Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
During the past two months, several new developments occurred with the two main participants in the race for potash exploration in the Holbrook basin. These events include capital raising, new permitting and land deals, and signing of contracts to sell some of the potash that will be mined from the Holbrook basin. The only two public companies actively exploring for potash in this region, Prospect Global Resources (PGRX) and Passport Potash (PPI: CN), are continuing to invest capital, time, and effort with assistance from public and private organizations. All this signifies that the Holbrook basin potash deposits should be taken seriously. Despite the lack of a larger mining company exploring this region, it is likely that, once the minor exploration companies are near production, the majors will become more involved in the Holbrook basin.
New Drilling Permitting and Land Deals
During the past two months, Prospect Global filed 10 drilling permits with Arizona Oil and Gas Conservation Commission, all on private lands, while Passport Potash filed one permit related to the Twin Butte ranch and 8 permits to their joint exploration with the Hopi tribe. In fact, on October 15, 2012, Passport Potash signed a letter of intent for joint potash exploration on Hopi’s land. The letter of intent was followed by a formal agreement that Passport Potash and the Hopi tribe entered on November 13, 2012. The importance of this agreement is that the Hopi land is checker-boarded with some of Passport Potash land and the agreement for joint exploration allows for a more efficient mining as well as better yield.
In addition to formalizing its agreement with the Hopi tribe, Passport Potash also renegotiated the terms for its Fitzgerald Property and settled a dispute with North American Potash Developments over the terms of a land purchase. The settlement with North American Potash Developments is important because it avoids a potentially expensive and time consuming trial. It also improves Passport Potash image as a reliable land buyer. In the case of the Fitzgerald Property renegotiation, it extends the closing date of the sale, giving Passport Potash more financial flexibility.
Capital Flow into the Holbrook Basin
On October 26, 2012, Prospect Global announced that it has entered into an exclusivity agreement with Apollo Global Management, a prominent New York City investment company. This is the first vote of confidence, in the Holbrook basin’s potash potential, by a large institutional money manager. Under the agreement, Prospect Global will receive a $100 million investment in return for newly issued second lien 10% convertible notes. The deal is subject, among other requirements, to the successful completion of a bankable feasibility study, expected in the first six months of 2013. In addition, the agreement gives Apollo an option to purchase an additional 16.7 million shares of Prospect Global common stock at a price of $3 per share or an additional $50.1 million.
In addition, on October 26, 2012, Prospect Global announced that it would offer 30 million shares for purchase with a 30-day option to purchase an additional 4.5 million shares. Following the announcement, on November 14, 2012, Prospect Global sold 15 million shares at $1.75 per share for net proceeds of an additional $24.3 million. Importantly, the investment banks helping with this capital raise include such well-known names as Dahlman Rose & Co., Macquarie Capital, Roth Capital Partners, and Sterne, Agee, & Leach.
Perhaps the largest vote of confidence, which should have a long-term halo effect on the entire Holbrook basin, is the agreement that Prospect Global signed with Sichuan Chemical on October 22, 2012 for sale of potash. Under the deal, Prospect Global will sell, over a period of 10 years, 500,000 metric tons of potash per year or 25% of future mine output per year (up to 1,000,000 metric tones). At a price per metric ton of $475, this will generate over $2 billion during the life of the contract. Prospect Global expects to start production in late 2015 to early 2016. Its stock price rose by 14.6% after the deal announcement.
The other public company exploring for potash in Arizona’s Holbrook Basin, Passport Potash, is also able to attract significant capital for its future potash exploration and mining activities there. On November 15, 2012, a private investor purchased, through a private placement, 69.44 million units at a price of $0.18 per unit for a total consideration of $12.5 million. A unit is the equivalent of one share and the units carry the option to purchase (two units for one share) 34.72 million shares at $0.25 per share for a period of five years. This present an opportunity for an additional $8.7 million of capital inflow to the company.
An important step to attracting additional capital is a reverse split that Passport Potash recently announced through an SEC filing. On November 23, 2012, Passport Potash will hold Annual General and Special shareholder meetings where, among other issues, a proposal for reverse split set at 1:10 will be voted upon. If approved, this will allow Passport Potash to reduce its outstanding shares from about 172,751,863 to 17,275,186. At the same time its share price will increase by ten times. A higher share price allows a company to list its shares on the NASDAQ and also to attract institutional investors who have restrictions on the minimum price at which they can purchase common stock.
The Near Future
In the near future, Passport Potash should be able to complete a preliminary economic assessment that will allow the company to raise additional capital and perform a banking feasibility study. Progress Global already has a preliminary economic assessment and, compared to Passport Potash, is ahead by a few months. Both companies are expected to start production by the end of 2016. Building a potash mine takes a few years and a minimum of $4 billion in capital. The good news is that the climate in Arizona allows for a year-round construction and mining activities and the local government there is mine friendly.
Conclusion
The latest developments discussed here are important milestones for both Progress Global and Passport Potash as well as for all shareholders in the potash deposits of Arizona’s Holbrook basin. Investors should be comforted by both the land deals and capital infusions surrounding Progress Global and Passport Potash. While these two companies remain exploratory in nature and highly risky (with high return potential) investments, it is likely that mining of potash in the Holbrook basin will soon become a reality.
