Western Potash up on positive Milestone feasibility

Western Potash shares (WPX-T) gained nearly 7% after the company published a positive feasibility study showing its proposed Milestone potash solution mine near Regina, Sask., could produce 2.8 million tonnes of potassium chloride (KCl) a year for 40 years. But while the project’s scope and timeline appear in-line with an October 2011 prefeasibility study, the economics have dropped.

The study, prepared by AMEC, indicates that Milestone has an after-tax net present value (NPV) of $2.44 billion and an 18.6% internal rate of return (IRR), based on a 10% discount rate. Despite being robust, it is considerably lower than last year’s $4.14-billion NPV and 22.7% IRR.

Payback has also nudged up to 5.6 years, from five years.

Higher projected start-up costs and reduced long-term potash prices have likely affected the project’s returns, Salman Partners analyst Andrea Rubakovic writes in a note, adding that the company attributed the reduced NPV to more detailed tax and royalty modelling.

The feasibility study assumes long-term commodity prices of US$450 per tonne for standard potash and US$470 per tonne for granular potash, compared with a US$511-per-tonne average previously. Milestone is expected to produce 80% granular and 20% standard potash.

Initial costs are estimated at $2.9 billion, including $550 million in contingency and escalation. Another $390 million, required to get the mine in full capacity, has been deferred.   

The prefeasibility study had predicted initial costs of $2.76 billion, including a $300-million allowance for a port facility. But the new start-up capital doesn’t contain that allowance, as a third-party is expected to provide a terminal, with the port use falling under transportation costs, Rubakovic notes. She explains that some of the cost hikes have been attributed to more expensive earthworks and higher indirect costs.

The study forecasts operating expenditures (opex) of $62 per tonne, with total opex — including port and transportation costs — coming in at $121 per tonne, up 33% from last year. “The increase is largely due to a $59-per-tonne rail and port cost, which was previously accounted for in the port facility allowance in capital costs,” Rubakovic comments.

Construction is scheduled to start in 2013 after financing and permitting approval, with first production expected in 2016. Ramp-up to full production would take six years.

The Vancouver-based firm has upgraded a portion of Milestone’s measured and indicated resources to reserves. The project now boasts 137 million tonnes of KCl in reserves, plus 52.5 million tonnes of KCl in measured and indicated.

The junior anticipates receiving an environmental assessment approval for Milestone in early 2013. The next catalyst would be securing a partner or offtake buyer.

“Our project is in an enviable, low-risk geopolitical and regulatory jurisdiction, which is an advantage for developers that look for long-term investment predictability,” Patricio Varas, the company’s president and CEO, says in a release.

But Rubakovic remains cautious about the project’s future, given the high development costs.

“We continue to be skeptical of the project’s final development. We view financing by a strategic investor or buyer — most likely one from Asia — to be the most likely source of funding for the construction of the project, but view the project as unattractive to these parties due to the hefty $3.3-billion price tag, along with the risk of oversupply of potash projects in Saskatchewan,” she argues. Rubakovic maintains a price target of 40¢ on the stock and a “sell” recommendation.

“However, with the feasibility complete, Milestone is one of the most advanced junior potash projects, and some parties may view Western Potash’s market capitalization as low, relative to the cost to procure potash concessions and advance a project to feasibility,” BMO Capital Markets analyst Joel Jackson comments. He has a “speculative market perform” rating and 65¢ target on Western Potash.

The firm closed Dec. 6 — the day the study was released — at 48.5¢, within a 52-week range of 41¢­ to $1.42. It has an $87.9-million market capitalization.