potash articleRPT-BAY STREET-M&A moves could extend junior potash play rally
13 October 2009
* Deals would boost valuations in junior potash sector
* Indian, Chinese buyers appear to be interested
* Potash One, Athabasca seen attracting overseas interest (In U.S. dollars unless noted)
By Euan Rocha
TORONTO, Oct 13 (Reuters) - Early-stage Canadian potash companiesmay have room to extend their healthy rally this year, given theprospect of takeovers by established miners or emerging market playershungry for supply.
But investors will need to cherry-pick those juniors that are mostwilling and able to strike a deal with potential partners or buyers.
Analysts see the companies with the most viable projects attracting the first deals and securing the best terms.
"It's like going to a dance, if you don't partner up with the prettygirls, then there might not be any pretty girls left," said WellingtonWest analyst Robert Winslow.
Still, analysts said any concrete deal with one of the juniors is likely to boost valuations across the group.
Small Canadian potash plays are typically overshadowed by industry giants Potash Corp , Mosaic Co and Agrium Inc. The big three producers of the crop nutrient have plenty of reservesand argue that greenfield mines are not economically viable at thistime, as new mines costs billions of dollars to build.
But those prohibitive development costs give smaller potashexplorers a strong incentive to seek alliances and engage in deals thatcan produce a big payoff for investors.
These include deals with potash producers with aging mines, such as Germany's K+S , or with established miners looking to enter the potash sector, such as BHP Billiton or Vale .
Other possible buyers include customers in emerging economies likeIndia and China, who are looking to sidestep the market dominancecurrently enjoyed by a small clutch of major potash producers.
U.S. Awasthi the head of India's largest fertilizer distributor,IFFCO, has said his company is looking at setting up potash jointventures overseas. [ID:nN23390880]
Two other Indian companies, MMTC and Rashtriya Chemicals & Fertilizers , have also been engaged in talks with Athabasca Potash .
ON THE MARKET
Shares of Athabasca, which are trading around C$6.50, are up 480percent year-to-date, after it announced it was exploring strategicalternatives, including the possible sale of all or part of the company.
Despite the run-up, GMP Securities analyst Anoop Prihar sees Athabasca's shares rising further and has boosted his price target to C$8 from C$3.35.
But Winslow contends that shares of Potash One are the ones most likely to outpace the rest of the pack.
"The reason we like Potash One more in terms of our rating is thatits CEO, Paul Matysek, is much more aggressive at trying to findpartners," said Winslow, noting that well known mining promoter RobertFriedland is chairman of the company's board.
Moreover, Potash One is trading around C$2.35 well below analysts'average price target of C$4.96. Its proposed Legacy project is likelyto be the first new potash mine in Saskatchewan in decades. As asolution-style mine, Legacy would entail lower capital expenses thanAthabasca's flagship Burr project, which is better suited toconventional shaft mining.
Though a conventional shaft mine is costlier to build its operatingcosts are lower than that of a solution mine, which uses water todissolve the desired mineral from ore.
Bank of Montrealanalyst Joel Jackson notes that although the proposed Legacy project isnot the cheapest in terms of capital expenditures per tonne of annualproduction, it is less costly than some mine expansions currentlyplanned by Potash Corp and Mosaic. [ID:nN07500323]
That said, Jackson still believes, "with capex estimates for a newgreenfield potash mine ranging from $600 to $1,500 per tonne, dependingon mine plan and scale, financing still remains the greatest impedimentfacing junior potash developments."
Analysts expect that a deal for either Athabasca, or Potash One islikely to boost the shares of other Canadian-listed producers, such asWestern Potash , Allana Resources and MagIndustries Corp .
Western Potash is expected to have a resource estimate and pre-feasibility study completed next year. While, Allana and MagIndustriescurrently have preliminary agreements with Chinese companies interestedin developing assets that the two Canadian companies own in the Congoand Ethiopia.
"I would say there is a good chance of a re-rating in the sector, if any group gets a concrete offer tabled," said Winslow.
($1=$1.04 Canadian) (Reporting by Euan Rocha)