South Boulder Mines

Featured In: July 2012

Partnership Average Cost per Share: $0.50

Current Market Price (July 15, 2014): $0.17

In April 2014, I received mixed news from CEO Paul Donaldson regarding South Boulder Mine's (OTCPK:SBMSF) Definitive Feasibility Study. The negative aspect is that the DFS (the final necessary report before construction can commence) will not be completed until 1H 2015, while I was expecting the release to be mid-2014. This substantial delay is due to management's decision to completely rewrite the mine plan that was devised by previous management. The silver lining to this delay is that the project's already robust economics will undoubtedly be improved upon when the DFS is released (more below). The Partnership will continue to hold STB until the DFS is released due to (1) the highly likely improvement of the project's economics and (2) STB's undervaluation compared to development rival Allana Potash (OTCPK:ALLRF).

While previous STB management did a fantastic job of discovering the impressive Colluli Deposit, they made some tactical errors in the later stages of the mines development. The most glaring of these was their decision to include only sylvinite rock (16% of the total resource) in their previous studies, including the PFS. While this may have saved time in advancing the mine through development, it ignored a large quantity of economic Carnallitite and Kainatite rock. This stunted the project's economics to a large extent. As explained in a recent STB new release: "By processing the carnallitite and kainitite mineralisation in addition to the sylvinite, the project has the potential to significantly reduce operating costs. This is because the carnallitite and the kainitite material would be considered as ore rather than waste, meaning the stripping ratio will be cut substantially. This approach would also significantly extend the mine life due to the expanded resource base." Additionally, Donaldson indicated to me that an initial CapEx of ~$400M is a distinct possibility. This is huge news considering that the company's previous CapEx estimate of ~$700M is in itself tiny relative to typical potash mines. This improvement in both initial CapEx and OpEx makes me believe that this already economic project will look a lot prettier when the comprehensive DFS is unveiled to the market.

Over the past six months, Allana Potash (another Partnership holding and STB's potash rival from neighboring Ethiopia) made great strides on their development project by securing strategic financing from Israel Chemicals. In fact, after receiving $25M in early 2014, ICL's controlling shareholder said in May that a fertilizer production plant will be fully constructed "within a year" and that potash from the Dallol Mine will be used as an input in 2015. This is a positive indicator for potash mining in the region and also a good benchmark to judge STB's relative value. Allana currently has a $100M IPV for their Dallol Project (market capitalization minus cash), while South Boulder's IPV is roughly $10-12M. While STB is a year behind AAA and has yet to find a strategic partner, this 10x deviation does not seem justified. At the very least, STB is relatively undervalued compared to AAA and seems to have justifiable upside if they are successful in releasing their DFS and securing strategic financing over the next 12 -18 months.

The combination of the Colluli Project's additional upside and the market's current valuation of STB justify waiting for the company's Definitive Feasibility Study. However, there will be a strict deadline of July 1, 2015 and, if the Feasibility Study hasn't been released in the timeframe Donaldson indicated, the Partnership will liquidate its STB holding. Over the next six months, there will be minimal news flow from the company - as the multiple consultancies hired for the DFS diligently push through their work. There is a slight risk that the company will have to raise up to $3M in order to finish the DFS (likely in Q1 2015). This should result in minimal dilution, given that the company's current market capitalization doesn't erode significantly between now and then.