Western gets $32M for Milestone from Chinese firms

Western Potash (WPX-T) has lined up $32 million to develop its Milestone potash deposit in Saskatchewan, giving it some breathing room to secure more funds to advance its $3.3-billion project.

On June 2, CBCHC, a joint-venture between China BlueChemical — a fertilizer producer and subsidiary of China’s oil and gas producer CNOOC — and Benewood Holdings — a subsidiary of investment firm Guoxin International Investment — agreed to buy 45 million newly issued shares priced at 71¢ apiece for $32 million. This ­represents a 15% premium over the 20-day, volume-weighted moving average.

The private placement gives the Chinese joint venture a 19.9% stake in Western and a seat on the junior’s board. The funding is expected to close on June 14, 2013.

As part of the investment, CBCHC signed a 20-year off-take agreement where it will purchase the lesser of either 30% of annual production, or 1 million tonnes of potash per year. The off-take agreement will be renewed for five-year intervals until either party cancels the extension.  

Analysts view the $32-million cash injection positively, but remain cautious about Western’s ability to build the capital-intensive project. Milestone is estimated to be capable of churning out 2.8 million tonnes potassium chloride annually for 40 years, with first production in 2016.  

“While we are clearly encouraged by this latest strategic development, we caution that this investment, on a stand-alone basis, does little to address WPX’s largest challenge: project financing,” says Raymond James analyst Steven Hansen.

He adds the investment covers 1% of the total capital requirement for Milestone, noting “a cavernous financing gap still needs to be addressed.” Hanson reiterates a “market perform rating” and a 75¢ target price.

BMO Nesbitt Burns analyst Joel Jackson says that the probability of Western building the project remains low despite the new-found cash, suggesting the investment was “politically motivated.”

“It’s a nice check box for certain Chinese bodies to indicate there is an investment in a Canadian potash project, even if that investment is meaningless when it comes to actually building the mine,” he explains in an email.   

Jackson assumes the project would cost over $4 billion to build and would come on stream in 2018, two years later than expected.

“In the end, WPX is $32 million closer to a likely $4-billion-plus price tag, which is not much closer,” he says.

Jackson points out that compared to the strategic investments made in potash juniors Karnalyte Resources (KRN-T) and IC Potash (ICP-T), Western “had to give up more for less for its investment, likely owing to its tight financial position.” The junior exited the first quarter with $1 million in cash.

This January, India’s Gujarat State Fertilizer & Chemicals Ltd. dropped $45 million on Karnalyte’s Wynyard potash-magnesium project in Saskatchewan for a 19.98% stake in the junior and a 20-year off-take of 350,000 to 600,000 tonnes per year, depending on the mine’s size, Jackson says.

Last March, Norwegian-based chemical company Yara International dished out $40 million for 19.9% of IC’s Ochoa sulphate of potash project in New Mexico and a 15-year off-take for 30% of the mine’s output.

Regardless, Jackson bumped his 45¢ target to 55¢ and maintained a “market perform” rating.

Echoing financial concerns for Western, Salman Partners analyst Andrea Rubakovic says she prefers Karnalyte out of the Saskatchewan potash juniors because of Wynyard’s “relatively low” $600-million start-up cost.

“We believe that in the current financing environment only the best quality potash assets, of those with a unique appeal to strategic investors, have the potential of being financed through to production,” she writes. Rubakovic has a 40¢ target and recommends a “sell” on Western.

The last trading day before the financing news broke Western ended at 71¢ a share. Since then it has lost over 23% to close June 4 at 57¢.