Junior Potash Companies Now The Focus

Richard (Rick) Mills
Ahead of the Herd

As a general rule, the most successful man in life is the man who has the best information

All eyes were recently focused on the senior Potash sector as BHP Billiton’s failed bid for Potash Corp was showcased in the Canadian press. Today there is news that will, in this authors opinion, refocus investors attention further down the potash food chain.

Potash One suitor offers $4.50 a share

K+S Aktiengesellschaft and Potash One Inc. have entered into a support agreement pursuant to which K+S will make an offer to acquire all of the issued and outstanding common shares of Potash One at a price of $4.50 per share in cash for total consideration of approximately $434-million (311 million euros).

82.2-per-cent premium to Potash One's share price of $2.47 on Aug. 16, 2010, the day prior to Potash Corp.'s rejection of BHP Billiton's unsolicited proposal.

BHP has made it very clear they really like potash - not just Potash Corp. Last year they bought Athabasca Potash for $341 million dollars, based on a resource of 465 million tonnes. This year they announced they were going to spend upwards of $12 billion dollars to develop the Jansen mine in Saskatchewan. The question I’m presently considering is where BHP, and others, will seek their next deal now that the Potash Corp. bid has failed and K+S has made an offer for Potash One.

Recent news flow from the potash sector has been dominated by BHP’s rejected $39 billion bid for Potash Corp and now K+S’s bid for Potash One. But a Canadian potash junior, Encanto Potash (TSX.V - EPO), with a market cap of $46 million, has been quietly drilling and reporting grades and thicknesses that perhaps moves one of its potash projects in Saskatchewan, Canada further down the development path to becoming a mine.

Many resource investors find potash exploration data difficult to interpret. While definition drilling on a typical gold deposit might be spaced at 50 meter intervals, Encanto and Potash Corp drilled about every 3.5 kilometers.

That’s because potash, being an organic product, is mined from deposits left behind when ancient sea beds evaporated. This left the potash laying like blankets on a made bed, very flat and evenly laid out deep underground.

Very few countries have accessible economic-grade potash, but when you do find it, it tends to be in ocean-size quantities. The Prairie Evaporate formation hosts all known Saskatchewan potash mines, and Encanto’s projects are surrounded by producers.

Recently Encanto reported assay results from the Lestock 7-2-27-15W2 well. This is the first well in Encanto’s four-well evaluation program on their Muskowekwan property in Saskatchewan. EPO’s first drill hole returned results of 3.43 meters of 40.06 per cent potassium chloride (KCL) in the Patience Lake member, 5.10 meters of 37.75 per cent KCL in the Belle Plaine member and 2.06 meters of 37.51 per cent KCL in the Esterhazy member.

On November 22nd 2010 Encanto reported the assay results from the second well of the Encanto four well evaluation program and the third hole in total.

"We are very pleased with the results of this hole as it continues to demonstrate the consistency of grade and thickness of the potash members on the property giving us even more confidence for the anticipated resource computation due in Q1 of 2011." CEO Jim Walchuck

The thicknesses and assay grades from this hole are consistent with the results from the original two wells which were drilled on the Muskowekwan property

The third (15-14-27-16W2) and fourth (15-16-27-15W2) well locations are currently being cored. Assay values from those cores should be available sometime in December, to be followed up with a resource estimate in Q1 2011.

The grades and thicknesses encountered in EPO’s first well are right on trend with Potash Crop’s Rocanville and Allan producing potash mines, and Athabasca Potash’s (now BHP’s) Burr property.

Also the new data clearly suggests that the Encanto Property encompasses the same ancient seabed as the existing Mosaic mine, which has an annual production capacity of 10.4 million pounds.

Adam Machionni, mining research analyst at Industrial Alliance has initiated coverage and states that these results “confirm ‘their’ view that the prospect holds the potential to host a resource in the order of several hundred million to over one billion tonnes of potentially underground mineable potash ore.”

Marchionni also states that that Encanto’s upper Belle Plaine appears most favourable for economic development as it has returned consistent ore grades over mineable widths. Marchionni also believes that although there is considerable work required to define the mineralization and potential for the development of a mine on the prospect, the risk reward profile is highly attractive.

Consider:

• Mosaic and PotashCorp raised prices by $138 a tonne in October to more than $560 a tonne.
• The failed BHP bid keeps the potash marketing cartel intact, which is bullish for long term prices
• Encanto has a big asset, surrounded by cash-generating mines
• There are two potash juniors left in the Saskatchewan basin - Encanto Potash (EPO.V) and Western Potash (WPX.V)
• The major potash players are definitely moving down the potash food chain
• Potash is a dominant global investment theme underpinned by the solid fundamentals of a growing population, a shortage of arable land and fresh water and severe climatic events

Conclusion

“Just when we need more soil to feed the 10 billion people of the future, we’ll actually have less—only a quarter of an acre of cropland per person in 2050, versus the half-acre we use today on the most efficient farms.” David Montgomery, author of the 2007 book Dirt: The Erosion of Civilizations

Fertilizers are going to become increasingly important to improve crop yields.

There’s certainly longevity to the potash story and as more and more investors become aware of it the most leveraged companies could very well deliver spectacular gains for their shareholders. Potash should be on every investors radar screen.

Is it on yours?

Richard (Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com

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