All of a sudden the majors seem to be jockeying for position in potash. Late last month BHP Billiton announced that it is to acquire Athabasca Potash for C$341 million. A tidy enough sum, you might think, but one that was dwarfed by the US$3.8 billion that Vale has just paid for the South American fertilizer assets of US commodity supply chain company Bunge. At the same time as that deal was going through, Vale also announced that it had acquired a 16 per cent stake in Fertilizantes Fosfatados in Brazil. Vale's got interests back in Saskatchewan too, and not far from Athabasca, where it continues to make progress developing its Regina project.
Meanwhile, BHP Billiton has also announced a US$240 million investment in its Jansen project, the borders of which run up against Athabasca's ground, and which promises to be the world's largest potash mine when it comes on stream in three or four years' time. Into that heady mix comes wild talk of a possible bid from BHP Billiton for Canada's largest Potash producer, Potash Corp. Of Saskatchewan, currently valued on the NYSE at around US$31 billion.
These are big moves by mighty fish in a relatively small pond. There are a couple of big producers left, namely Agrium and Potash Corp., but the takeout of Athabasca leaves just three Canadian-listed junior potash companies for investors to choose from: Potash One, Western Potash, and Encanto Potash. So, for potash bulls, where's the best investment opportunity? Well, Potash One is currently working up a mine, and, with a market capitalization of C$192 million, is rated accordingly. Western Potash is in the final stages of getting to grips with the size and nature of its deposit, and is valued at a more modest C$48 million. Encanto Potash is the furthest from development of the three, and, with a market capitalization of just C$35 million, perhaps offers the most long-term upside. All told, this is the company that still has the most value to add.
And it's not standing still. Encanto's been making a few waves of its own in recent weeks, following a hectic time at the Vancouver Roundup, and the release of new drill results on its lead Muskowekwan project. These showed a 3.6 metre intersection of 39.9% potassium chloride at a depth of 1,193.6 metres, and a 2.4 metre intersection of 40.4% at a depth of 1,204 metres. A third and deeper intersection, at 9.6% over 5.3 metres was less encouraging. But two out of three ain't bad, and was certainly reason enough to make Encanto chief executive Jim Walchuck sound cheerful when Minesite caught up with him for a chat on the phone this week.
The key to understanding what those grades and thicknesses mean is to take a look at what intersections other companies have reported, and how they've worked their resources up from their. Potash One has wider intersections, but lower grades, and still reckons it has a feasible project. Athabasca Potash, meanwhile, has a resource 4.55 metres thick, very similar to Encanto's and a grade slightly lower than Encanto's own. Given that Athabasca's take-out price works out at very roughly ten times the current Encanto valuation, and given that at this early stage the deposits controlled by the two companies look similar, it's no wonder that some in the market reckon that Encanto's shares might be due for a run shortly.
Certainly there won't be any shortage of news flow to support such a run, as the company is now fully into the swing of working up a maiden 43-101 resource, currently on schedule for release in September. The next big news will come as the results from a 3-D seismic survey are released in March, at which point resource modeling can begin in earnest. At some stage Encanto will require additional funds - between C$5 million and C$7 million on the next round, reckons Jim Walchuck - but given the buoyancy of the potash space at the moment, that shouldn't be too onerous a task.
In any case, Encanto has strong institutional support. It would be nice, though, if the company could give its shares a bit of a lift ahead of any raising. The way to do that, of course, would be for it to demonstrate that Muskowekwan holds a real and viable resource. So all eyes turn to the rotary truth machine and the seismic.
