Western Potash hits a milestone with PFS

Western Potash (WPX-T) has put a spotlight on its Milestone potash project in Saskatchewan with a positive prefeasibility study (PFS) estimating annual production at 2.8 million tonnes for at least 40 years. This has some analysts speculating that if the company continues to de-risk the project, it may attract the eye of a major fertilizer company or miner looking for exposure to potash.

 “The company’s management team has done a great job in advancing Milestone and taking it to this point,” writes analyst Siddharth Rajeev of Fundamental Research in an email to The Northern Miner. “Even though we believe the PFS gives a good understanding on the economics and risks associated with the project, potential bidders might want to see a feasibility study completed before they make a move.”

That being said, he adds that the valuation of company with a PFS is significantly lower than that of company with a feasibility study in hand, providing those interested an incentive to acquire Western Potash at its current $228-million market cap.

Given the company is one of the few juniors left in the Saskatchewan potash basin, Rajeev cautions, “potential bidders need to move fast to beat competition.”

Western Potash is on Fundamental Research’s list of top three picks out of the 150 companies it covers, says Rajeev,  adding he is currently updating his previous $2.75  valuation.   

Also bullish on Western Potash is Mackie Research Capital’s analyst Jaret Anderson, who kept his speculative buy on the stock but boosted his target price to $3.00 from $2.75 following the PFS.

 He says the modest increase in valuation resulted from both the capex per tonne and opex per tonne estimates reducing in the study.   

“Typically, a project such as this would see both of these figures move higher as we transition from a scoping study to a PFS,” he explains in a Nov. 1 note.

Compared with last September’s scoping study, the capex for tonne fell slightly to $985 from $1,004 per tonne, while opex per tonne dropped 55¢ to $62.35.

However, the initial capex for the plant increased from $2.51 billion to $2.76 billion. The new figure includes $300 million to build port facilities, which was excluded from the scoping study. The company points out if that allowance is removed the capex actually drops by 2% compared to last year’s estimate.

Asked how the junior could finance a $2.76-billion project, Anderson said in an email Western Potash could take two plausible routes: secure an offshore partner or sell to a well-funded company.

“State-owned enterprises (SOE) in China and India have looked at a number of projects similar to Milestone, and have both the financial capability and the desire to reduce their respective country’s dependence on foreign-owned sources of potash. Another option and the option that all Saskatchewan-based juniors to date have taken is to develop/de-risk the project and sell to a better capitalized company with an interest in developing a potash capability in Saskatchewan.”

That trend has been apparent with BHP Billiton (BHP-N, BLT-L) acquiring Anglo Potash in 2008 for $284 million and Athabasca Potash in 2010 for $341 million in cash. Late last year, German fertilizer giant K+S inked a deal to scoop Potash One for $434 million in cash.

Given the Milestone project is starting to look a lot like Potash One’s former Legacy project, it may have some investors more than pleased with the project’s potential.

Based on an October 2010 feasibility study, Legacy could generate 2.85 million tonnes of potash a year for 40 years. It has a slightly lower capex of $2.5 billion and is slated to begin in 2015.

In comparison, Milestone could churn through 2.8 million tonnes, up from the 2.5 million tonnes estimated in the scoping study, for 40 years. Milestone would cost $2.76 billion to build and is anticipated to come online in 2016.

The study pegs Milestone’s after-tax internal rate of return at 22.7%, while a little lower than the scoping study’s 27.3% estimate, it remains “attractive” and comparable to other Saskatchewan-based solution mining projects, writes analyst Ben Isaacson of Scotia Capital in a recent note.

At a 10% discount, the after-tax net present value comes to $4.14 billion, using a long-term potash price of $511 per tonne. Payback is estimated within 5 years.

Isaacson also points out that several emerging economies such as Brazil, China, India are seeking to become potash independent, and says he won’t be surprised if a SOE takes a go at Western Potash in the near-term.

But for now, the junior will start working on a bankable feasibility study, which should be completed by late 2012, with construction set for 2013. Western Potash predicts it will take six years to achieve the full production rate of 2.8 million tonnes a year.   

On the improved economics, Isaacson has raised his target price from $1.80 to $2.20.

Some analysts with more conservative valuations include Max Vichniakov of Octagon Capital and Robert Winslow of National Bank Financial.

Vichniakov says the impact of the PFS falls between positive to neutral, adding he will update his model once the junior files a N1 43-101 technical report. Regarding potential bidders, Vichniakov narrows the field down to a fertilizer company in India or China, naming India’s Tata Chemicals as a possible suitor.

India is 100% reliant on potash imports, so a company like Tata Chemicals acquiring Western Potash will be a more likely scenario, he says, explaining majors such as BHP, Vale (VALE-N) and Rio Tinto (RIO-N, RIO-L) are not likely to make a move as they have their own potash projects. Vichniakov maintains a buy on the stock with a $1.85 target.

The least bullish on the company is Winslow with a revised $1.00 target, up from 85¢, but reiterated his underperform rating.

“In the absence of a deep-pocketed partner and with Saskatchewan’s potash region becoming increasing crowded with both greenfield and brownfield expansion projects, we believe management’s largest hurdle remains finance risk… and this drives our cautious view,” he penned in a Nov. 1 note.

Asked if shareholders should be concerned about Western Potash’s lack of partner, Anderson of Mackie Research says Western Potash shares have gained 66% over October, which he attributes to both investors’ general appetite for risk and the belief that the PFS would further de-risk the Milestone project.

 “The goal is not to do a deal quickly, but to do the right deal at the right time in order to maximize shareholder value,” he concludes.

On Oct. 31, the day the PFS was released, Western Potash closed up 6¢ at $1.37.

At presstime, its shares are trading at $1.42, within a 52-week range of 70¢ (Oct. 4, 2011) to $1.80 (Feb. 14, 2011).