Ahead of the Herd With Western Potash




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


Today I’m speaking with Patricio Varas, P.Geo., Chief Executive Officer and Director of Western Potash Corp. TSX – WPX


Pat has over 24 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.


Pat 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 and copper deposit in Chile with Far West mining.


Rick: Let’s do an overview of the global potash market - what’s going on out there regarding potash from a global perspective. And then we’ll bring it down into Saskatchewan and then get right into Western.


Pat: Sure. From a needs perspective, and you’ve been saying this all along in your letters, the world needs more food and it’s going to continue to need more and more food. World grain production has simply not kept up with the rising demand. You can’t get away from utilizing the NPK fertilizers, they are responsible for 50% of the current crop yields. In fact, you’re going to see an increasing demand, in particular for potash, as a part of the new global balanced fertilization approach. Potash application rates will benefit as it is currently the most under applied nutrient. However, a balanced application of fertilizers improves the efficiency of all the nutrients and therefore provides significant economic return to farmers.


The bottom line? There’s going to be more people, and more money in more pockets and they are all going to want to eat more and better foods, as you say they will climb the protein ladder. When grain and oil seed production is converted into meat protein and fuel this effect is magnified. So the long-term and short term outlook is that the industry expects record global demand for potash to continue. You wouldn’t have the BHPs, the Rio’s and the Vale’s becoming involved or getting more involved if this wasn’t so. BHP is forging ahead and developing potash resources. Why?


Because they also believe there is going to be a lot of demand for it. They’re not going to go into the market and kill it. They think that the market is going to grow.


We at Western Potash want to be one of those expansion mines, and of course with a solution mine like ours that can be done in a fairly short period of time compared to other types of mines.


Rick: Some investors have been asking me am I worried about the existing larger players ramping up production and deliberately causing overproduction and a subsequent price drop. My answer is no, there’s 220,000 more mouths to feed every day. That’s how many people are being born every day. You’ve got an increasing disposable income in a growing middle class. You’ve got a huge loss of arable land, topsoil degradation. You’ve got desertification and climate change. There’s many reasons that the market will absorb any kind of a ramp up.


Pat: In the next 40 years, the chances are that some older mines are going to become more inefficient. Some of them may be lost, people don’t think about that. There’s also, as I have been saying, an underutilization of potash, Africa is an example, they don’t use a lot of potash. So in terms of demand we’re talking about A) the countries whose economies are starting to develop and have the ability to really get into farming and B) underutilization which is part of the balanced fertilizer approach that I spoke about earlier.


Rick: Africa’s got a billion people. They’ve got a middle class that could be approaching 300 million, they’re going to be climbing the protein ladder. You get this picture of drought and famine in some African countries, that’s a tragic picture but it’s not the whole picture. A lot of African countries have better incomes than Indians and their stock markets, their GDP, are growing much faster than India’s and China’s.


Pat: We’re not too worried about the demand picture. I’ve been travelling to India and China, we’ve talked to all kinds of fertilizer companies and distributors. We go to a lot of these fertilizer conferences, and we get lots of interviews, one on ones, with people who want to buy potash because their projections see that they need potash, and they also need a diversity, they need other people to buy from.


There is no competition out there. They feel like they’re under the gun buying from one supplier. So are they are going to support an independent producer like we’re trying to be? I think they would.


Rick: China and India have to be very interested in securing some Saskatchewan potash.


Pat: I know for a fact they are because we’re talking to various groups from China and India and our impression is that they’re very keen on acquiring assets. I expect they’re more than keen. They have a mandate from their governments to acquire assets, and in particular, potash assets.


Rick: That’s both the Indians and Chinese?


Pat: Absolutely. You know in India they’ve had all kinds of food riots. The Indian government is very aware they have to feed their people, remember that in India potash buyers get hugely subsidized. The budget for fertilizers in India is bigger than their military budget.


Rick: That’s interesting.


Pat: India’s economy is 60% agricultural based so there is no surprise that  they imported 6.3 million tonnes of Potash in 2010.


Rick: How bad is the Chinese market in this regard?


Pat: The Chinese are in the same situation. They currently produce 30% of what they utilize, and all they’re seeing is an increase in demand with minimal increases in domestic production.  The Chinese are very keen to acquire potash assets. Potash Corp has predicted that consumption in China has the potential to increase from 9MT to over 25MT if they adopt a balanced fertilization approach.


Rick: Some other large population bases, Indonesia for example, are they in the same boat, Pat?


Pat: Yes. They’re players you don’t hear much about but when we go to the conferences, we meet with them. They want to find out how they can get off-take agreements, how can they get some security of supply. In these countries palm oil (an extremely lucrative crop) is the major driver of potash demand.


Rick: There are quite a few players, and wannabe players, both countries and companies, that can afford to step into or expand their presence in Saskatchewan, Canada.


Pat: Absolutely, absolutely.


Rick: Western seems to be sitting in a pretty sweet spot. Why don’t you tell us how this came to be. Give us the basic rundown on how you put it together.


Pat: Our group has been involved in mineral exploration and building mines our whole careers. We’ve worked with Rio Tinto, we were involved with the discovery and development of the Diavik diamond mine. Most recently I put together the Santo Domingo Sur iron and copper deal in Chile. I put together the land packages and the programs that discovered that deposit, this was all done through an alliance with BHP Biliton. That project was bought out by Capstone, and they’re going to take it to production.


Over the last 10-15 years we’ve gotten a pretty good insight into what BHP and Rio Tinto have been working on. Around 2007 we recognized that both of those big mining companies were getting involved in potash. We thought that if these big companies are becoming involved there’s a business there, there’s huge opportunity.


That’s because the only businesses they’re interested in are big businesses. All our careers we’ve been looking for the kind of mines that these big businesses want, so why not look for one in our own vehicle? We created Western Potash to go out and look for potash assets that had merit.


Rick: You and your team saw the opportunity and leveraged your skill sets and experience to try and build something of value.


Pat: We’re a very, very competent exploration group having done a lot of great exploration all around the world. We started at square one, the jurisdiction of course had to be Saskatchewan, Canada. When you go into a new district, you have to first compile the data. We went and bought all the data we could and started our research.


Rick: In my article “The Ready Bullion Boys” I said Prospecting success, finding showings, is still possible after a careful study of mining records from areas with favorable geology and drill programs that are targeting these showings should be on every investors radar screen.” This applies equally as well to potash as it does to gold.


Pat: Research is key. We recognized that there were reasons why, at the time, there was a lot of open land in Saskatchewan. We thought, why are Potash Corp, Mosaic, and Agrium not securing more land around their projects? 


If you want to build a conventional mine, you need to be in the part of the potash belt that is closest to the surface because the deeper you go, the more expensive your CAPEX (cost to build the mine) is and the higher your operating costs are.


Yet we saw a solution potash mine run by Mosaic called the Belle Plaine Mine. That mine is at the very southern edge of the basin and its very deep at 1600 meters.


We thought, why there, why so deep? To liberate potash from solution you need lots of energy, in the form of natural gas (NG), to heat the solution, evaporate the waters and recover your salts. The higher the temperature of the underground solution you start with the more potash dissolves into it, and less NG, less energy is used for evaporation.


Obviously your yields and economics improve.


These two things drove our land selection, conventional or solution mine. Right or wrong, our due diligence was a process in which we had to look for advantages that were going to have long-term effects. The idea was, if we discovered something that had the right grade and the right thicknesses then we were looking at having better economics simply because we had selected the project with a little bit of thought.


Rick: The recent prefeasibility study (PFS) for Milestone was very strong, but at the same time understates just how robust this project is.


Pat: I think that what we’ve proven with the Milestone Project is the time we spent doing the research was time well spent. We’ve delivered what I think is an outstanding project. We’re now talking about a project that has terrific grade, better than what you see at the Belle Plaine Mine and what you see at Potash One’s Legacy Project. Our thicknesses are quite adequate and in fact they make up a very significant resource. The mine plan in the PFS is for 40 years but our resource has more than 90 years of mine production and beyond available to us.


A lot of our potash is in the inferred category and was never included in the PFS. This potash will be moved into the measured and indicated categories over the lifetime of the mine.


The PFS shows a project with an impressive net present value (NPV). It’s an incredibly valuable project, Milestone is a big mine, a mega mine. If Milestone was in production today it would likely generate revenues better than $1.2 billion a year. That’s a big project.


Of course that brings up our next challenge, to try and secure the financing to put it into production. And that’s no small task when you’re talking about a CAPEX upwards of $3 billion.


Rick: The numbers are right off the charts, $1.2 billion and $3 billion. On the other hand, K + S bought Potash One’s Legacy Project last year for damn near $450 million, and potash prices were some 20 percent lower last year than they are now.


Pat: K+S were thinking long term, Legacy is going to be in production for 100 years. The $450 million, that’s just their ante, they are still going to have to spend another three billion to put it into production on top of that. (K+S has just announced they are moving forward with building their Legacy Mine at a cost of $3b – Rick)


Rick: Yes, three billion for building the Legacy mine, $2.7b for Milestone, but nobody ever mentions that your building a mine that will be generating $1.2 billion a year for close to a century at today’s potash prices. Hard to believe these mines will still be producing potash to feed the world after almost everybody who is born in the next twenty some years dies.


Pat: Exactly. You recover the purchase price and CAPEX in just a few years - but the big hurdle is getting the funds to get the mine built, people think it’s a big apple to take a bite of.


Rick: Western needs to show the market your capable of attracting partners and signing off-take agreements.


Pat: We’re professionals, we’ve got a process in place. What we’ve done is put together a commercial team whose task is to go out and find all the parties that can execute on a project like this, who want to have an  ownership piece of a potash mine. We’re looking for the people who want to build real value, real mines and we’re talking to a number of them.


Rick: Some people think the Milestone project is too big for a junior and it needs to be in the hands of a major mining company.


Pat: Well that could happen. Somebody could come in tomorrow and offer $2.50 a share. For a lot of investors that’s a pretty good win. But they forget that if they were to hold on and stick around till we’re valued on earnings the stock would be valued at 10 or 20 times what it trades today.


What big businesses are looking for is a return, they would like to buy us at the lowest price possible. What we’re trying to do internally is to find a partner(s) that’s going to help us and leave our shareholders with a large or a significant portion of the shares so that we can benefit from that uplift, from the value creation being a producer gives us.


Do I think that partner is there? Well, like I said, we’re in discussions with a number of groups and if we seal one of those deals we’ll be having a different conversation next time.


Rick: I look forward to that discussion. We first talked two years ago, the progress that’s been made by you and your team since then is tremendous.


Pat: We’re pretty proud of what we’ve done. The crew that I have, they’re really good. They’re technically sound, and they have experience managing some big projects around the world, we have a lot of confidence that we can get this done.


Rick: A lot of people think juniors are nothing but a crapshoot, but I’m not one of them. I think that’s absolutely the furthest thing from the truth. I firmly believe that this is a people’s game, you do not invest in projects or share structures, you invest in people with ideas and the ability to carry them to fruition.


Pat: Yes, look at our track record. Western Potash is not that old. We were formed in 2008, that’s when we went public, we started drilling the Milestone Project in June 2009, look where we are today.


We’re already embarking on a feasibility study. We’ve raised well over $80 million. I don’t think that you could raise $80 million if there weren’t people who believe in us. A lot of our shareholders have been with us before on other projects, or they’ve seen us do some really great things working with Rio and other major companies. They believe in our abilities, and of course at the end of the day like you say, people are what make a company, one that delivers projects. It’s people.


Rick: It’s the people that drive the events news releases are about, without the right people steering the ship, it’s a fact that the company is going nowhere.


Pat: And we’re moving this, we’ve brought it along to a place where people are starting to pay notice. We’re getting more coverage by the analysts and most of them are pretty positive. The ones that are not so positive are the ones that think the task is too large. How about that, you start with the intention of, and do all the necessary work to find a monster mine, you find one, and now the task is too large.


Rick: You’ve got a very positive prefeasibility study, you’ve got your commercial team talking to potential partners. What’s our next step on the road to developing Milestone, can you lay that out for us over the near and middle term, Pat?


Pat: We have several teams working. Concerning our operations people, their task is to continue to bring the project along, so we have people that are working on memorandums of understandings (MOU) for rail and port access and water and of course there’s teams working on the environmental and the engineering sides.


In the near future and into the midterm you are going to see different kinds of news, mostly things that happen when you build a mine, you’ve secured power, you’ve secured a railway contract, maybe we lease cars, maybe we buy them.


What you might see is news regarding a deal with a potential partner or securing a deal with a financial group to continue to fund, with equity, some of the development parts.


What you’ll definitely see is us continuing to move this company forward in its development process.


Rick: Anything you want to add?


Pat: When a company actually has a real asset a lot of the smaller investors lose interest because you’re just going to be building a mine, the discovery phase is over, there’s a resource. Until you have a different evaluation based on the money for production having been raised and being closer to earnings sometimes stocks suffer.


Rick: Yes, money is secured, construction is ongoing and investors can see cash flow coming over the horizon. Magic things happen to the share price, but you’re right, there’s always that dead spot.


The bottom line is, and shareholders might not even realize it, but value is continually building. You can have what looks like the nicest deposit in the world, but until you have all your studies done and your permits in place, you don’t have a mine.


Pat: Exactly. When you have a PFS that’s telling you this is going to be such a nice mine it gives you the drive to make it a reality. Rest assured, we’re going to continue to put our heads down and bring this project forward.


Rick: Potash is not something that is ever going to fall out of favor. You’re not going to feed today’s population without it, and you’re certainly not going to feed the 4.5 billion people that we’re going to add in the next forty years without more of it.


Pat: A lot of people, including some analysts and financial guys, see Western and Milestone as a great M&A buying opportunity. My biggest fear has nothing to do with the project itself, whether it’s a good project or whether it has the right grades, it’s nothing like that. My biggest fear is that we’re going to get people out there realizing how great this project is and they’re going to try and buy it from us or from the market.


Rick: I’d be surprised if they didn’t. But that’s two realistic outs, get bought out or move forward with a partner. Investors need to show some patience, wait for it to play out.


Pat: Exactly.


Rick: Thank you Pat, it’s been a pleasure.


Richard (Rick) Mills

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Richard is host of Aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 300 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Uranium Miner, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FNArena, Uraniumseek, and Financial Sense.


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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.


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Richard does not own shares of Western Potash Corp. TSX - WPX


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