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Fundamental Research Corp sees 'significantly increased likelihood' of Western Potash takeover

Fundamental Research Corp sees 'significantly increased likelihood' of Western Potash takeover

Investment research specialist Fundamental Research Corp (FRC) has published a report on Western Potash Corp (TSX-V: WPX), in which it highlights a “significantly increased likelihood” that the Western Canada operating explorer will be acquired by a major mining group.

According to FRC, the recent acquisition of Athabasca Potash by BHP Billiton (LON:BLT, ASX:BHP) and an increasing focus on potash projects by other majors - including Vale SA (NYSE: VALE) and state-backed Chinese groups - have significantly increased the likelihood of a takeover.

The researcher also highlighted the significant resource upgrade at the company’s flagship Milestone property in May, with measured & indicated resources now at 174 million tonnes, plus 560 million tonnes of inferred resources. The resource update incorporated a third potash bed known as Esterhazy, supplementing the December 2009 maiden resource estimate, which consisted of the Patience Lake and Belle Plaine potash beds.

“The updated resource estimate shows a dramatic increase in both measured and indicated resources and brought over 40 million tonnes into the measured category,” FRC stated.

A scoping study is currently underway at the Milestone property, and FRC said it expects the study to be completed by the end of July.

The report also noted that the company will have to raise additional funds in the next few months, given the management's exploration budget of C$14m, and the C$11.4m cash and cash equivalents held by the company at the end of March.

In terms of its valuation for Western Potash, FRC sees the estimate fair value, for Milestone, at C$1.42 per share. The researcher also highlighted that the company is trading with a EV (Enterprise Value to Resource ratio, which is significantly below its peers - FRC estimates a EV/Resource of C$0.06/tonne for Western Potash compared with an average of C$0.39/tonne.

In reference to the researcher’s view of Western Potash as a good takeover candidate, it highlighted that BHP has previously indicated that it wants to be a major player in the potash industry. It has already made a significant acquisition in the sector, and Western Potash’s exploration permits lie adjacent to BHP’s, providing for ‘significant synergies’.

Aside for BHP, FCR believes that with Vale also holding exploration permits next to Western Potash, it too could be a potential suitor. The researcher said that Vale “has been aggressively acquiring potash assets all over the world”.

FCR also noted that most of China’s potash imports come from Canada, and Chinese state-run mining companies are also showing an interest in projects.

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