Positive Study For Potash One’s Legacy

VANCOUVER–Backed by a resource of more than 1 billion tonnes of potassium chloride, a prefeasibility study for Potash One’s (KCL-T, KCLOF-O) Legacy project has churned out solid numbers for the proposed mine.

The study investigated the economics of developing a solution mine at the Saskatchewan project producing 2.5 million tonnes of potash annually. The conclusion: despite a high capital cost, the mine would start paying returns in no time.

The estimated capital cost to develop the mine is US$1.88 billion, including allowances for contingency, risk and escalation. But that investment should result in a mine producing a 30.1% after-tax internal rate of return. With a rate of return that high, the capital cost is repaid in 3.3 years. The study used a potash price of US$525 per tonne.

The project’s after-tax net present value, using a 10% discount rate, is US$4.47 billion. Potash One hopes to get the project into production before the end of 2013.

The resource at Legacy, which sits 80 km northwest of Regina, could support an operation of this size for more than 100 years. Measured resources currently stand at 29 million recoverable tonnes of potassium chloride, indicated resources contribute 222 million recoverable tonnes KCl, and inferred resources add 853 million recoverable tonnes KCl.

Despite the encouraging prefeasibility numbers, Potash One’s share price lost 20¢ on the news to close at $3.35. The company has a 52-week trading range of 70¢-$6.25 and 77 million shares outstanding.

Potash One’s share-price loss is at least in part due to other happenings in the potash world, specifically a falling potash price and resulting production cutbacks. On back-to-back days in mid-June, two major potash producers further curtailed production. Potash Corp. of Saskatchewan (POT-T, POT-N) reduced its production guidance by 800,000 tonnes per year, bringing total curtailments since January to 4.7 million tonnes. In 2008, the company shipped 8.5 million tonnes of KCl. And German potash giant Kali und Salz (K+S) also cut production rates, lowering output by 2 million tonnes this year in addition to the 2 million tonnes annually it cut a few months earlier. K+S described international potash prices of US$735- 750 per tonne as “currently unsustainable for large quantities.”

The downturn in the price of potash, which peaked near US$1,000 per tonne last year, is being driven by de-stocking: faced with seemingly tight supply, fertilizer sellers bought considerable quantities at the peak last year and are now unable to sell it. Global stockpiles of fertilizer are up 100% above their five-year average and while wholesale potash prices have come off roughly 30% since last year, retail prices have only come down some 13%.