the market in summer and the fall to complete the feasibility.

“Who knows where the markets will be,” Matysek says. “They could be completely toast or they could be great, and I don’t think anybody knows.”

Under the merger deal, Potash North shareholders will receive 0.3125 of a Potash One share for each Potash North share. The exchange ratio represents a 29% premium on Potash North shares over the 20-day trading period before the agreement — a binding letter of agreement — was reached. The deal is subject to the approval of Potash North shareholders, the execution of a definitive agreement and the completion of due diligence, among other conditions.

Potash North has 65.7 million shares issued and outstanding. Potash One already holds 11.5% of Potash North, or 7.6 million shares.

The transaction would be similar to Potash One doing an above-market financing at $1.66 per share.

Potash North shares were unchanged at 41¢ apiece on the news on a trading volume of 1.4 million shares, while Potash One shares fell 2¢ to $1.44 on 907,000 shares.

Potash One is working to update its resource estimate for a prefeasibility study on the Legacy project, 80 km northwest of Regina. The project is next to Mosaic Co.’s (MOS-N) Belle Plaine potash solution mine, the largest solution mine in the world.

Solution mining was pioneered by Mosaic. It involves dissolution of a selected bed with removal of all soluble minerals between the bottom and top cavern. The mineral resource may include zones that are either barren or poorly mineralized.

Potash One’s Legacy project in Saskatchewan has an inferred resource of 391.5 million tonnes of potash and an indicated resource of 40.8 million tonnes.

Indicated resources have drill holes with a 1.6-km radius, while inferred resources have an 8.05- km radius.

Potash One will also be inheriting Potash North’s two prospective properties, KP 416 and 417, which are near Mosaic’s Esterhazy mine in Saskatchewan.

Matysek says he’s not interested in developing KP 416 and 417. He says Potash One has no real commitment to the projects, although the company is obligated to spend $1.5 million over the next 18 months if management thinks that’s reasonable.

“They’ve got a good address but I would say our primary (idea) was to have the cash to have that certainty,” Matysek says. “I think it’s got some value for Potash Corp. or Mosaic, so we may do some work to upgrade its value.”

In a statement, Potash North president and CEO Craig Angus said the deal is good for both companies, given the economic circumstances.

“The successful companies in the junior potash space will be those that have large cash treasuries and advanced-stage projects moving toward feasibility and development,” he said.

Potash prices quadrupled to US$1,000 per tonne last summer, causing eager investors to buy up potash stocks on the slightest news, such as the staking of ground.

Potash North was one of those market favourites. The penny stock shot up to $4.49 per share after Canaccord Capital led an overnight $25-million financing at $2.50 per share before the company had even acquired a potash project.

Potash One enjoyed the ride as well, its share price rising as high as $6.25 last summer.

The craze has died down, but the major producers continue to report strong profits and are still selling potash for more than US$500 per tonne in North America, and upwards of US$600 overseas.