Good afternoon,
We are pleased to send you this FinancialPost article on Potash with Allana Resources (AAA-TSX.V) being mentioned.The article talks about potash and the three ways in which potash is mined.Should you have any questions regarding this article or on Allana please feelfree to contact myself.
Kind Regards,
Christian Scovenna
By Richard (Rick) Mills
Potash juniors: Are you buying whatthey’re growing?
When looking for a dominant long term investment theme the approach I takeinvolves looking at global, big picture conditions. I study trends, read thenews, and basically watch and listen to what’s going on in the world.Then I study the different sectors in order to select the one that I think isgoing to match up well with the overriding theme and outperform the rest. Thisis called “top-down” investing.
For instance, when Barack Obama was running for election, two of the planks inhis platform were electrification of America’s transportation system andthat the United States was going to eliminate its dependence onforeign-supplied energy.
If you're going to place one million hybrid/electric cars on American roads by2015, you are going to need an awful lot of batteries. Lithium-ion was –and still is – the leading battery technology. To me, everything Obamasaid meant a company that owned a lithium deposit in the United States waslikely going to be a pretty good investment. When I had my theme –America’s Energy Independence/Electrification of the Transport system– it was time to do some due diligence on specific companies. This typeof investing, and doing the necessary due diligence to find the right stocks,can pay off quite handsomely. RodiniaMinerals Inc. (RM/TSX-V) went from a dime to a high of 80¢ and currently istrading near 50¢ with a bright looking future.
A theme you might want to learn more about
The Intergovernmental Panel on Climate Change (IPCC) has made some startlingand extremely alarming predictions. They say that the availability of waterwill decrease by as much as 30% in already-dry parts of the world. Manycountries do not have enough water to meet domestic demands for growing foodand these water-short countries are increasing their grain imports.
The second day of a 192-nation meeting on climate change in Copenhagen on Dec.8 saw the UN Weather Agency release an update that said for most of the world,this decade is on track to be one of the five warmest on record. The year 2009is on track to be the fifth warmest year on record. Only the United States andCanada experienced cooler conditions than average. The agency also said therewas an extreme heat wave in India in May, with China experiencing one in June.Parts of China have experienced their warmest year on record and Australia isexperiencing their third warmest year on record.
The world’s population is averaging growth of 75 million people a year.The United Nations Food and Agriculture Organization (FAO) reported they thinkthat the total world demand for agricultural products will be 60% higher in2030 than it is today. Rising incomes in developing countries means moremoney in the household budget. These consumers will add more protein –meat and dairy products – to their diets. The newly-added proteinrequires additional growing of grains.
One of the greatest threats facing us isthe loss of arable land that was once used for food production. Land is beingused for production of bio-fuels, topsoil is eroded away by wind and water, andthe agriculture land base is being paved over as we become more and moreurbanized. Feeding the world is going to become an overriding dominant theme inthe years to come. Quite simply, we have to grow more food on less land. Thereare several ways farmers can get increased yields, Genetically Modified Organism(GMO) seed, pesticides, fertilizers, and satellite (GPS) farming.
Improved seeds, pesticides and new farming techniques are all going to beneeded, improved and used. But the nutrients in soil are soon used up by evermore intensive farming – and Mother Nature can’t replace them fastenough. These nutrients need to be replaced or you have land where crops cannotgrow.
The availability of nitrogen, phosphorus and potassium in the soil, in areadily available form, is the biggest limiter to plant growth. Plants give uswhat we need to survive – if our soil is nutrient deficient then we needto fertilize, without fertilizer we are not going to eat.
The Investment
I think there is a good chance that we’ve seen the bottom in the juniorpotash market. The senior producers have seen their stocks jump 15% to 20%recently, as it was reported that market-savvy investor George Soros (the manthat broke the British pound) is stepping back into the potash sector. Mr.Soros boosted his fund's position in Potash Corp. by 50% – some$240-million. Potash Corp. is North America’s largest potash producer.
What isn’t known is if he did that because he believes in the long-termfuture of potash, or if he smells a take-over about to happen. Bank of Americais on the record stating that BHP Billiton could buy Potash Corp. Also in therumor mill is that Warren Buffet is buying German potash producer K+SAktiengesellschaft.
Between the BHP rumor, and the confirmed Soros purchases, many of the majorproducers have seen their stocks levitate near or at year highs, despite theprice of potash being 50% lower than a year ago. On Dec. 7 shares of two of thebiggest fertilizer makers – Potash Corp. (POT/TSX) and Agrium Inc. (AGU/TSX) – rose on broker upgrades.Potash Corp. rose after a Goldman Sachs upgrade, while rival Agrium rose aftera UBS upgrade.
Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier, recently said, referring to fertilizer companies: “Thewhole sector is becoming more favorable amongst investors. It was down in thedumps, the fertilizer stocks in particular in the last year, and I thinkit’s one sector that has moved recently, but still lags the overallmarket.”
Potash is mined in one of three ways
1. There are conventional underground mining operations. Western Canada’spotash deposits occur in the Middle Devonian Prairie Evaporite formation atdepths in excess of 900 metres. Start-up costs can run in access of $2-billion.These costs include driving vertical shafts down to the potash and purchasingunderground mining/surface milling equipment. This money needs to be paid upfront before any production can start leaving the company at risk to commoditymarket swings. Very few junior companies will have the experienced managementteam and the requisite financial backing necessary to pull off building aconventional underground potash mine.
2. Solution mining involves pumping heated water through the ore body todissolve the potash and pumping the resultant brine solution to a refinery forextraction. Deposit temperature is an important component in the economics ofsolution mining – a minimum temperature of 50° C is thought to be needed.The solubility of potash increases with temperature such that the higher theformation temperature, the higher the yield of potassium chloride in the brinesolution.
The presence of carnallite is also a factor – carnallite will notdissolve and creates an impediment to the flow of the brine solution. Start upcosts are fractionalized; $100-million will give you production of 100,000tonnes per year, allowing current production to pay for future expansion.
It's cheaper to drill brine injection/production wells to handle solutions thanto construct a pair of extremely deep conventional shafts, undertake theinitial underground development work and install mining machinery. So thereshould be a significant saving in the initial capital cost of a solution mineversus a conventional underground mine. But solution mines use hot brineinstead of mining machines to extract the potash from underground deposits andfor this reason their operating costs are very sensitive to the price of fuel.When natural gas prices were low, solution mining was very competitive, but therise in fuel prices since 2000 has changed this situation.
3. There are Salares, or salt lakes, as well as near-surface saturated gravelsand underground aquifers. These contain minerals dissolved in brines and someinclude buried layers of evaporite minerals. The brines are pumped to thesurface into evaporation ponds. There, the water evaporates leaving the potash,lithium, boron and salts behind. Start-up costs can be fractionalized and thediversification of selling more than one product gives the producer someprotection from see-saw commodity markets.
Some junior potash companies that appear poised to move up the food chain
Conventional underground mining
EncantoPotash Corp. (EPO/TSX-V) has made deals with several First Nations groupsregarding potash projects on their traditional territories in South-EasternSaskatchewan. These projects are located within a radius of about 80 kilometersof each other and cover an aggregate area of over 187,000 acres (76,000hectares). Encanto has also acquired the rights to four potash properties fromRaytec Metals. These four potash properties cover more than 179,000 acres(72,800 hectares) of potash permits and are also in Saskatchewan.
Drilling is now underway and 2D seismic iscomplete. Nearby historical oil and gas drilling logs clearly show potashbeds present (these beds in the Saskatchewan Potash Basin are known for theirconsistency over many kilometers).
Encanto Potash has the backing of theEndeavor Financial Group, so access to capital should not be a problem. First Nationsinvolvement and having the projects on their traditional territory lessens thenumber of stakeholders in negotiations and consultations. The deals are heavilyweighted towards the back-end, meaning benefits such as training, jobs, sharesand royalties do not come till certain milestones, such as feasibility andproduction, are reached.
Solution mining
Western Potash Corp. (WPX/TSX-V) has three contiguouspermits comprising a total of 123,948 acres in South-Eastern Saskatchewan. Thepermits are located approximately 30 km southeast of Regina and to thesoutheast of the Mosaic Belle Plaine KL-106-R mining lease, which hosts one ofthe largest producing potash solution mines in the world. They are alsoimmediately adjacent to potash permits held by BHP Billiton,Vale and Potash One.
Seismic data has confirmed the presence ofpotash prospective salt beds, possibly amenable to solution miningtechnologies, on the eastern portion of the Milestone property. Temperaturemeasurements from all the wells show minimum formation temperatures rangingfrom 60° C to 65.5° C and results from the Milestone-005 well shows nocarnallite present in any of the three potash members encountered.
AllanaResources Inc. (AAA/TSX-V) has three potash concessions collectively calledthe Dallol Potash Project. It’s located in Ethiopia’s northeasternDanakil Depression and totals 150 square kilometers. The Dallol Potash Projectarea is approximately 100 km from the Red Sea coast.
Allana has completed a NI 43-101 compliant technical report for the threeconcessions highlighting several unique advantages of this project:
- An Inferred Mineral Resource of 105,200,000 tonnes of potash mineralization(Sylvite and Kainite) with a composite grade of 20.8% KCl
- Near-surface (shallow-depth) potash mineralization (within 50 meters ofsurface)
- Potential for solution or open-pit potash mining
Wellington West, Loewen, Ondaaje and McCutcheon (LOM) and Dundee CapitalMarkets have initiated coverage on Allana. The company has secured a Strategicoff-take/financing deal with China Mineral United Management Ltd.
Brines
Dajin Resources Corp.(DJI/TSX-V) Company representatives have submitted to the local governingauthorities in Salta and Jujuy provinces of Argentina applications to acquire a100% interest in certain mineral concessions covering approximately 130,000hectares (320,000 acres). These concessions - as reported by a specialistconsultant, various government and academic sources - cover regions with brinesrich in potassium, lithium and boron. Historic sampling done by another companyreport potash concentrations at over 10,000 ppm.
A national highway, gas pipeline and electric power grid cross the projectproviding vital infrastructure and low cost access to regional agriculturalmarkets for a potash product. Imported potash carries a large transportation premium.The characteristics of these brines and the large basin size give this projecta fast track shot at large-scale low-cost potash production.
Dajin recently announced a small private placement. The proceeds will be usedfor the establishment of corporate operations in Argentina and for testing oftheir 100% owned mineral concessions.
Potash with an interesting twist
Amazon Mining Holding Plc(AMZ/TSX-V) has a potash asset in Brazil, at surface, that is so largeit’s simply hard to believe. Imagine a deposit 100 km long! Butit has different chemistry than conventional potash so would need a differentprocess (Agrifirma Brazil, a United Kingdom based farmland operator and developer,is going to fund agronomic tests using Amazon Mining’s proposedThermoPotash product). Brazil is a country that wants and needs potash - Amazonis definitely going to attract attention and capital.
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What’s the goal for our above listed juniors? Well the next stage, ifshareholders are lucky enough, is defining a large enough resource with a highenough grade to become a development stage company like the two listed below:Potash One and Athabasca Potash. What this would mean to an investor ishuge - it’s the difference between a $50-million market cap company and a$250-million market cap company.
Potash One Inc.(KCL/TSX)
Potash One is the acknowledged leader among the junior potash companies; theymight own the first potash mine built in Saskatchewan in 40 years.
Potash One just announced it has started a feasibility study on its LegacyProject. Potash One has a NI 43-101 compliant Measured and Indicated MineralResource of 251 million tonnes of KCl grading 26% and an Inferred MineralResource of 852 million tonnes of KCl grading 23.8%.
Athabasca Potash Inc.(API/TSX)
Like Potash One, Athabasca is a development stage company. AthabascaPotash’s Burr deposit contains a Measured Mineral Resource of 125,800,000tonnes at a grade of 21.27% K2O, an Indicated Mineral Resource of 299,000,000tonnes at a grade of 23.07 % K2O, and an Inferred Mineral Resource of186,900,000 tonnes at a grade of 23.55% K2O. A prefeasibility study is expectedto be completed in the third quarter of 2009.
Conclusion
The potash story is just starting. Potash is a high margin product and there isno commercial substitute. Unlike other resource plays there is no cycle –demand is always going to be there and it is rising year-over-year, makingpotash an excellent play in what will be a long-term agricultural commoditiesbull market.
The right potash juniors should be on every investor’s radar screen.
Richard (Rick) Mills
rick@aheadoftheherd.com
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