Proactiveinvestors USA & Canada column

Hudson’s Neodymium Magnet Mine

Tue, 07 Feb 2012 15:04:00 -0500

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

Sarfartoq Carbonatite Complex

The Sarfartoq Carbonatite Complex, in west Greenland, is 100% controlled by Hudson Resources TSX.V – HUD and is one of the worlds largest carbonatite complexes having approximate dimensions of 13km X 8 km.

The minerals of economic interest are:

Pyrochlore - a niobium and tantalum oxide. In the core of the complex there are high uranium levels corresponding with exceptionally high concentrations of niobium and tantalum, concentrations which are unusually high in comparison to other such deposits throughout the world - the Sarfartoq Project has produced some of the highest known niobium intercepts.

Uranium is directly associated with the niobium in the pyrochlore and is an effective prospecting tool used to identify other pyrochlore occurrences on the project.

Red Ankerite - the bulk material containing bastnaesite and monazite which are host to the rare earth elements. The Sarfartoq Carbonatite’s rare earth elements (REE) are generally found along the outer margins of the carbonatite.

The distribution of individual rare earth oxides, as a percentage of the total rare earth oxides, demonstrate a high proportion of neodymium oxide to total rare earth oxides.

The high grade rare earth oxides on the Sarfartoq Project are associated with low levels of thorium. As a result, the thorium radiometric signature is an effective prospecting tool for identifying additional REE occurrences.

A 2002 radiometric survey identified over 30 targets on the Sarfartoq Project but a significant portion of the area is covered by disaggregated material which may be masking additional radiometric anomalies.

Sarfartoq Project Historical Work

The Sarfartoq Carbonatite Complex was the focus of limited exploration activity after its discovery by Greenland government geologists in 1976.

Hecla Mining completed a small initial drill program in 1989 which was followed by New Millennium Resources spending in excess of five million dollars on exploration from 2000 to 2002.

Non-compliant NI 43-101 historical results include a trench sample grading 14.4% Nb2O5 over 200 meters and a diamond drill hole averaging 12.13% Nb2O5 over 20 meters starting from near surface.

Bench-scale metallurgical test work carried out on the pyrochlore material from 2000-2003 demonstrated that recoveries of over 95% for niobium and uranium are achievable utilizing solvent extraction.

No follow up work was ever done on some highly anomalous REE results in a number of areas within the outer ring structure of the carbonatite - the north area, despite the average combined lanthanum, cerium and neodymium oxides samples averaging 1.1% (a number of samples exceeded 4.0%), saw little advanced exploration.

Infrastructure

The Sarfartoq Complex is 20 minutes by helicopter from a major airport, is located near tidewater - in a year round ice free area of Greenland - and is adjacent to very good potential hydroelectric (run of river) sites.

Alcoa is currently evaluating a hydroelectric site within 15 km of the Sarfartoq project to support an aluminum smelter to be built on the coast. The hydroelectric facility would have an installed capacity of 600 to 750 megawatts. Civil infrastructure, including harbors, camps, roads and heliports would be developed to support construction of the project.

Hudson has had preliminary discussions with the Greenland government and Alcoa to ensure access to this clean, cost effective power source should it be constructed.

Moratorium On Uranium Exploration

The Government of Greenland amended the Standard Terms for Exploration Licenses and will permit - subject to their approval - the exploitation of minerals that co-exist with radioactive elements above normal background concentrations. There has been no change to the moratorium on uranium exploration and the government retains all rights to radioactive elements.

Because of the current controversy surrounding uranium mining in Greenland, and the exceptional grades of uranium - consistently hitting one percent - Hudson is not, despite average niobium grades of five percent, committing itself to working in the core of the Sarfartoq Carbonatite Complex at the present time. Instead, it is Hudson’s intention to focus on development of its rare earth prospects, in particular the REE(s) associated with the manufacture of today’s powerful miniaturized magnets.

Todays Sarfartoq Carbonatite Neodymium Mine Project

Hudson has recently released the results of a Preliminary Economic Assessment (PEA) for its Neodymium Mine Project.

The Study shows a Net Present Value of $616M and an Internal Rate of Return of 31.2 % with a 2.7 year pay-back period. The Study was based on the Company’s 43-101 compliant inferred resource of 14.1Mt at 1.5% TREO at the ST1 Zone.

A total of 16,514 meters in 71 holes were drilled in 2011 and these results have not yet been incorporated into the resource estimate or the PEA.

“We are very pleased with the results of the PEA which demonstrate the robust economics of the project. Having the project located adjacent to tidewater provides significant economic benefits in both capital and operating costs. Looking ahead, we expect to have an updated resource estimate completed in early 2012, which will incorporate all of the 2011 drill results which includes dozens of high-grade sections from 2.0% to 6.5% TREO.

We plan to update the PEA with the results of the updated resource estimate in early 2012. As the project economics are quite sensitive to grade, we are optimistic that higher project valuations will be reported in the updated PEA." James Tuer, Hudson’s President

Assays from a five tonne bulk metallurgical sample, collected on surface at the ST1 Zone, graded 2.5% Total Rare Earth Oxides (TREO). Neodymium oxide averaged 20% of total REO’s.

“The extraction of the five tonne metallurgical sample is very exciting for several reasons. Firstly, it confirms the presence of a significant amount of high-grade rare earth material at surface. Secondly, and possibly more importantly, it provides a sufficient quantity of material for us to take the metallurgy through to pilot scale testing. This sample will be incorporated into our updated resource model which we expect to have out in the first quarter of 2012.” James Tuer, Hudson’s President

Recent metallurgical test work from SRC has demonstrated successful extraction of rare earths utilizing acid baking and leaching. Test work showed that two hours of baking, at 220°C and approximately one tonne of acid per tonne of mineralized feed (concentrate) recovers 94% of the TREO.

Neodymium

The U.S. Department of Energy, in its Dec. 2011 report Critical Materials Strategy examined the role that rare earth metals and other key materials play in clean energy technologies such as wind turbines, electric vehicles, solar cells and energy-efficient lighting.

Five rare earth metals – dysprosium, neodymium, terbium, europium and yttrium are considered to be the most critical of the elements considered in the report.

Neodymium is the key to making the highest coercivity rare earth permanent magnets – the superior high strength permanent magnets used for many energy related applications, such as wind turbines (the most efficient turbines require approximately 1,000 kg of neodymium for each megawatt of electricity to be produced) and hybrid automobiles. The shift away from electromagnetic systems towards permanent magnetic-based direct drive systems is increasing demand for these high powered magnets.

Neodymium is in short supply in the global marketplace causing prices to remain robust with neodymium oxide currently quoted at US$200/kg, FOB China, and at US$100/kg, within China, according to metal-pages.com

Neodymium Mine

The distribution of individual rare earth oxides, as a percentage of the total rare earth oxides, from the Phase Two program at HUD’s Sarfartoq Carbonatite’s ST1 Zone are documented in the table below. The results are consistent with previous assay results and demonstrate a high proportion of neodymium oxide to total rare earth oxides at 19% - based on the present inferred resource the ST1 Zone at Sarfartoq represents one of the industry’s highest ratios of neodymium to total rare earth oxide (TREO).

Note that the gross amount of neodymium (Nd203, 40 Mkg in total) oxide is approximately the same at each of three locations, this is important for development of the project as a neodymium mine.

Also note; Hudson’s ST1 Zone represents one of the industry’s highest ratios of neodymium and praseodymium to TREO, totaling 25%, and that drilling at ST40 continues to intersect a very high ratio of neodymium oxide to TREO at 46%.

Management & Board

James Tuer - President & Director;

MBA, Mechanical Engineer. CEO of Hudson since 2000. Public company & corporate finance background (TD Securities)

Jim Cambon – VP Project Development;

B.Sc. Geology. Over 20 years international mining/engineering project experience (AMEC, Bateman) including specific arctic project experience (Ekati, Snap Lake)

John McConnell - Director

Professional Mining Engineer with an extensive background developing and operating mining projects, particularly in arctic regions. President of Victoria Gold

Flemming Knudsen - Director;

Retired CEO of Royal Greenland A/s, Greenland’s largest company. Extensive world-wide business experience. Strong connections in the EU.

John Hick - Director;

Has served in a senior capacity and/or on the board of directors of major mining companies (Placer Dome, TVX Gold, Rio Narcea) .

Dr. John A. McDonald - Director;

He and his technical team were directly responsible for the discovery and development of the Snap Lake diamond deposit, acquired by De Beers for $480 million in 2000.

Dr. Peter Le Couteur – Consulting Mineralogist;

A mineralogist with significant experience working with carbonatites. Ex-Cominco.

Dr. Mike Druecker – Consulting Geologist:

Ex-Hecla, professional geologist, one of the pioneers in rare earth exploration dating back to the 1970’s.

John Goode– Consulting Metallurgist:

48 years experience with numerous rare earth projects in China, Canada and the USA.

2012

Hudson’s plans for 2012 include the commencement of a prefeasibility study (PFS) and an extensive drill program which will further delineate the high grade zones encountered in 2011 as well as other prospective targets that have been identified around the 32 km circumference of the Sarfartoq Carbonatite Complex. With current working capital of $12.5M, the entire 2012 program could be accomplished with the current treasury.

Conclusion

There currently exists a formidable demand for Hudson’s primary target, neodymium and its other potential by-product credits ie praseodymium. Neodymium is in a supply deficit, both in China and in the west - the magnet industry demand for neodymium is expected to grow by about 10% per year.

Hudson’s Neodymium Mine Project should be on everyone’s radar screen. Is it on yours?

If not, maybe it should be.

Stock Buy Back Programs

Fri, 16 Dec 2011 10:44:00 -0500

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

The two most common methods used by companies to return "excess" cash to their shareholders are dividends and stock buybacks – stock buybacks are currently favored.

S&P Indices data shows 305 S&P 500 companies purchased their shares in the first quarter of 2011 – at a cost of $89.8 billion. This compared to 270 company’s conducting buyback programs during the fourth quarter of 2010, 261 in the third quarter, 257 in the second quarter and 251 in the first quarter of 2010.

S&P 500 stock buybacks increased 21.6% to $109.2 billion during the second quarter of 2011 - there has been eight consecutive quarterly increases in stock buybacks.

"Companies returned to the $100 billion quarterly buyback level in the second quarter as they continued to match and control employee options, thereby protecting their earnings per share. At this point, companies are continuing to use buybacks to prevent earnings dilution from employee options, as well as shares used for dividend reinvestment programs. Few companies are venturing outside of the box to purchase additional shares, as was the common practice from late 2005 through mid-2007." Howard Silverblatt, Senior Index Analyst at S&P Indices.

Let’s consider why management might favor buybacks over one time special dividends, starting or increasing dividends:

- Management receives compensation - usually in the form of stock options - that is tied to the company stock price. The higher the stock price the more they make cashing out their options

- When a stock buyback occurs the short term implications on the stock price are positive. If a company’s stock is suffering from low financial ratios ie earnings per share (EPS) and price earnings ratio (PE) buying back stock can give them a temporary boost because they are based on the number of outstanding shares. Earnings don’t change but the EPS looks better because you’ve reduced the number of shares outstanding so management meets goals for profit growth and earn bigger bonuses

- Dividends may work against the stock price of a company by reducing the book value of the stock

- Managers do not immediately benefit from dividends as their options do not qualify for dividend payments

According to TrimTabs Investment Research companies announced $124 billion worth of stock buybacks in Q2 2011 while insiders used less than $2 billion of their own money to buy stock in the same quarter. This is one of the highest ratios of announced company share buybacks to insider stock purchases since the investment research firm began keeping records in 2004.

“We’ve never seen such a sharp contrast between what insiders are doing with their own money and what they’re doing with the money of the companies they manage. While insiders are willing to use corporate cash to try to support the value of their stock-based compensation, they don’t seem to think their stocks are attractively priced.

The ratio of announced stock buybacks to insider buying topped 70 in the first two quarters of this year.

They were by far the highest levels in our records. How many of the analysts and journalists, cheering the big buybacks, realize that the people rolling them out aren’t buying anything themselves?” Charles Biderman, CEO of TrimTabs

TrimTabs data shows that insider buying occurred at only six of the 30 companies with the biggest announced stock buyback programs this year - totaling $168 billion dollars. The insider buying at these six firms amounted to less than $10 million, which makes an announced buyback to insider buying ratio of 16,800 to 1.

According to istockanalyst.com, insider buying decreased by 50% the first week of December with insiders purchasing just $20.6 million of their stock compared to $41.01 million the week before. Selling increased during the same time period - insiders sold $926.4 million worth of stock compared to $558.9 million the week before.

The insider Sell/Buy ratio is calculated by dividing total insider sales in a given week by total insider purchases for the week. The ratio for the first week of December 2011 is 926.4/20.6 = 44.9. In other words, insiders sold very close to 45 times more stock then they purchased.

Oh, there ain't no rest for the wicked

Money don't grow on trees

I got bills to pay

I got mouths to feed

There ain't nothing in this world for free

“Ain't No Rest For The Wicked” Cage The Elephant

Consider:

- Reducing a company’s outstanding shares does make each dollar of earnings more valuable on a per share basis. Unfortunately shareholders will not benefit after a stock buyback program has been undertaken if companies fail to reduce their share count because they have issued new stock to replace employee stock options

- Stock buybacks are almost always initiated in good times – when stock prices are high. Stock buybacks do not happen in bad times when stock prices are low. Purchasing stock at inflated prices, paying a dollar for .50 worth of stock is not an effective use of cash and some companies borrow money to pay for their stock buyback programs

- According to Fortuna Advisors companies that spent the most on stock repurchases, over the last ten years, had a total shareholder return of 37 percent versus 127 percent for companies that spent the least. Spending money on stock buybacks can halt or delay development of new products, acquisitions, diversification and spending on new plants and infrastructure

- Stock buybacks are more tax efficient than dividends. But dividends drive shareholder returns – over the last 50 years 56 percent of returns from the stock market have come from dividends

- Dividends are the only form of returns on investment that shareholders achieve during bear markets

- Dividends are valuable indicators of whether or not a stock is undervalued or overvalued and dividends put a floor under a stock

- Dividends are flexible, they give investors options by allowing them to time, and direct, income flow to where they think the best investment opportunities are at any given moment

- Dividends are a predictable and reliable source of income in retirement, relying on stock buyback programs not so much

- Research has found that paying dividends increases earnings growth

- Companies that regularly pay dividends have imposed fiscal discipline on their managers. There’s no empire building, instead focus must be on improving the bottom line without sacrificing return on equity

- Stock buyback programs can be cancelled and most investors would not notice while dividend payments are highly visible to shareholders and cutting or eliminating a payment creates warning signals something is amiss

Conclusion

Knowing what we now know, in regards to current stock buyback programs and insider selling, is it any wonder that managers prefer stock buybacks as opposed to special one-time dividends, starting or increasing existing dividends?

Each companies share buyback program will have to be individually judged by their shareholders as to its worth – but with very few corporate insiders willing to put their own money where they are putting corporate cash and with heavy, long term insider selling taking place, perhaps existing shareholders and potential investors had better take a hard look at just what is happening.

Whether or not there is a relationship between buybacks and insider selling in the company you own, the bottom line is that share buybacks usually do nothing to create long term shareholder value and are never a match for a steady, and sustainable, dividend.

There are many studies, easily accessible online, that have shown that the companies with the most consistent, and quickly rising dividends have greatly outperformed the overall market.

For those in search of appreciating retirement income streams, or income in bear markets and times of uncertainty, dividend paying stocks – companies returning “excess” cash to shareholders in the most beneficial manner - should be on every investors radar screen.

Have you got a few good dividend stocks on your radar screen?

If not, maybe you should.

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

If you're interested in learning more about the junior resource sector, bio-tech and technology sectors please come and visit us at www.aheadoftheherd.com

Site membership and our AOTH newsletter are free. No credit card or personal information is asked for.

***

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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Legal Notice / Disclaimer

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.

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

Two Bullets and Baron Rothschild

Fri, 09 Dec 2011 11:35:00 -0500

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

I’ve read the following articles so many times I can just about recite both from memory. I found them years ago, there were no author’s name attached, no credit given, but anon thank you, you’ve helped keep me focused.

I hope readers find both pieces as useful as I did.

Richard (Rick) Mills

***

Two Bullets

Several years ago, I met someone, Trader Joe, who was an expert technical trader. I call him an expert because he lived off of his profits, he was financially independent, and he frequently went on random scuba diving and bird watching vacations at the drop of a hat.

Since this was a time when I was diligently honing my trading skills, I often corresponded and spoke with him about trading. I already had a system in place, so that’s not what we concentrated on. Instead, he helped to educate me about the mental side of trading. And what he shared with me has helped to define my success as a trader.

To that point, I had never really acknowledged that there was a mental side to trading. After all, I was just looking at charts and playing the setups. But I have to admit, playing the setups wasn’t working out too well.

At the time, I was making about 7-10 trades per month. Most didn’t do so well, but the ones that did always made up for the losses and kept me at a small gain. My account was up, so I figured I was doing okay. But I also knew that the great traders like Paul Tudor Jones and Ed Seykota were able to consistently make many times the returns I was making. In case you’re wondering, Seykota increased one of his clients accounts by 250,000% over a 16 year period (after withdrawals) and Jones realized five consecutive triple digit return years.

I knew there were flaws in the way I was trading, but I didn’t understand what I was doing wrong. So, I shared my predicament with Trader Joe. I asked him why in the world I could not make a yearly gain over 12%.

He laughed... and then he gave me some of the best advice I’ve ever received.

But he didn’t tell me directly. He imparted his wisdom in the form of a story:

“Imagine that you’re a deer hunter and you only have two bullets. You cannot get any more bullets until next month. If you miss your shots, you won’t be able to eat any meat this month. But if you make one of the two shots, you’ll eat well.

“Now every time you walk into the forest you patiently wait… and wait… and wait. Most of the time in the forest you don’t even see a deer. Some days you might see an occasional rabbit hopping around. Do you shoot at the rabbit hoping that later you can get a deer? Or do you wait?

“If you hit the rabbit you can eat for a day. But if you miss, you have just wasted one of your bullets on the chance for a small meal. You decide the rabbit is too small for the risk involved, so you keep waiting.

“A few days later you see a deer, but it’s not a clear shot. Do you shoot? If you miss, you’ll have only one bullet left. You decide the risk in missing the shot is too great, so you wait.

“The next day, you see a big buck in clear sight about a hundred yards away. Now the shot is nearly guaranteed. You take your shot and you nail it.”

I immediately understood what he was saying.

I’m the hunter, the market is the forest and my money is my ammunition. Once I run out of money, game over. But if I choose only the best shots, I will do well. In other words, you only want to trade when the odds of winning are heavily in your favor.

In my case, I was trading on setups that were mediocre. To pull the trigger, I needed four of my indicators to line up and scream buy or sell. But when I looked at my past record, I discovered that most of the trades I entered were not based on my system. I would become impatient, often trading when only two of my signals lined up, instead of all four.

In other words, I was shooting at rabbits and taking difficult shots at deer that were out of range. Sure, I might have made a lucky shot here and there, but the odds were not in my favor.

By simply reducing the number of trades and only making those that were optimal, I dramatically increased the profits I earned.

Trader Joe told me I wasn’t alone in making these mistakes. He said new traders do this all the time, perhaps that includes you.

Maybe you become impatient, looking for excitement and feeling that you are missing opportunities if you’re not in the market. Nothing could be further from the truth.

By simply limiting the number of trades you make to those which put you at the greatest odds of winning, you will save money on commissions AND put more money in your account. After all, trading isn’t about excitement; it’s about making money.

There’s no question that Trader Joe’s advice has improved my success. I can’t thank him enough. And I hope that you will benefit from his advice as well. So the next time you’re looking at your trading record and you see less than optimal results on a high number of trades, just ask yourself:

You only have two bullets. What do you do?

Author unknown

***

Baron Rothschild

Let's play a little game – it's called “Baron Rothschild,” who once said “I made my fortune by selling too early” (a comment also made by Bernard Baruch). It's a lot like various kids' games where you know something bad will happen but you don't know when. These include “Musical Chairs,” “Don't Break the Ice” (where you take turns hammering out little ice blocks hoping that you won't cause the whole surface to collapse), or “Kerplunk” (where a load of marbles rests on sticks that have to be removed one by one). My impression is that investors are playing this sort of game here.

Suppose that the dealer lays cards down, one after another. Each is an annual market return. At any time, you can call out “Baron Rothschild” and go to a defensive position, or you can gamble and get the market return the dealer shows next. The gain cards read - 15%, 20%, 25% and 30%. If you're in a defensive position you lag the market by 10% when the market return is a gain, but you get 5% if the market return is a loss.

There is one -20% loss card. Once it appears, the game ends and everyone counts their dough.

It turns out that if the loss comes anytime before the 5th card, you're almost always ensured to beat or tie the dealer by immediately blurting out “Baron Rothschild” even before the first card is shown. For example,

20%, 20%, 20%, 5% beats 30%, 30%, 30%, -20%.

15%, 15%, 15%, 5% beats 25%, 25%, 25%, -20%.

20%, 10%, 5%, 5% beats 30%, 20%, 15%, -20%.

5%, 5%, 5%, 5% ties 15%, 15%, 15%, -20%.

You can easily prove to yourself that even for a six-year market cycle, you still generally win even if you call out “Baron Rothschild” after year two. Meaning it just doesn't pay to risk the big loss.

The point of this isn't that investors should always take a defensive stance - some market conditions are associated with very strong return/risk profiles that warrant substantial exposure to market fluctuations. The point is that the avoidance of significant losses is generally worth accepting long periods of defensiveness - the mathematics of compounding, large losses have a disproportionate effect on cumulative returns.

Remember that historically, most bear markets have not averaged 20%, but approach 30% or more. A 30% loss takes an 80% gain and turns it into a 26% gain. It's difficult to recover from such losses.

The avoidance of significant losses is typically worthwhile even if, like Baron Rothschild, one is defensive "too soon."

Author unknown

***

Ahead of the Herd With Western Potash

Mon, 05 Dec 2011 13:22:00 -0500

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.

World’s Largest Miners like Potash

Wed, 30 Nov 2011 15:16:00 -0500

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

Miners are looking to enter the potash business, or expand existing operations, as they look for increased demand from developing nations such as China, India and Brazil.

BHP Billiton - In the spring of 1869 a German Chemist named Charles Rasp immigrated to Australia for his health. Unable to find work in his chosen trade Charles learned to ride a horse and began wrangling sheep. One day, while out riding his horse at Broken Hill, he discovered mineralized rock. He took out a mining lease, punched holes in the ground and eventually found rich veins of silver. The Broken Hill Proprietary Company – BHP - was incorporated in 1885 while mining silver and lead at Broken Hill in western New South Wales.

Billiton was a mining company that got its start in September 1860 when the articles of association were approved by a meeting of shareholders in the Groot Keizerhof Hotel in The Hague, Netherlands. Shortly afterwards the company acquired the mineral rights to the tin-rich islands of Banka and Billiton off the eastern coast of Sumatra.

BHP Billiton - also known by the nickname "the Big Australian" - is the world's largest mining company. It was created in 2001 by the merger of Australia's Broken Hill Proprietary Company and Anglo-Dutch Billiton. Today BHP produces - oil, natural gas, bauxite, aluminum, copper, silver, lead, zinc, uranium, diamonds, coal, titanium, well, you get the idea, they’re miners, they pull “stuff” out of the ground and sell it.

BHP, seeking to benefit from surging demand for fertilizer made a $40 billion hostile bid for Potash Corp. of Saskatchewan Inc. Yielding to political pressure, Canada’s Federal government nixed the deal.

BHP paid $341 million, C$8.35/share, to acquire Saskatoon's Athabasca Potash (TSX: API). This acquisition will give BHP Athabasca’s Burr Project, which is located next to BHP’s Jansen Project.

BHP Billiton announced on 24th June 2011, a further investment of US$488 million to support development at its Jansen Potash Project. This piece of additional capital will fund site preparation and the procurement of long lead time items during the project’s feasibility study. This funding will also enable BHP to develop the first 350 meters of the production and service shafts.

The announcement takes BHP Billiton’s investment in Jansen to, so far, $1.2 billion.

BHP likes big stories, the unfolding potash story is one of the biggest and in this author’s opinion it can only get bigger.

Vale S.A. - Formerly known as Companhia Vale do Rio Doce (CVRD) was founded by the Brazilian Federal Government in June 1942. The company was privatized in 1997 when the Brazil Consortium bought just over 40% of the Federal Government’s stock.

Even though Vale has operations in the energy and logistics sectors both sectors combined contribute less than ten percent to Vales total revenues. Vale is a miner and controls the Brazilian iron ore industry owning all Brazilian iron ore exporters.

In recent years, in an attempt to diversify its operations, Vale has made a string of purchases getting into copper, kaolin, nickel and coal. In October 2006 Vale bought Canada’s second largest mining company, Inco, for $18.9 billion. Vale also produces manganese, ferroalloys, bauxite, potash (Sergipe mine in Brazil), alumina and aluminum.

Vale S.A. has moved into the fertilizer business in a big way:

In January of 2009 Vale bought Rio Tinto’s potash assets in Argentina and Saskatchewan Canada for US$850.

In January 2010 Vale announced it would acquire all the shares of Bunge Participacoes e Investimentos S.A. (BPI). Vale will pay $1.65 billion US for BPI - for its wholly owned phosphate mining operations in Brazil - and another $ 2.15 billion US for its 42.3 percent in Fertilizantes Fosfatados S.A. (Fosfertil) - a leading Brazilian fertilizer company.

Engineering work has started at Vales Rio Colorado solution mining potash project in Mendoza, Argentina. Estimated start-up is for the second half of 2014 with a nominal capacity of 4.3 Mtpy year of potash.

Vale said it’s planning to consolidate its position in the potash industry by taking its fertilizer unit private. The change would give the Brazilian-based miner more control over the business that now represents about 2 per cent of global potash production. Vale is planning to build a $3 billion potash project in Saskatchewan, and has other potash projects in its pipeline.

Rio Tinto – A site along the Rio Tinto river in the Andalusian Province of Huelva, Spain has been mined for copper, silver, gold, and other minerals since 3000 BC.

After being lost for centuries the mines were rediscovered in 1556, the Spanish government began operating them in 1724 but sold them in 1873

to Matheson and Co. Hugh Matheson formed a syndicate consisting of Deutsche Bank (56% ownership), Matheson (24%), and railway firm Clark, Punchard and Company (20%). The syndicate registered the Rio Tinto Company on 29 March 1873. The Rothschild family had control by the end of the 1880s.

After selling its South American and Saskatchewan, Canada potash assets in 2009 to cut debt Rio has re-entered the potash business. The company is teaming up with North Atlantic Potash Inc. - the Canadian subsidiary of Russia's JSC Acron, a fertilizer producer - to hunt for potash in Saskatchewan.

A joint venture between Aluminum Corp. of China (Chinalco) and Rio Tinto has received approval for exploration in China. The JV will initially focus on exploring for copper in China but has plans to expand into coal and potash.

"This is a solid business and the big mining companies agree. If they can find a way to participate in it, they will.” Mark Connelly, New York brokerage Sterne Agee.

As I’ve just shown you, three of the world’s biggest miners are moving into fertilizer in a big way.

Consider this plus $3.6 billion investment into potash…

K+S AG - Bought Canada’s Potash One, the previous owners of Legacy, in a 2010 deal worth $434 million. Potash prices at the time were 40% lower than today.

After saying on March 8^th 2011 that it expects global demand for potash to rise 3-5 percent per annum, Europe's largest, and the worlds fourth largest potash producer, Germany’s K+S AG said on November 29th 2011 that it will move forward with construction of its $3.2 billion Legacy project in Saskatchewan.

The reality is the potash story is just starting. Unlike other resource plays there is no cycle, demand is always going to be there and its rising year over year making potash an excellent play in what will be a long term agricultural commodities bull market.

“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 for many reasons:

There’s 220,000 people being born every day, that’s 220,000 more mouths to feed every day
An increasing disposable income in a growing middle class, more money in more pockets means more and more people climbing the protein ladder
Loss of arable land, topsoil degradation
Desertification and climate change
The Green Revolution's impact on crop production is declining, in some cases reversing
Some older mines are going to become more inefficient or be lost
Underutilization of potash in many countries
Demand from the countries whose economies are starting to develop and have the ability to get into farming
Security of supply

Conclusion

Two junior potash players who are trying to become independent producers are on this authors radar screen. Both could threaten the industry dominance of the two main potash marketing companies.

Canpotex Ltd. and Belarusian Potash Co. control two-thirds of the global market - Canpotex markets potash produced in Saskatchewan by Potash Corp., Mosaic Co. and Agrium Inc. while BPC is an arm of Belaruskali and Russia’s Uralkali.

China produces just 10% of the potash it utilizes, India’s economy is 60% agricultural based and the country produces very little potash. Brazil is one of the worlds breadbaskets and imports most of its potash. Both the Chinese and Indians have groups given government mandates to secure potash assets. Brazil’s government is also very active in regards to its agricultural sector.

There’s a global macro theme - “Feeding the World” - and certainly longevity to the potash story.

Potash should be on every investors radar screen. Is it on yours?

If not, maybe it should be.

Richard (Rick) Mills

rick@aheadoftheherd.com

www.aheadoftheherd.com

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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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