Palisade Research - Thu, Jun 1, 2017

Gensource Confirms The Future Of Potash Production With One Feasibility Study: Gensource Potash (V.GSP; AGCCF)

computer illustration of potash processing plant

Gensource Potash's feasibility study (FS) was largely in line with its preliminary economic assessments (PEA), validating the robust economics of Vanguard 1.

The team erred on the side of prudence in the new study, increasing capital expenditures from US$190 million to US$210 million, while also incorporating a 25% contingency.

table showing financial performance at various potash prices

Because of its joint venture with Essel Group ME (EGME), Gensource will now be carried to production and own 30% of Vanguard 1.

However, the market still is not giving any value to the multiple Vanguards on Gensource's prolific acreage package. We still estimate there are 6 Vanguard clones, and Gensource's next steps will be to prove this.

With the FS declared, it will not take a lot of work to get there. The geology remains the same, but still needs to be confirmed with some 2D seismic and a couple of wells.

Is Gensource an acquisition target? We believe so.

The operating costs make Vanguard economic in even the harshest pricing environments. Right now, the $US39.54/t places Vanguard in lowest of the first quartile in costs, and can be lowered even more as Gensource adds more Vanguard clones to the mix. It takes the same number of labourers to run two projects as it does to run one, and this can potentially cut costs in half.

Will Gensource sell itself now? No.

If it did, it would literally be giving away hundreds of millions of dollars for free. Gensource now has to prove it does indeed have multiple Vanguards, and is currently raising the money to do so.

Gensource has completely disrupted the archaic potash industry, and will also revolutionize the business model. Because of Vanguard's low initial capex, operational leverage, and low operating costs, Gensource can now partner with end-users and offer them the ultimate price hedge, they can own their own resource.

Now let's take this one step further. If Gensource can do this in Saskatchewan, nothing is stopping them from moving onto other potash-rich areas where its extraction method is amenable.

The company is actively raising C$6 million via hard and flow-through dollars at a price of 18 cents and 20 cents, respectively. The proceeds will go straight into the ground to prove the multi-Vanguard theory, and to validate Gensource remains the most undervalued potash company in today's market.

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.

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