Western Potash Corp. (WPX-V C
.48)
Playing Catch-Up on Milestone
Event
¦ We have initiated coverage of Western Potash Corp.
Implications
¦ The goal. Western Potash is focused on developing an economically
viable potash mine on one of its three properties in Canada - two in
Manitoba (conventional), and one in Saskatchewan (solution).
¦ Saskatchewan more promising. We think the company will lean more
toward the development of its Milestone project in Saskatchewan, due
to: (1) a solution mine being less expensive to construct than a
conventional mine; (2) a quicker construction timeline; and (3)
potentially greater shareholder value due to a higher project equity IRR.
¦ Still exploring. Although drill results looks promising, Western Potash
has not yet delineated a NI 43-101 compliant resource estimate, and
may be late out of the gate relative to its peers.
¦ Stock catalysts. More drilling results, a NI 43-101 compliant resource
estimate, a feasibility study, a 2010 equity issuance, and a strategic JV
with a deep-pocketed sponsor should likely follow.
Recommendation
¦ We have initiated coverage on the common shares of Western Potash
Corp. with a 2-SP rating and a one-year target price of
.80 per share
Playing Catch-Up on Milestone
¦ Western Potash Corp. is a junior mining company engaged in the acquisition,
evaluation, and exploration of potash mineral properties in western Canada. The
company has over 860,000 acres of potash exploration permits in Manitoba and
Saskatchewan, which are grouped into three distinct projects: Russell-Miniota (MB);
Russell-South (MB); and Milestone (SK). Additionally, Western Potash has investment
interests in exploration properties in Australia, Brazil, and Mexico.
¦ The development of Western Potash’s three exploration properties in Canada remains
in its infancy, with no NI 43-101 compliant resource estimate having been attained to
date. However, results from the company’s drilling programs suggest that an economically
viable potash-producing mine is possible.
¦ In our view, the most promising project is the Milestone property in Saskatchewan,
located some 23 km from Mosaic’s 2.8 million tonnes per year (mt/y) solution potash mine.
Following the supportive potash assay results from its Milestone-003 well, the company
accelerated its drilling program in the vicinity of the well. Results from two new drill holes
show an average composite intersection of 22.8 metres, and an average K2O grade of 18.6%.
Western Potash is in the midst of drilling several other wells in a resource definition drill
program, to further define the grade, thickness, and extent of the higher grade zone within the
Patience Lake and Belle Plaine members. The company also intends to complete an NI 43-
101 compliant calculation of the indicated and inferred resources available to Milestone,
which we expect in early 2010.
¦ Given the intense competition for greenfield potash mine development, as well as for lowcost
brownfield expansions, we think Western Potash is somewhat late out of the gate.
Perhaps the only way for Western Potash to catch up is to develop a solution mine in
Saskatchewan, rather than a conventional mine on one of its two Manitoba properties.
¦ We believe the market will be focused on the following events over the next 12 to 18
months: (1) results from Phase II of the company’s Milestone drilling program; (2)
completion of a NI 43-101 compliant resource estimate; (3) progress on greenfield potash
mine development from Western Potash’s competitors; (4) how the company will achieve its
next round of financing requirements; and (5) to a lesser extent, movement in potash prices.
Initiating Coverage
¦ We have initiated coverage on the common shares of Western Potash Corp. with a 2-
Sector Perform rating. Our one-year target price is
.80 per share, which represents a
potential one-year rate of return of about 70%. We value Western Potash using a discount to
our net asset value calculation (NAV) of $1.95 per share. Specifically, we assign a 0.50x and
a 0.10x NAV multiple to its Saskatchewan and Manitoba projects, respectively. The NAV
multiples reflect the progress of the projects, as well as the likelihood that the projects’ full
net asset values will eventually be realized.
¦ Our risk ranking for Western Potash is Caution Warranted. This is the same ranking we
assign to several other junior potash exploration and development companies within our
coverage universe. In our minds, the Caution Warranted risk ranking is justified due to the
company’s potash projects not having: (1) delineated any proven or probable potash
resources; (2) completed major project equity and debt financing; or, of course, (3)
commissioned a project. Additionally, the nature of the potash market does not enable
forward sales or price hedging to occur beyond one year out, which, in our view, exposes
investors to near-maximum commodity price risk. Partially mitigating this risk is: (1) the
company’s active pursuit to find a financial partner to develop a project; and (2) the low
political risk associated with potash development in Saskatchewan.
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