Proactive investors

Western Potash Corp

John Costigan of Western Potash Talks to Proactiveinvestors

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Why should investors be interested in a potash exploration and development company, such as Western Potash?

I think it’s very important to realise what the context is that we’re starting up this exploration company.  Right now I think the potash market is very tight for the foreseeable future and that supports the elevated pricing that we’ve seen in the potash market.

I don’t think the market can tolerate another supply-side disruption that we saw in Russia in 2006 and the payback is relatively short for a green field capacity.  Also the price of potash is still a relatively inexpensive nutrient for farmers.  Even if potash is a thousand dollars per metric ton, the farmers are still at a payback of one to three.

Why Western Potash in particular?  I think the value in Western Potash is that we are very serious about exploration.  It’s a very targeted programme that we’ve got going forward.  We have a highly technical team that’s going to be running these projects.  We have the cash to do it which is very important in the potash market because exploration is so expensive.  

We also have great neighbours that have in excess of a billion tons of potash already defined as a resource.  So I think we’re in a great area with lots of cash and some great people to run these projects.

John, how is the potash market structured?

The potash market is unique insofar as potash is not traded as a commodity anywhere.  Basically 75% of the world’s export production is controlled by two distinct bodies, one being Canpotex which is comprised of Agrium, PotashCorp and Mosaic, and BPC which is basically the Belarusians and the Russians.  

That being said, there’s such tight control on the market that consumers do have to pay whatever price is dictated by those organisations.  So the opportunity for a junior to come in here and become an alternate supply is quite obvious.

What do investors need to know about hard rock potash mining and solution mining of potash?

Hard rock dry shaft mining is the traditional mining where we sink a shaft in about 1,000 metres below.  There’s a limit however, to conventional mining and that’s about 1,100 metres.  Most of the potash mines in existence today are traditional mines.  

That being said, most of the available potash that we will be exploring for are beyond the 1,100 metre cut off grade for the hard rock mines.  Hard rock mining - the shaft sinking itself can cost in excess of $1 billion so when we are looking at hard rock mining as an exploration company, we obviously have to look to a partner who assists us with that kind of financing going forward.

However, if we look at solution mining as a small exploration company, all you need to begin production is basically to sink one exploration hole and that will become your production hole.  

Solution mining is scalable which means you can start out small for a lot less money than you can in hard rock mining.  You may be able to get going with $400 million and have a complete solution mine versus a CAPEX in excess of $3 billion for a hard rock potash operation.  That’s obviously a significant difference in financing.  

$400 million maybe something that Western Potash could raise on their own whereas $3 billion - I don’t think there’s anyway we could proceed without a major partner.  I don’t even think the major partners would go forward without another partner with those kinds of dollars.  

So Western Potash is shooting for a solution mining opportunity?

Well, we have both available.  In Manitoba, currently we are looking at a hard rock mining opportunity where we are going to have to look for a major partner. In Saskatchewan, we are looking at solution mining because the depths are around 1600 metres and we could conceivably raise enough money to start a small scalable solution mining.  There is no reason in the world that we have to start up mining 2.4 million tons a year.

Now when you sink a shaft in excess of $1 billion you’re going to have to hit the ground running and in excess of 2 million tons a year.  But with a scalable mine, you don’t need to do that to hit your ROI. You can start small and scale it up!

So tell us about Western Potash’s project in Manitoba and the progress that’s been made there.

We have currently drilled five holes in our Northern Russell-Miniota project in Manitoba.  Those holes, we were looking for a 200 million ton resource.  We fell short of that and needed an add-on so we moved a little further south and we hit our three best holes to date.  

We’ve got three metres in excess of 26 percent, 23 percent and 21 percent in those three holes.  We’ll be drilling two more holes and looking for a resource calculation by the end of Q3 of 2009.  

So we’re quite excited about Manitoba.  I think we really have something there.

Given that you would need a large project in Manitoba, I notice that you referred to the companies having the ‘Manitoba advantage’.  What does that mean?

Well I think that’s a two part question.  The first part is that we do have a considerable size which we are going to be doing our resource calculation on.  It’s about 100 square kilometres which is plenty enough to offer a world class mine.  

But the ‘Manitoba advantage’ is in the fact that the Manitoba government realises they missed the boat back in the 70s on the development of a potash mine.  They do not have a potash mine in Manitoba.  They do have the potash sequence or member or layers of potash do cross the border into Manitoba.  It’s quite clear on all the geological maps.  We have intersected some good grade of potash and the government’s quite excited about developing that.  If you look across the border at Saskatchewan, and realise that they’re missing out in over $1 billion in potash taxes.  

I think realistically a potash mine can be operated in Manitoba.  It will require additional partners, of course a junior development company is not going to raise $3 billion to construct such a mine but when the government’s on side and the potash grade is of a good enough quality I think it’s a real possibility. 

And what is the situation with Western Potash’s project in Saskatchewan?

We’ll be beginning our exploration project this spring, as soon as the thaw’s over.  We will be drilling three holes in Saskatchewan.  We call that our milestone project.  The depths are considerably deeper than in Manitoba and that will be subject to solution mining methods, when all’s said and done.

We have an exploration budget of about $5 million for that project and hope to have a resource calculation of those three holes by the end of 2009.  So the difference to Manitoba; in Manitoba we have one potash layer, or potash member of about four metres. In Saskatchewan we have three distinct members, three distinct potash members and we’re looking at any where from 25 to 40 metres of potash that we’ll be intersecting once we drill.

So there’s a considerable difference in each hole and the yield that that will have when we do a resource calculation.  Basically three to one when each drill hole will be three times the volume that we have got in Manitoba.

So again, we’re even more excited about Saskatchewan than we are about Manitoba currently.

What is Western Potash’s financial situation, John?

Well Western Potash currently has zero debt.  We have in excess of $30 million.  Our drill programme this year will cost in the neighbourhood of $10 million leaving us with perhaps in excess of $20 million by the end of the year.  Now $20 million can last us another two years so I think we have at least three years of exploration left without going back to the market so we will be able to weather this recession quite easily.  

What can investors expect from Western Potash over the next 12 to 18 months, John?

I think within the next ten months is what you’re going to see out of Western Potash is two distinct resource calculations.  Now that’s very exciting for us as an exploration company because we are now trading at 25 cents.  We’re trading under cash value currently and we don’t have a resource on any of our project areas.  

Come the end of this year, we will have two distinct resource calculations which will give us assets in the ground and that is something that will be hopefully valued by the market appropriately, and give our shareholders the same kind of value creation.

What experience does the Western Potash team have in taking mines into production, John?

Well, our CEO, Pat Varas and Buddy Doyle, both have experience with the Diavik Diamond Mine.  Buddy Doyle and Pat Varas are basically behind the discovery at the Diavik Diamond Mine where they started from inception and they brought that all the way into production.  

Buddy Doyle was also involved in the discovery of the Lihir Gold Mine, Papua New Guinea, which is now in production.  

Pat Varas was once again was responsible for the discover of the Santo Domingo del Sur copper deposit in Chile, which is nearing production, well, it’s not that near production but it is a significant discovery and I think if you look back at discoveries are about 1 in 1000, so we have guys that have done that three times.

In production they have the experience they know the Rio Tinto guys, the CVRD guys.  They know what it takes to move these deposits into production and they’ve done it twice.  

What techniques are used for exploring and developing potash resources?

Well, you really only have two tools for potash exploration.  You do direct drilling and geophysics, which is seismic.  The geology of potash is such that it’s a very uniformed layer below the surface.  It’s a prairie evaporite that we are exploring which means that it was deposited uniformly throughout the formation.  

So when you drill you can define an area of mineralisation around each drill hole that constitutes a 1.5 kilometre radius around that drill hole.  That combined with the seismic will allow you to state that it is a defined resource.  
    
Therefore you can connect your drill holes with 3 kilometre spacings.  You can define a large area very quickly when you are doing potash exploration.  That being said, it is very expensive to drill these holes so thank god, you don’t have to drill every 50 metres.  

How is potash processed?

Well, as you know the conventional underground dry shaft mining methods we use in depths of up to 1,100 metres or 3,500 feet.  The ores are extracted from the potash deposits by these electrical operating mining machines.  They convey it to the surface where it is then crushed then using something called a floatation process the salt and clay particles are removed, the brine or the salt solution is dried and then the dried potash is sized by various screens.  So the resultant coarse grade is ready for distribution and the fine particle size that are left over from the screening process then are compacted back into sheets which are then re-crushed and screened. Then you re-do the particle sizes again, which are suitable for blending for the fertilizer applications.

What is the main use for potash, John?

Well 95 percent of potash goes into the mineral fertilizers basically to improve the yields and crop quality.  40 percent of all the crop yields are basically derived from fertilizer applications.  Potash itself, they call it the quality nutrient, and what it does in particular is improve your disease resistance of your crops, improves the taste, the colour, the texture and in essence the nutrient value of those crops that it’s used on.  

What are the prospects of potash in the medium and long term, John?

I think right now, we have a very interesting situation where the farmers are currently withholding your purchases or deferring your purchases.  The major producers are cutting production to keep the prices stable but you cannot rob the soil of the nutrients, farmers have got to grow crops and they cannot take a 40 percent reduction in crop yields so eventually they will need to fertilise.  Right now we are seeing quite a stand-off between the farmers and the fertilizer producers.  

So as far as the prospects go in the short term, there’s a bit of delay going on.  In the long term they’re fantastic I mean we have a growing population, we will have in excess of 9 billion people and we have to eat.  There’s no question about it.  Fertiliser has to be used.

The under-application of fertiliser in Latin America and China, there is so much room for growth there.  North America and Europe are very mature markets and I don’t think we’ll see a lot of growth in fertiliser consumption or potash consumption in those markets.  But again in Asia and Latin America there is an incredible room for increase and could in essence see a doubling in potash consumption in both those countries.

What are the prospects for more large potash mines coming on stream?

Well we’ve seen the brown field capacity expansions of the major producers.  They are all adding capacity.  And that’s not cheap either, we’re still talking billions of dollars to add that capacity; PotashCorp itself is adding over 2 million tons of capacity.  Large independent new mines, green field mines, I think we will see some indeed, but again the growth rate that’s predicted is in excess of 3 percent a year in terms of potash consumption. The world is going to need in excess of 1.5 million tons of new potash annually going forward and I think Western Potash is well poised to take advantage in the increase in consumption.