Western and Allana lead a potash recovery in May
ProEdgeWire Potash and Phosphate Month in Review for May 2013: In May the ProEdgeWire Potash and phosphate Index rose 4.97%; Allana Potash (TSX: AAA | OTCQX: ALLRF) which rose 34.94% and Magna Resources (CNSX: MNA) which rose 30% were the biggest gainers – the latter owing to the likelihood of receiving federal drill permits this summer. However, one of the biggest stories in the junior potash sector was announced after the end of the month as Canada’s Western Potash (‘Western’, TSXT: WPX) which is developing the Milestone Project in Saskatchewan. During May, there was growing speculation about Western’s search for a strategic partnership in China or India, which led the stock to rise some 25% in the latter half of May, hitting CAD$ 0.75/share. Western Potash had until very recently languished around its 52-week low of about CAD$ 0.40/share even though by April the feasibility study had been completed and the government had granted the environmental permits.
The costs of development remains the issue, which at some USD$ 3 billion represented a rather tall funding hurdle. A Chinese company, China Blue Chemical (China Blue), which held talks with Western in the recent past, has stepped up to help it reach the production stage. On Sunday, China Blue Holdings and Benewood Holdings (China Blue is a subsidiary of China National Offshore Oil Corporation, while Benewood is a wholly-owned subsidiary of Hong Kong’s GUOXIN International Investment Corporation Ltd.) made a strategic investment of approximately CAD$ 31 million at CAD$ 0.71/share or about 20% of the Company. The main advantage for Western is that it gets crucial access to project financing and access to marketing channels for future potash sales – beyond the boundaries of CANPOTEX Cartel (representing Potash Corp, Mosaic and Agrium).
The Chinese partners also have experience in bringing large projects to completion. China has shown considerable interest in the North American agricultural resource sector in the past weeks. Last week, a Chinese meat processor, Shuanghui International, made a USD$ 4.5 billion bid for Smithfield Foods. The other big story in potash for the month of May belongs to Allana, which recorded a long overdue share performance, which reflects its completion of significant milestones. In mid-April Allana reached a 52 week low point, reflecting the general trend in commodities. Since then, however, the stock rose more than 60%, and reaching a peak of CAD$ 0.64/share in the third week of May. The recovery was initially slow despite the fact that the company announced, among other things, that it is in talks about loans and / or purchase agreements for the financing of its project in the Danakhil area of Ethiopia. However, that announcement merely got the stock to stabilize around the CAD$ 0.40 mark. Allana’s stock leapt only after it announced that the Ethiopian government had approved the environmental study for the Danakhil project leaving it but one step away from obtaining the mining license.
The share price recovery was matched by a high trading volume and by news that Paradigm Capital analysts identified Allana as one of the cheapest to build (USD$ 642 million) and operate (having the lowest CAPEX) in the potash industry at less than USD$ 100/ton (to port). Finally, in May, Potash Corp (NYSE: POT) announced that it expects rising prices for potash fertilizers in the coming months. CEO Bill Doyle has predicted a spot price of $ 470/ton in Southeast Asia for the third quarter of 2013 and about USD$ 450/ton in Brazil, one of the most prolific potash markets today. In the second half of 2012, China and India put pressure on potash prices in the world markets, delaying their contracts until December and early January. However, given the current price level and the generally good harvests of 2013, demand for potash fertilizers should grow in the latter part of the year, even if the costs of bringing a mine project from exploration to production will remain very high.
Get our daily investorintel update