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BHP Announces $12 Billion Investment in Saskatchewan Potash Belt

BHP Billiton (NYSE:BHP) – the $180 billion global mining giant – is making a $12 billion investment in the Western Canadian potash basin, and the money inflow is likely to affect the stock prices of resource-rich potash juniors, like Western Potash (TSX.V:WPX) and Encanto (TSX.V:WPO).

Potash Prices have been on a roller-coaster ride the last five years, rising from $150 to almost $1,000 before settling back to the current price of $400. Farmers, who missed a year or two when prices were sky high, are now facing chronic soil nutrient deficits. They are forced to buy more potash now, or risk having sub-economic crop yields.

As cities spread and encroach on arable (farmable) land, farmers are forced to pump more and more nutrients into the soil.

Potash stocks appear to be entering a perfect storm, with a number of catalysts converging simultaneously to drive stock prices up.

"Our game is to really develop a resource basin for the long term," confirmed Graham Kerr, the head of BHP's Diamond and Specialty Products business, earlier this week.

Kerr noted that BHP invests in assets that are low-cost and have expandable resources, making a Saskatchewan potash project an ideal fit for the company's portfolio.

BHP has just released resource data related to Jansen -- its flagship Saskatchewan potash project. Jansen, which is expected to begin production of the fertilizer in 2015, has 3.37 billion tonnes of material contained 25.4 percent potassium oxide.

BHP plans to develop Jansen into the world's single largest potash mine with eight million tonnes of annual output. Part of BHP’s motivation may be to diversify out of Australia – where the government is planning a new tax on the mining industry.

''The Jansen project is a prime example of the array of opportunities BHP Billiton has to grow its portfolio outside Australia,'' said a BHP spokesman, ''Canada is a stable and supportive investment environment and the all-in tax rate for this project will be globally competitive for potash.'' Meanwhile, Western Potash (TSX.V:WPX) has just announced the receipt of an NI 43-101 compliant Mineral Resource Estimate for its Milestone property in southern Saskatchewan. This updated resource estimate significantly upgrades the Milestone potash resource, which consists of 41 million tonnes of Measured Resource (contained KCl), 133 million tonnes of Indicated Resource, and 560 million tonnes of Inferred Resource.

Is Western Potash a possible buy-out target? Yes. With the acquisition of Athabasca, BHP has signaled what kind of project they are looking for.

Encanto (TSX.V:EPO) is also on that potential buy-out list. Encanto is a well-run potash junior with resource grades that compare favourably to Athabasca. They have similar thickness and grade – while EPO has market cap of $23 million – about one tenth of the API valuation. So EPO has lot of share price upside as they build up their resource with more drilling and 3D seismic.

EPO’s first drill hole at its Muskowekwan potash property in Saskatchewan returned values of 25.2% K2O (39.9% KCl) over 3.6 metres in the Patience Lake potash bed, and 25.5% K2O (40.4% KCl) over 2.4 metres in the Belle Plaine potash bed. Drilling in the lower Esterhazy Member returned values of 5.3 metres of 12.4% K2O (19.6% KCl).

The size of Encanto’s land package is 36000 acres and the two beds combined are 6 m thick. That’s a potential mineable resource of about 137 M tonnes of K2O or 217 M tonnes of KCL. About $200 billion worth of potash.

Not surprisingly – given all this activity - a UBS analyst upgraded shares of POT from "Neutral" from "Buy" and increased the price target by $6 to $112 - implying stock gains of about 20% in the next year. Potash Corp shares rose 3% percent on the news.

But big trees don’t grow as fast as little trees. Keep your eye on Western and Encanto as the potash sector heats up again.

SOURCE: http://www.midasletter.com/news/100613_BHP-Announces-12-Billion-Dollar-Investment-in-Saskatchewan-potash-belt.php


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