Palisade Research - Wed, Nov 16, 2016

How One Small Company Will Revolutionize A Whole Industry

picture of a plant breaking through pavement

Potash is normally a sleepy industry, especially after eight years of declining prices and delayed and cancelled projects. However, the last half of 2016 proved to be extraordinary, highlighted by several mega deals that look to finally re-spark the fertilizer sector.

First was the merger of industry heavyweights Potash Corporation and Agrium Inc., creating a US$32 billion dollar agricultural giant. The union sees the combination of Potash Corp's upstream, with Agrium's extensive network of retail outlets, also creating the number one and number two producer of potash nitrogen fertilizer, respectively.

Second is the possible divestment of Vale's fertilizer unit to the Mosaic Company, the world's largest producer of concentrated phosphate. This is the second time Mosaic has made a bid, valued at ~US$3 billion, but was previously rejected. Vale is the world's largest iron ore producer and is looking to reduce its debt-laden books by $10 billion by next year.

Third, involves another iron ore tycoon and Australia's richest woman, Gina Rinehart. Her company, Hancock Prospecting, announced in October that it will be investing ~US$300 million in Sirius Minerals' North Yorkshire polyhalite project, the United Kingdom's biggest potash mine.

All these proposed deals come as the fertilizer sector is mired in a deep slump, with Potash Corp. reporting an average realized price of $154/t, compared to $900/t at the peak in 2008. The combination of Potash Corp and Agrium will lead to a better control of fertilizer output; however will lead to mine closures as companies continue cut costs and production. In fact, Potash Corp. has already shuttered its brand new mine in New Brunswick, while Mosaic has halted production at its Colonsay mine in Saskatchewan.

While Vale is eagerly looking to reduce its debt, the recent uptick in iron ore prices may put this deal on hold once again. A 50% increase in iron ore prices have led to earnings the highest in two years for Vale, and the company has stated it will now proceed with more caution when deciding to sell its assets. The deal structure between Vale and Mosaic has not been defined, and the market awaits further details.

Lastly, Gina Rinehart's investment will fall flat. The project's price tag is US$2.9 billion plus an additional US$207 million in post-capital financing. In addition to the mine sitting on protected moorland, the actual product the mine will be producing is inferior to similar products and will be sold at a discount. In fact, the product is brand new and the market for it will be built from scratch. Sirius plans to make up for this by big tonnage, as the operating costs will be very low. The trade-off will be up to the buyer, who will need to account for moving and application costs.

With all being said, the above deals appear, in fact, to be more sizzle than steak. The sector is still scrambling to survive, and still clings to archaic, expensive, and environmentally-unfriendly methods. We maintain that the beneficiary of the struggling potash industry will be Gensource Potash (TSXV:GSP), whose selective dissolution mining method and unique business model addresses all the negative characteristics of current potash mining sector.

PEA potash mining table
(Source: Corporate Presentation)

Gensource's Vanguard project will cost US$190 million, a far cry from the $2-3 billion price tag potash mines are known for. More importantly, the mining method does not leave piles of salt tailings on the surface or require large containment structures. The salt is left underground, making the method the safest the safest for the environment.

Since we last wrote on Gensource, the company has maintained its torrid pace. First, it appointed Dwayne Dahl to the board of directors. Mr. Dahl is the former CFO of Canpotex, the potash marketing and logistics export company formed by the Saskatchewan potash producers. This is significant news because it puts Gensource in the spotlight for all the major players, while giving the company an incredible endorsement by one of the most powerful men in the potash sector. Please listen to our interview with him here.

Second, Gensource has firmed up its offtake agreement with Yancoal Canada, a wholly-owned subsidiary of Yanzhou Coal, to pre-sell 100% of the initial scoped potash production. The take-or-pay C$500 million agreement is for 250,000 t/a from GSP's first production facility and is for 5 years with options to extend. Yanzhou Coal is a US$6.8 billion company, giving Gensource a credit-worthy partner and an offtake to bank come time for construction financing.

Third, Gensource has begun its feasibility study to confirm both the technical aspects of the project and the financial performance of the project as defined in the PEA, including an after-tax NPV8 of C$213 million and an IRR of 16.9%. Gensource trades at a market cap of C$15.7 million and is the only potash company in our portfolio. In even the worst of potash markets, the management team has performed and will continue to do until production. The feasibility is slated to be completed in Q1 2017, and the company is concurrently working on the EA and the capex financing plan. Gensouce Potash should be the one and only potash name in any resource speculator's portfolio.

Palisade Global Investments Limited holds shares of Gensource Potash. We receive either monetary or securities compensation for our services. We stand to benefit from any volume this write-up may generate. The information contained in such write-ups is not intended as individual investment advice and is not designed to meet your personal financial situation. Information contained in this report is obtained from sources we believe to be reliable, but its accuracy cannot be guaranteed. The opinions expressed in this report are those of Palisade Global Investments and are subject to change without notice. The information in this report may become outdated and there is no obligation to update any such information. Do your own due diligence. publishes interesting contributor articles in addition to its own content. We have not verified any of the above details.

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