INITIATING COVERAGE
Western Potash Corp.
February 19, 2014
Primed to Build a World-Class Potash Mine By Stephan Bogner (Dipl. Kfm., FH)
xxxxx NEED A GOOD FRONT COVER PICTURE xxxxx
Type of Analysis: Initiating Coverage Home Exchange: TSX Venture (Canada) Symbol: WPX IPO: 05/06/2008
Current Price: Shares in the Market: Market Capitalization: Cash in the Bank:
www.rockstone-research.com
$0.35 CAD (02/17/14) 226 million $79 million CAD $26 million CAD
INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
Analyst: Dipl. Kfm. Stephan Bogner Research Label: Rockstone Research Ltd. #504, 81 Oxford St. London W1D 2EU, England
[email protected] www.rockstone-research.com Analyzed Company: Western Potash Corp. #1818 - 701 West Georgia St. Vancouver, BC, Canada V7Y 1C6 Phone: +1-604-689-9378
[email protected] www.westernpotash.com ISIN: CA95922P1099 Home Exchange: Toronto Stock Exchange (Canada) Stock Symbol: WPX Type of Analysis: Initiating Coverage:
Initiating Coverage 02/19/2014
Current Price: 52 Week High / Low:
$0.35 CAD (February 17, 2014) $0.76 / $0.25CAD
Market Capitalization: Cash in the Bank:
$79 million CAD $26 million CAD (approximately)
TSX.V: WPX
Frankfurt: AHE
IPO: May 6, 2008 Shares (issued & outstanding): 226.336.059 Warrants: 20 million @ $0.58 CAD until October 24, 2014 Options: 21.6 million 610,000 @ $0.50 CAD 710,000 @ $0.50 CAD 2,500‘000 @ $0.50 CAD 225,000 @ $0.50 CAD 3,154,000 @ $0.50 CAD 250,000 @ $0.50 CAD 725,000 @ $0.50 CAD 11,240,000 @ $0.45 CAD 2,195,000 @ $0.45 CAD
until May 19, 2014 until June 1, 2015 until December 29, 2015 until February 3, 2016 until May 20, 2016 until February 15, 2017 until March 30, 2017 until September 12, 2017 until November 30, 2017
Trading Volume (200-Day Average): 203,548 Trading Volume (Year-to-Date): 121,551 Moving Averages: 50 Day @ $0.31 CAD 100 Day @ $0.35 CAD 200 Day @ $0.43 CAD TSX Price Performance: 5 Day: +0.02 (+6%) 20 Day: +0.03 (+9%) 50 Day: +0.03 (+9%)
100 Day: -0.06 (-16%) 200 Day: -0.13 (-26%) Year-to-Date: +0.04 (+15%)
WPX @ TSX (1 Year Linear in CAD) 90 Day MA (blue)
www.rockstone-research.com
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INITIATING COVERAGE Major Shareholders: Management & Insiders: Institutionals: China BlueChemical Ltd.: E&P Fund Ltd.: Natixis Bank: Rig Fund III: Rig Fund III: Rig Fund Ltd.:
February 19, 2014 26% 22.06% 19.90% 0.69% 0.67% 0.39% 0.32% 0.09%
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
(58,760,000 shares) (49,930,563 shares) (45,040,876 shares) (1,562,500 shares) (1,507,812 shares) (887,500 shares) (721,875 shares) (210,000 shares)
Frankfurt Stock Exchange (FSE): Symbol: AHE WKN: A0QZLM Price: €0.24 (February 17, 2014) 2014 High / Low: €0.60 (May 28, 2013) / €0.18 (December 9, 2013)
FSE Price Performance: 1 Week: +4% 1 Month: +7% 6 Month: -29% 1 Year: -27% 5 Year: +17%
WPX @ FSE (1 Year Linear in CAD) 90 Day MA (orange)
Sources: www.westernpotash.com www.k-plus-s.com www.sedar.com www.tsx.com www.vantagewire.com www.quotemedia.com www.canadianinsider.com www.deutsche-boerse.de www.consors.de www.onvista.de www.stockcharts.com Abbreviations: $ = Dollar € = Euro @ = at % = per cent & = and BC = British Columbia CAD = Canadian Dollar CAPEX = Capital Expenditures Corp. = Corporation
www.rockstone-research.com
EUR = Euro Exec. = Executive FSE = Frankfurt Stock Exchange g = Gram(s) h = hours(s) IRR = Internal Rate of Return ISIN = International Securities Identification Number K = Potassium (element) KCl = Potassium Chloride („Potash“)
kg = Kilogram(s) km = Kilometer(s) Ltd. = Limited m = Meter(s) MA = Moving Average min = Minute(s) NaCl = Sodium Chloride (salt) NI = National Instrument NPV = Net Present Value NYSE = New York Stock Exchange
OPEX = Operational Expenditures ROI = Return On Investment t = Tonne(s), metric TSX = Toronto Stock Exchange TSX.V = Toronto Venture Exchange USD = U.S. Dollar VP = Vice President WKN = Wertpapierkennnummer WPX = Western Potash Corp.
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INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
Company Synopsis We are initiating coverage on Western Potash Corp. due to its attractive risk/reward profile. The company’s Milestone Project is one of the most attractive greenfield (in-development) potash projects in the western world. The company is focused on building an environmentally-sustainable solution-extraction mine at its Milestone Potash Project, which is located in southern Saskatchewan. A prospectively world-class 2.8-milliontonnes-a-year producer, Milestone has an anticipated mine life of at least 40 years. Among its peers, it hosts an unrivalled “proven and probable” reserve (a definitively reliable measurement) of 137 million tonnes of net recoverable high-grade potash (KCl). This makes it an unequivocally world-class asset – one that has an after-tax net present value (NPV) of $2.44 billion CAD. Other key value drivers include the following catalysts for success: • The project has been technically de-risked, which means that there are no meaningful impediments to the construction of a world-class potash mine at the heart of the world’s richest potash fields in Saskatchewan, Canada. • The company has formed a strategic alliance with a Chinese government-owned fertilizer manufacturer, China BlueChemical Ltd. By leveraging this emerging business relationship, Western Potash is committed to seeking out the necessary project financing to build and commercialize the Milestone Project. • Milestone compares very favourably with the nearby Legacy Potash Project, which is being developed into an environmentally-sustainable potash-extraction mine by the German fertilizer company, K+S. This reality bodes well for the realization of a commercially successful potash mine at Milestone, which promises to benefit from project metrics that are equally as attractive as those at Legacy.
www.rockstone-research.com
4
INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
Investment Highlights/Value Drivers • WPX has defined a world-class, high-grade deposit of at least 137 million tonnes of potash as proven and probable reserves at the heart of the world’s richest potash fields in Saskatchewan; • The Milestone project is an advanced-stage project that is technically de-risked; • A positive feasibility study (a detailed blueprint for a mine) for Milestone was completed in early 2013 demonstrating robust project economics for a solution-extraction mine; • The study confirms that the reserves are of sufficient size and grade to support potash solution mining for at least 40 years at an ultimate production rate of 2.8 million tonnes of potash (KCl) per year. Current resources could add another 180 years of mine life; • Measured, indicated and inferred resources add another 761 million tonnes of potash as KCl; • After tax, the project is estimated to have a net present value of $2.44 billion CAD, with an 18.6% internal rate of return (IRR) and a payback of 5.6 years; • With a projected operating cost of $62.28 CAD per tonne, Milestone enjoys one of the lowest projected operating costs among all the world’s potash developers; • A major Chinese fertilizer company, China BlueChemical Ltd., has indirectly completed a $32 million CAD strategic investment in WPX; • The financing arrangement includes an off-take agreement that allows China BlueChemical to purchase the lesser of 30% or 1 million tonnes of potash annually from WPX for a 20-year term; • Milestone offers an environmentally-sustainable business model that has received full governmental environmental approval; • Milestone is located in a supportive, mining-friendly jurisdiction at the heart of the world’s most prolific potash mining territory. This makes it well-suited to support a large-scale mining operation; • Solution-extraction mining has a variety of advantages, first and foremost reduced capital costs, shorter payback (higher IRR), faster timeline to production, well-established methodology, lower safety risks, and being environmentally-sustainable; • Ideal geological conditions (a deep deposit and a desirable heat gradient) exist for what could prove to be one of the world’s most energy-efficient and therefore cost-efficient potash mines; • WPX has a healthy cash-on-hand position ($26 million CAD) with sufficient working capital for 2-3 years. www.rockstone-research.com
5
INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
Company Overview Western Potash Corp. (“WPX”) is Vancouver-headquartered potash development company that trades on the Toronto Stock Exchange under the symbol WPX and on the Frankfurt Stock Exchange under the symbol AHE. The company is focused on building an environmentally-sustainable solution-extraction mine at its Milestone Project, which is located in southern Saskatchewan. A prospectively world-class 2.8-million-tonnes-a-year producer, Milestone has an anticipated mine life of at least 40 years.
The Key to Success: Strategic Partnering In June, 2013, WPX received a strategic equity investment in the company by CBC (Canada) Holding Corp. totaling $31.98 million CAD, giving CBC a 19.9% ownership stake in WPX. The majority partner in CBC is China BlueChemical Ltd., one of China’s largest fertilizer manufacturers, with sales of approximately $12 billion USD per annum. China BlueChemical is also a majority owned subsidiary of China National Offshore Oil Corporation (“CNOOC”), the largest offshore oil and gas producer in China. Further to taking an indirect equity stake in WPX, China BlueChemical is seeking project financing for Milestone in Southeast Asia. In the eventuality that China BlueChemical succeeds in this regard, it will be granted by WPX an off-take agreement for the lesser of 30% of production, or one million tonnes of potash per year, over a 20-year period. This would guarantee China BlueChemical and other future partners certain quantities of potash each year at a predetermined “reasonable” price in exchange for assisting to finance mine construction costs at Milestone. The significance of this business arrangement is summed up by WPX’s President, Patricio (Pat) Varas, as follows:
“Our strategic alliance with China Blue and Guoxin will provide Western with access to project financing, technical expertise in large-scale project construction and marketing channels for future potash sales.” www.rockstone-research.com
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INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
Exceptional Geology & Ideal Infrastructure are a Winning Combination Saskatchewan hosts an estimated 46% of the world‘s potash reserves and is currently the world’s second largest potash producer with 10 operating potash mines. These mines account for about 33% of global output, translating into annual revenues averaging over $6 billion CAD per year. The province’s ore beds exhibit optimal, uncomplicated geology (with excellent continuity and consistency of grade and thickness, as well as cost-effective accessibility), along with high grades ranging from 20% to 35% KCl. Saskatchewan has all the necessary infrastructure in-place, as well as a skilled labour force, to support a new mine at Milestone. Proximal infrastructure to Milestone includes railways, paved roads, power and gas, industrial services, and other utilities, as well as potable water and ready access to treated effluent. The close proximity of both the Canadian National Railway and the Canadian Pacific Railway provides easy access to deep-water ports in both Canada and the U.S. for potash exports to China. Compared to most of the world’s other well-established potash fields, Saskatchewan also offers an exceptionally low risk of civil unrest, war, and political interference (including a very low risk of expropriation of land). The odds in favour of a potash mine being successful at Milestone are also supported by its close proximity to the largest solution-extraction potash operation in the world, the Belle Plaine Mine. It is situated approximately 50 kilometres to the northwest of Milestone. Owned by the potash giant, The Mosaic Company (NYSE: MOS), it has been in business for over 40 years and is still highly productive with around 2.8 million tonnes of KCl output per annum. Milestone benefits from similar geological features to Belle Plaine and comparable regional infrastructure.
www.rockstone-research.com
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INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
Solution-Extraction Mining: Structural Competitive Advantages Translate into Cost Savings Solution-extraction mining (also known as “solution mining” or ISR, in-situ recovery) involves the injection of brine (salt and water solution) into a sub-surface deposit to circulate throughout the ore body. In the process, it dissolves potash into the solution, which is then pumped to the surface. Thereafter, the solution is treated to recover the potash, which is then pumped to an on-site mill for processing. Listed below are the key advantages of solution mining over conventional mining methods:
Initial Capital Costs:
It is more cost-effective to drill a series of production wells to extract potash solution than to construct conventional mining shafts, conduct underground development work and install mining machinery. Approximately 25-30% in infrastructure costs can be saved by mining potash with in-situ recovery, according to investment industry analysts.
Shorter Construction Timeline:
Thanks to fewer CAPEX requirements for solutionextraction mining, a mine development timeline of 3-4 years, versus approximately 5-7 years for a conventional potash mine, is anticipated for Milestone. Total CAPEX costs for Milestone are projected to be $3.3 billion CAD.
Operating Costs:
Because solution-extraction mines use heated brine instead of mining machines to extract potash from underground deposits, high prices for natural gas (a key thermal input) could make this process more expensive over the longer-term than conventional potash mining. However, a sustained trend of low natural gas prices, that is unlikely to change for the foreseeable future, make solution-extraction mining very cost-competitive. Additionally, the Milestone Project benefits from relatively high ambient temperatures at depth, which is not only a decisive but also a valuable attribute in solution-extraction mining. The temperature of the formation is around 65°C, which is several degrees warmer than Mosaic’s nearby Belle Plaine Mine, as well as being yet warmer than K+S’s in-development solution-extraction potash project at Legacy. Higher ambient temperatures at depth offer two distinct advantages in solution-extraction mining. First, they help improve the solubility of the potash salts in the deposit, which boosts mining yields and overall productivity. Second, the higher temperatures also reduce the amount of energy (natural gas) consumed in the mining process as the injected solution (i.e. water / brine) requires less pre-heating. In other words, higher temperatures at depth assist significantly to reduce overall operating costs at Milestone.
Environmental Benefits:
Conventional potash operations produce large amounts of waste salt (NaCl) that is expensive to dispose of. Solution-extraction mines can avoid this problem by pumping back underground any solid waste in the form of slurry.
Absence of Flooding Risk:
Solution-extraction mines are not threatened by the problems caused by water inflow, which have caused devastating flooding in some conventional underground mines in recent years. www.rockstone-research.com
8
INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
A Wealth of Waste Water: Building an Environmentally-Sustainable Business WPX has an agreement to pay the nearby city of Regina to redirect much of its treated sewage water to the company’s Milestone potash project site. Currently, this effluent is deposited into the nearby Wascana River. Not only does this agreement benefit the environment, but it also offers the company a strategic, long-term water supply for its solution-extraction mining requirements. In so doing, Milestone will be the first potash solution mine in the world to use treated effluent, rather than fresh water, to extract this salt-based mineral. The agreement would see roughly half of the city of Regina’s treated waste water piped approximately 58 kilometres to the Milestone Property, which is southeast of Saskatchewan’s capital. This represents as much as 60,000 cubic metres per day — enough to fill two dozen Olympic-sized swimming pools. This removal of the treated effluent from the local environment is considered a net positive environmental benefit. WPX is required to build the infrastructure to transport the waste water to the property, including a pump house, at an estimated cost of $80-100 million CAD. After it arrives at the Milestone Mine site, the effluent will be further purified before it is used for potash extraction.
Milestone vs. Legacy: How These Regional Peers Match-Up Comparable industry transactions provide a useful valuation benchmark for junior potash developers. In particular, we believe that the $434 million CAD acquisition of the Legacy Potash Project by the German fertilizer manufacturer K+S in November 2010 offers the most relevant comparison. For context, Legacy and Milestone are geologically similar in size, grade, and amenability to solution-extraction mining. Most other logistical metrics, as well as the availability of necessary project infrastructure, are likewise similar. K+S is currently developing Legacy into a mine and is on schedule to start production in 2016. With an update of its feasibilty study in 2013, K+S has increased Legacy’s CAPEX to $4.1 billion CAD, thus the numbers in below table, which represent initial feasibility economics of both projects, are even worse for K+S now putting Milestone in an even better light. In order for WPX to gain up to a comparable market capitalization of $434 million CAD, its stock must rise to $1.95 CAD; an appreciation of 457% from its current share price of $0.35 CAD.
Project Comparison: Milestone vs. Legacy Parameter Project Name Project Stage
Contained Potash Proven & Probable (in million t) Measured & Indicated (in million t) Inferred (in million t) Operating Metrics Production Rate (in million t/year) Minimum Life of Mine (in years) Initial CAPEX (in billion CAD) OPEX (in CAD/t) Payback Period (in years) Implied Project Value After-Tax NPV (in billion CAD) Before-Tax IRR
www.rockstone-research.com
WPX
K+S
137 53 708
160 88 982
2.80 40 $2.91 $62.28 5.6
2.86 50 $2.78 $62.65 6
$2.44 18.6%
$2.63 22.7%
Milestone Feasibility Study
Legacy Feasibility Study
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INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
Strong Management with a Proven Track Record The advanced state of developing the Milestone Project is a testament to the professional expertise and depth of experience of WPX’s management team. Additionally, management has demonstrated the ability to raise significant investment capital (over $140 million CAD to date) since the company’s IPO in 2008. WPX’s board of directors has also demonstrated shrewd business acumen by securing China BlueChemical (a leading Beijing-based Chinese fertilizer manufacturer) as a strategic investor and a potential end user. The company president is Patricio Varas, a professional Geoscientist with over a quarter of a century’s experience in exploration, project development and corporate management. Throughout his career, Mr. Varas has worked at operating mines, as well as exploration projects from inception to discovery. He has also authored feasibility studies for world-class deposits around the world. His credentials also include being integrally involved in the discovery of the Diavik Diamond Mine as a Project Manager while at Kennecott Canada Inc. WPX’s Project Manager is Richard Lock, who has more than 20 years experience in the mining industry. Among his many accomplishments, he guided Rio Tinto’s Diavik Diamonds Project in northern Canada from discovery to production. Richard also completed a large oil sands mining project in Alberta, Canada for Canadian Natural Resources Ltd. Other members of the management team and board of directors have a combined experience in the mineral resources exploration, development, and mining sectors of over 200 years.
Management & Directors PATRICIO VARAS (CEO & Director)
Patricio Varas is a professional geoscientist with over 26 years experience in exploration, project development and corporate management. Mr. Varas has worked and collaborated with major, multinational and junior mining companies in exploration and development projects that span North and South America, Europe, Africa, Asia and Australia.
Throughout his career, Mr. Varas has enjoyed the experience of having worked at operating mines, exploration projects from concept inception to discovery, feasibility studies of world-class deposits and mine development. Mr. Varas was involved in the discovery of the Diavik Diamond Mine as a Project Manager while at Kennecot Canada Inc. and was instrumental in the project management that led to the discovery of the Santo Domingo Sur Iron-Copper Deposit in Chile with Far West Mining Ltd., which was acquired by Capstone Mining Corp. in a $725 million deal. Being a member of the team that contributed to the discovery of WPX’s Milestone Potash Deposit is his most recent accomplishment.
DEAN PEKESKI (Executive Vice President)
Dean Pekeski is a professional geologist registered in the provinces of Manitoba and Saskatchewan. Mr. Pekeski graduated from the University of Western Ontario and has over 18 years experience in mineral exploration. From April 1996 to March 2008, Mr. Pekeski was employed as an Exploration Geologist and Project Manager for Rio Tinto Exploration, when he explored for base metal and diamond deposits across Canada, Southern Africa, and India. Mr. Pekeski was the leader of the Rio Tinto exploration team that discovered, and evaluated, the diamondiferous Bunder Kimberlites in India.
Mr. Pekeski has been involved with the Milestone Project from exploration through to feasibility, and is responsible for all technical aspects of the project. He is considered a Qualified Person in the field of potash geology as defined by NI43-101, and is an active member of the Solution Mining Research Institute. www.rockstone-research.com
10
INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
RICHARD LOCK (Project Director)
Richard has more than 20 years experience in the mining industry, having begun his career with De Beers-Anglo American in South Africa. Richard then joined Rio Tinto’s Diavik Diamonds Project at Lac de Gras in Canada, where he took the project from discovery to production. Richard also completed a large oil sands mining project in Alberta for Canadian Natural Resources Ltd., an independent oil and natural gas exploration, development and production company. Most recently, Richard was the Project Director for Resolution Copper - a joint venture between Rio Tinto and BHP Billiton to develop and operate a deepseated porphyry copper underground mine with an inferred resource of 1.6 billion tonnes averaging 1.5% copper and 0.037% molybdenum, at depths exceeding 1,300 metres. Mr. Lock was responsible for the pre-feasibility studies and associated on-site activities at the Resolution Project in Nevada, USA. Richard holds a Bachelor of Science degree in Mining Engineering from the University of Wales in the United Kingdom.
DAVID THORNLEY-HALL (Executive Vice President, Corporate)
David Thornley-Hall is a securities industry professional with over 20 years experience in fixed income brokerage, corporate finance and regulatory compliance. He is a graduate of the University of Western Ontario with a degree in Social Science. His experience includes the role of Managing Director of the UK office of a Canadian dollarbond brokerage firm.
JOHN COSTIGAN (Vice President, Corporate Development)
John Costigan has been the Vice President of Corporate Development at Western Potash Corp. since 2007. He is a former Vice President of AKP Canada. He brings a particular business acumen that supports the future and development of WPX. This includes over 25 years experience in technical sales and marketing to the mining, food, and pulp & paper multinationals. Mr Costigan’s responsibility includes the development and management of supply chains in Thailand, Brazil, Germany as well as North America. Graduating first in his class, Mr. Costigan holds an Honors degree from Concordia University in Montreal, Quebec. He is also a current member of the Canadian Institute of Investor Relations.
LIMIN SUN (Executive Vice President, Communications)
Limin (Linda) Sun brings 15 years of mining industry experience--focusing in the area of government relations, as well as, having a comprehensive knowledge of public company administration and human resources. Ms. Sun has extensive international relations experience with Ivanhoe Group Companies and her bilingual skills are a great asset to WPX. Mrs. Sun holds a Bachelor Degree in English Literature at Northeastern Normal University, and a diploma of International Economics &Trading from the University of International Business & Economics Beijing.
BUDDY DOYLE (Geological Advisor & Director)
Buddy Doyle brings more than 30 years of experience exploring for gold and diamonds. Mr. Doyle led the team that discovered the currently-producing Diavik/Aber Diamond Mine and served as Vice President of Exploration for North American Diamonds with Kennecott Exploration, a division of Rio Tinto for 12 years during which time more than 100 kimberlites were discovered. He was awarded the Hugo Dummitt Award for excellence in diamond exploration by his peers in the industry. Since leaving Rio Tinto, Mr. Doyle has entered the junior sector with flair. He remains active in the diamond sector through a consultancy and non-executive directorships. Few geologists have seen two projects from discovery through to decision to mine. Mr. Doyle brings WPX a disciplined scientific approach to mineral exploration and managerial skills that have a proven track-record. www.rockstone-research.com
11
INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
DAVE HODGE (Director)
Dave Hodge contributes many years of company management, financing and wealth of experience with publicly-traded companies. Through over 20 years experience in the markets, he has served as a director for several mineral exploration companies, and is a founder of Commerce Resources Corp. and Zimtu Capital Corp. WPX has been benefiting greatly with his vast network of contacts, whereas Mr. Hodge is known as a gifted teambuilder backed with exceptional expertise in the mining industry.
PATRICK POWER (VP Corporate Finance, Director)
Patrick Power is a seasoned venture capitalist and financier with over 20 years of experience as a stock market professional and as a director of public companies. WPX benefits from Mr. Power’s wealth of experience as a shrewd dealmaker, an adept financier and as a tireless, results-driven leader of dynamic public companies, as well as his large network of contacts within the industry, his enthusiasm and his efforts as a board member and trusted advisor.
TROY NIKOLAI (CFO, Director)
Troy Nikolai brings over 10 years of accounting and auditing experience to the board. His considerable knowledge with compliance requirements to various exchanges and overall understanding with financials provides WPX with the necessary tools to report to investors in a timely and efficient manner. Mr. Nikolai also serves as director on various other private company boards and holds the position of President for a large BC charity entrusted with overseeing the administration of over $15 million worth of public funds annually.
PETER MILES (Director)
Mr. Miles has a B.Comm. from the University of British Columbia and has more than 20 years experience in investment banking and retail stock brokerage, and was formerly a Vice President of Midland Doherty Inc., Dean Witter Reynolds, and CIBC World Markets. Prior to becoming President & CEO of Sanatana Resources Inc., Mr. Miles was an advisor to a number of public and private companies, primarily in the natural resource sector including Roughrider Uranium Inc. At a private stage, Mr. Miles financed Roughrider and he was later instrumental in Hathor Exploration Ltd.’s acquisition and financing of Roughrider that lead to their key discovery of the Roughrider Uranium Deposit. Hathor was acquired by Rio Tinto for $654 million. Mr. Miles is a Director of Gamehost Inc., Western Potash Corp. and The Vancouver Aquarium & Marine Science Centre, and is the founder of Sanatana Resources Inc.
YANG YEXIN (Director)
Mr. Yang Yexin, is an executive Director and also the CEO & President of China BlueChemical Ltd. Mr. Yang graduated from Wuhan Communication Technology University in 1978 with a major in Vessel Engineering and obtained a masters degree in Business Management from China University of Petroleum (Beijing) in 2004. He joined the CNOOC Group in 1978 and served as a Mechanical Engineer and the Deputy Head of the Mechanics Division of China Offshore Oil Southern Drilling Company, the Deputy General Manager of CNOOC Nanhai West CPEC (Shekou) Company from 1992, the Chief Engineer of the Equipment Division of CNOOC Nanhai West Corp. from 1993, the Deputy General Manager of China Offshore Oil Southern Drilling Company from 1994-1999, the General Manager of China Offshore Oil Southern Shipping Company from 1999-2001, the General Manager of CNOOC Shipping Company Ltd. from 2001-2002, and a Director and Executive Vice President of China Oilfield Services Ltd. from August 2002 to September 2003. Mr. Yang joined China Blue in August 2003 and was appointed as the Chairman of CNOOC Fudao Ltd. Mr. Yang was appointed as a Director in September 2003 and the General Manager of China Blue in October 2005. He was the Chairman of Hainan Basuo Port Ltd. from its incorporation to May 2010, has been the Chairman of CNOOC Kingboard Chemical Ltd. since its incorporation and is also the Chairman of Hubei Dayukou Chemical Co. Ltd. Mr. Yang was appointed as an Executive Director of China Blue in April 2006. www.rockstone-research.com
12
INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
ZHIMAO MA (Non-Voting Observer to the Board) Mr. Zhimao Ma is a senior Engineer and General Manager of Legal and Assets Management Department of China BlueChemical Ltd (CBC). Mr. Ma brings has extensive commercial experience in potash and fertilizers, as well as a sound M&A background due to his +20 years experience in state-owned enterprises in China’s chemical industry.
Short-Term Demand Plateau:
Mr. Ma’s main responsibilities in CBC include corporate legal affairs, stock equity management, and M&A development in the potash sector. As the company’s Potash Work Group leader, he was closely involved in one brownfield project cooperation, two potash greenfield project tender offers, and tracked several potash greenfield projects.
Ability to secure the required funds to advance Milestone to production represents a final hurdle as CAPEX costs are estimated at approximately $3.3 billion CAD.
Since January 2011, he has been in charge of CBC’s strategic investment in Western Potash over the world-class Milestone Project in Saskatchewan, Canada. Before joining CBC, Mr. Ma worked with China National Chemical Construction Corp. (CNCCC) for 16 years, where he rose to the position of General Manager of the Business Department. His main duties included management of CNCCC’s +30 domestic and overseas branches and subsidiaries, and he was closely involved in several major overseas chemical projects from preliminary negotiations to operations and managements. Mr. Ma holds a Bachelor of Science degree and a Master Degree, both in Polymer Science from East China University of Science & Technology.
Potential Risk Factors The following risks were assessed towards the development of the Milestone Project into a mine:
General Mining Company Risks:
Mining operations have exposure to a number of operational and technical risks including: environmental risks, personnel accidents, production processing problems, unexpected geological anomalies, flooding, fires, earthquakes, equipment failures and consultant errors.
Potash Pricing:
The value of the company also depends on potash prices. www.rockstone-research.com
A confluence of factors has recently conspired the potash market to impair global potash demand — a phenomenon that is widely regarded as transitory. However, there are no guarantees that this situation may not continue for years to come.
Major CAPEX & OPEX Costs:
Potash projects are typically capital intensive.
Access to Capital and Share Dilution:
Project Valuation and ROI:
Milestone’s NPV and IRR are highly sensitive to production rates.
Timeline to Production:
Solution potash mines take around 3-4 years to reach initial production and industry fundamentals can change significantly over such a time frame.
Energy & Infrastructure Costs:
These are the most sensitive dynamics to change.
Foreign Exchange:
Sales are likely to be settled in USD, while costs are denominated in CAD. Fluctuations in the CAD/USD ratio represent a foreign exchange risk.
Labour Risks:
The Milestone Project is approximately 80 kilometres away from K+S’s in-development Legacy Mine. This could provide a temporary strain on local human resources and increase costs for skilled construction and operations labour.
Transport Risks/Bottlenecks:
Transport-related risks (considered very low) to mining operations include road closures, port closures, and ability to access adequate rail and port facilities.
Permitting Risk:
WPX’s plan to production is based on the assumption that all the necessary permitting can be obtained without significant delays. At this juncture, all the key permits have already been received and the risk of the remaining permits being withheld is considered low. 13
INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
Technical Analysis
$0.90 within 6 months, which represents an appreciation of 157% from current price level.
Since late 2010, WPX’s share price on the TSX has been consolidating within the legs of a (blue) triangle, whereas its apex at $0.30 CAD was reached in late 2013. We are very bullish since the price has reached the triangle’s apex and is successful in having started to move up — which is a bullish and strong indicator that the (blue) triangular price formation is finishing with a ‘thrust to the upside’; per definition a prolonged and strong upward-trend that has the goal of reaching to the resistive high of the (blue) triangle at around $1.80 in order to transform it into new support — at which level we anticipate the next larger consolidation phase and may consider selling part of our position, which represents an appreciation of 414% from current levels. The next strong buy-signal is generated when rising above the (red) resistance currently at around $0.40 CAD, in which event we anticipate the ‘thrust to the upside’ to strengthen strongly and expect it to reach around
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INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
About Potash: Why the World Needs it There is no commercial substitute for potash in fertilizers. It improves crop yields by helping plants absorb water, and provides some protection from drought, disease, pests and cold temperatures. Potash plays a central role in assisting feed the world’s growing population. It has been demonstrated to virtually double crop yields in many regions of the world, especially in emerging economies. Furthermore, potash-based fertilizer is crucial to realizing meaningful cost containment while boosting crop yields. The world is increasingly waking up to potash’s paramount role in food production. This is because various global government organizations, such as the United Nations, have begun to issue grim warnings about the urgent need to drastically improve year-on-year crop yields.
Macro Drivers Support Long-term Potash Demand Growth Over the past couple of years, the fertilizer market has been in a state of demand deferral, not demand destruction. This is due to an anaemic post global financial crisis economy, which has suppressed demand. On a more positive note, crop commodity prices remain historically high. And potash application is a key component of fertilizers and thus represents a costefficient means of maximizing yields. It is also worth noting that global grain prices remain historically high as a result of increased demand from emerging economies, which require crops like corn and wheat as key inputs for producing protein-dense foods, primarily meat. Along with population growth, this helps explain why demand has grown from 31 million tonnes of KCI in 1970 to 57 million tonnes in 2012. This is a 21-million tonne increase (around 83%), which is mainly attributable to increased demand from China, India, and Brazil. According to the United Nations’ Food and Agriculture Organization (FAO), global food production will need to increase 70% by 2050 in order to feed a projected global population of between 9 and 10 billion people – an increase over 2014 of between 28% and 43% more hungry mouths. Up to 90% of this growth is expected to be generated by improved crop yields, according to investment industry analysts. Improved fertilizer application will play a critical role in achieving this target, with potassium (potash) being the most crucial component for success. Such key macro drivers underpin the future prospect of a long-term demand rebound and a recovery of higher-trending potash prices, beginning by 2015, according to leading investment industry analysts. In particular, an acceleration of demand from China, alone, is expected to boost overall demand by the end of this decade by an additional 10 million tonnes of potash. www.rockstone-research.com
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INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
Much of China’s potash demand growth is expected to come from further expansions in the cultivation of cash crops, i.e. fruits and vegetables. This sector currently accounts for around half of all potash fertilizer consumption and requires a higher proportion of potash than grain crops. As for rice, wheat, and corn farming, prices are kept artificially low in China by way of government-imposed price controls. This has historically made this sector a low margin business for farmers. However, the recent advent of land reforms has paved the way for the consolidation of farmland and the associated emergence of farming cooperatives. In turn, this popular trend should allow for greater economies of scale to be realized. As a result, farming cooperatives are incentivized to invest more in the application of potashbased fertilizers and other key inputs. All told, Chinese demand for potash is expected to virtually double by 2020 to around 20 million tonnes a year, according to analysts who closely follow developments in the Chinese farming industry (including Credit Agricole Securities, which cautions that Chinese potash demand may remain unchanged until around 2015). Hence, the race to build up Canada’s potash supplies because of a heightened need to maximize global crop yields is turning Saskatchewan’s potash fields into key strategic assets. This explains why several of the world’s biggest mining companies are now jostling for position to access these rich potash reserves – against a backdrop of rising crop prices and an additional 75-80 million people that need to be fed each year.
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INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
Ramping-Up Chinese Food Production: The Challenges Ahead According to investment industry analysts, if China is to achieve food self-sufficiency, much more money will have to be invested in its agricultural sector – especially in potash-based fertilizers. However, China faces some serious structural challenges in its drive to produce more crops, especially grains for livestock that is destined for meat production. First, China’s arable land base is shrinking due to the competing forces of land development for residential housing and industrial expansion. Second, climate change (think heat waves, droughts, water shortages, floods, and hurricanes) is negatively impacting crop yields in some areas of China. All told, this means that more crops will have to be produced from even less land. Among the investment industry analysts following the quantum shift in China’s food dynamics is David Murphy, Head of China Reality Research (CRR), a division of the Hong Kongheadquartered investment bank Credit Lyonnais Securities Asia (CLSA), who said in a research report entitled Future Fields: Change and the Chinese Farmer:
“The authorities are actively looking to boost both the acreage and yield of major grain crops. For farmers, increased application of fertiliser is the most common way to increase yield, with 70% of farmers (surveyed by China Reality Research) ranking ‘more fertilizer’ as the top choice for higher yield.” In fact, China needs to almost double its potash application by 2020 in order to make up for a current shortfall in the amount of potash it uses in its fertilizer products, according to Murphy and other investment industry analysts at CLSA. Currently, most Chinese farmland is not anywhere near as productive as it could be as “low-to-mediumyield farmland accounts for 70% of total farmland in China” according to Murphy.
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17
INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
Inefficiencies of China’s Agricultural Industry • China faces major structural issues that currently impede farm production. They include water shortages, soil erosion, flooding and climate change; • China has a growing reliance on crop imports, especially corn; • Rice production aside, China needs to boost its corn and wheat output – especially to provide livestock feed for animals; • Misapplication of fertilisers (relying solely on cheap inputs like nitrogen and phosphate at the expense of potash) leads to soil hardening and degradation, which generates lower yields; • Improper application of fertiliser is blamed for soil degradation in much of China; • Low- to medium-yield farmland accounts for 70% of farmland in China and less than half of the arable land is effectively irrigated; • It is commonplace for farmers to plant the same crops year after year, rather than using crop rotation. This puts stress on the soil, which makes increased potash application all the more necessary to prevent the soil’s fertility from continuing to deteriorate.
Inefficiencies in Small-Scale Chinese Farming • China’s farms are tiny, inefficient, and under-mechanized. The average farm size is between 0.5 to 1.0 hectares; • In many regions, +90% of all farms are for subsistence; • As a consequence of poor earnings, a majority of farmers are part-timers; • Limited access to funding makes it difficult for small farmers to invest in their land holdings to boost output; • Relatively expensive inputs like potash-based fertilizers for subsistence farmers (the majority) have not historically been economically viable; • Small farmers do not have the resources to invest, the scale to benefit, and the technology to drive significant production gains.
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INITIATING COVERAGE
February 19, 2014
Western Potash Corp.
TSX.V: WPX
Frankfurt: AHE
China’s Farming Reforms: An Economic Imperative The ascendancy of China’s industrialized economy has in recent years created a new challenge: A better-paid urban workforce is demanding much more meat in their diet than ever before, as well as more plentiful fruits and vegetables. This means that China needs to produce significantly more wheat and corn for raising beef cattle, broiler chickens, and pigs. Especially since it feeds 20% of the world’s population with only about 7% of the world’s arable land. Additionally, the need to produce more proteindense food is being compounded by China’s population growth, which will be accelerated by the recent relaxing of China’s longstanding one child per couple policy. Most notably, China’s less affluent rural population is expected to grow from around 650 million today to more than 900 million within the next two decades. And thanks to an anticipated increase in income, they are going to follow the lead of their city cousins by improving their diets with more meat.
Farming Co-Ops: A Key Catalyst for Increased Potash Usage New land reforms in China are making it possible for subsistence farmers to pool their resources by way of establishing self-directed farming collectives or co-operatives. In other words, farmers are gradually being allowed to combine small plots of land into large farms. This development is paving the way for the farming industry to boost output by way of the realization of meaningful economies of scale. Also, the central government is advocating the issuance of long-term land leases for farmers. In turn, this game-changing initiative incentivizes farming cooperatives to make long-term investments in the land, such as improved agricultural inputs. Such a paradigm shift means that farming collectives should benefit from a more scientific application of potash-based fertilizers. In comparison, most small independent farmers currently do not use fertilizers to best effect. They tend to use cheap ones that have little or no potash content. Just as importantly, these land reforms also encourage the mechanization of farmland, and on a much larger scale than ever before. Accordingly, this re-energizing of the farming industry should prove to be the most effective way for farmers to exponentially increase output and boost their incomes. www.rockstone-research.com
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Western Potash Corp.
February 19, 2014
DISCLAIMER Neither Rockstone Research Ltd. nor the author was remunerated by Western Potash Corp. to produce or publish this content. However, the author holds shares of Western Potash Corp. (TSX.V: WPX, FSE: AHE), and therefore would financially benefit from volume and price appreciation. The author may buy or sell securities of the featured company at any time, without notice to the market. The author of this article has been paid to write about Western Potash Corp. indirectly, namely by Zimtu Capital Corp. Please read the full disclaimer on www.rockstone-research.com as none of this content is to be construed as an “investment advice”. This article is intended for information use only, and the author is not a registered investment advisor. Readers should never make investment decisions based solely on what they read in a featured company article, and should seek the advice of a registered investment advisor to determine if a potential investment is suitable.
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