Potash Takeover Action Heats Up in Canada

Last week’s proposed $341 million buy-out of Athabasca Potash Inc. (TSX: API) by the world’s largest mining company, BHP Billiton Ltd. (NYSE: BHP), leaves only three publicly traded junior explorers remaining.

One of them, Potash One Inc. (TSX: KCL), is striving to develop its own mine, and the newest arrival on the scene, Encanto Potash Corp. (TSX.V: EPO), is still at an early stage of development. This leaves only Western Potash Corp. (TSX.V: WPX) as the next most likely buy-out candidate – now that it finally has a grasp on the actual size and potential of its flagship deposit.

To be more specific, the Vancouver-headquartered company has just announced a preliminary resource calculation for its emerging Milestone potash deposit. A total of 34 million tonnes of potash have been estimated in the ‘indicated category,’ along with a further 245 million tonnes in the more approximate ‘inferred category.’

These numbers were determined by an independent U.S. engineering firm, Agapito Associates, which next has the task of upgrading the deposit to a much more definitive ‘measured and indicated’ category.  This should allow the company to proceed with a preliminary economic assessment.

Around 80% of the deposit’s ‘in situ’ (mineable and non-mineable) size of 1.3 billion tonnes has been discounted by Agapito. This is due to the potential presence of “unknown geological anomalies” and because of tonnage that needs to remain in place to support the mine, and various logistics related to anticipated mineral losses during production.

Commenting on Western Potash’s announcement of its initial resource estimate at Milestone, potash analyst Robert Winslow of Toronto-based Wellington West Capital Markets Inc. says: “They have some very favorable things going for them and today’s news really makes them more attractive to a potential suitor.”

Meanwhile, BHP’s move to gobble up Athabasca Potash is an example of how badly it wants to muscle its way into Canada’s lucrative potash mining business. Athabasca’s Burr deposit contains 425 million tonnes of potash in the measured and indicated category.

In other developments in Saskatchewan that further underscore BHP’s resolve, the Australian powerhouse just announced a $240 million cash infusion into its Jansen project – which promises to become by far the world’s largest potash mine. It is scheduled to be commercialized in 2013 or 2014 and could produce up to eight million tonnes a year, making it about four times as prolific as most other major potash mines.

The mining giant is also rumored to be interested in buying out Canada’s largest potash producer – Potash Corp. of Saskatchewan (TSX: POT) (NYSE: POT). Even Bill Doyle, the CEO of the very profitable potash producer, is caught up in the speculation. He is recently quoted as saying: “We do think some of [BHP’s] recent public pronouncements have been designed to drive down the share prices of existing potash players to make a potential acquisition more attractive.”

But BHP is not the only new power player aiming to make a big splash in the potash mining business by way of key acquisitions. The world’s second largest mining company, Vale SA, announced a $3.8 billion deal in January to buy fertilizer and mining assets from Brazil’s agricultural trading giant Bunge Ltd.

Though it is also based in Brazil, Vale SA (NYSE: VALE) has a strategic foothold in Saskatchewan. This is where it is developing a ‘solution-extraction’ (cost efficient and relatively inexpensive to build) prospective potash mine-the-making near Regina.

The property actually borders Western Potash’s Milestone property. This is particularly encouraging for Western Potash, which believes that its own deposit exhibits similar geological features. Ones that are likely suitable for the realization of an energy-efficient and therefore cost-efficient solution-extraction mine.

The Milestone project is also located in close proximity to the largest solution-extraction potash mine in the world – Mosaic’s Belle Plaine mine. It has been in operation for over 40 years and is still going strong at around 2.8 million tonnes per annum.

So why have the world’s major mining companies become so enthusiastic about Canada’s potash exploration sector, especially lately? The fact is that they are now jostling for position to access rich potash reserves – against a backdrop of rising crop prices. Indeed, food staples are already starting to resume an across-the-board upward trend now that the global economic recovery is underway. This bodes especially well for potash prices for the foreseeable future.

Furthermore, potash-based fertilizer is crucial to realizing meaningful cost containment while boosting crop yields. The world is now waking up to its paramount role in food production. This is because various global government organizations, such as the United Nations, have begun to issue grim warnings about the urgent need to exponentially improve year-on-year crop yields.

With a surging expansion of the global population, the farming industry now faces the extraordinary challenge of feeding an additional 75-80 million mouths per year. Then there’s also the challenge of serving up to three billion people in emerging economies who now demand feed-intensive animal protein in their diets.

In fact, the world faces a permanent food crisis and global instability unless countries act now by working towards doubling agricultural output by 2050. This is the conclusion of a report that was released last year by government representatives of the Group of Eight nations.

The G8 report, entitled “The Global Challenge: to Reduce Food Emergency”, also warns of the global food production challenges posed by “pronounced climate changes,” leading to water shortages, as well as “higher input costs.”

Marc Davis has been a business journalist for many years, during which time he has specialized in the mining sector. He has also worked in television and in newsprint for major news organizations. Prior to his journalism career, he also worked in the stock market as a mining research analyst and as a floor trader. Marc also ran www.smallcapmedia for seven years, which is a news and commentary web site that covers junior mining stocks.

Disclaimer: Marc Davis indirectly holds a position in Western Potash Corp.