Breaking news from Western Potash Corp. (TSX: WPX; market capitalization: $50 million CAD). The trading of its stock was halted "pending news", some 30 minutes before opening in Canada today. Trading resumed at open.
China based Beijing Tairui Innovation Capital Management Ltd. has agreed to make a strategic equity investment of $80 million in Western Potash in order to gain a 51% ownership stake on a non-diluted basis.
This investment represents the total CAPEX ("Capital Expenditures") of Western Potash's revised mine plan, which was disclosed last week on Thursday for its Milestone Potash Deposit, which is in close proximity to K+S's Legacy Project (the main target of Potash Corp. proposed K+S takeover valued at an estimated $9 billion).
Thus, Milestone is now fully financed to go into production - hand in hand with its neighbor, Legacy, which plans to start production in late 2016. However, this transaction requires shareholder approval until August 30, 2015, during which time a counter-offer from someone else may be received.
Western Potash achieved a CAPEX reduction of 98%, down to $81 million from $3.3 billion as per its 2012 Feasibility Study. This may have even surprised the big potash players as potash deposits typically require multi-billion Dollar pre-investments to build a mine, which funds are hard to get these days. Legacy is an exception as it is already being developed into a mine for more than $4 billion. Legacy and Milestone are similar in size and economics.
Western Potash achieved this substantial CAPEX reduction by starting with a smaller potash mine producing around 150,000 tons of potash per year. At a potash price of $315/ton, annual revenues of $47 million are possible. OPEX ("Operating expenses") are maintained at low levels ($80/t) thus potentially providing high profit margins. This initial mine could be in operation for up to 12 years thus generating revenues of more than half a billion dollar during mine life (with potash at $315/ton).
In comparison to Legacy's planned output (2.9 million tons/year for at least 50 years), Milestone's output (0.2 million tons/year) may appear small. However, the strategic clue is that production rates could be scaled up anytime to achieve similar production rates as Legacy; thus practically increasing revenues by a factor of 20.
Western Potash becomes the Wild Card in the Potash Space
A scalable potash mine, next to Legacy, is quite an ace up the Chinese's sleeve, especially in terms of negotiating potash prices with Western producers, such as the north-American potash cartel, Canpotex (Potash Corp, Agrium and Mosaic).
