Take A Close Look At Gensource Potash Corporation

What does “P” stand for? In the mining market it increasingly means politics and potential, but for grassroots opportunities, go no further than POTASH. The premier fertiliser mineral that makes plans grow, is in rising demand. Why? Much of the world’s people are undernourished, the head count is growing exponentially and better living standards are being sought. So more food and more fertiliser to grow it.

Potash, the hard rock mineral that carries the staple ingredients of plant growth, KCL, is the key. There is no shortage of it in the ground – like there is no shortage of any mineral. The politico-economics of getting it out, which is our interest as investors, include these:

• The bulk of resources lie at depth in Canada and Russia.
• The major importers include China, India and Brazil.

The price was for some years held artificially high by cartel action, like above $700 per tonne, against production costs below $200. This encouraged massive new projects to be planned. The potash price is now a more sober $300-320 and the wannabees hang like a dark cloud over the market. Or do they?

The world demand is about 65 million tonnes per year, growing at 3% annually. Just two of the mega projects partly built, Jansen in Canada and Sirius in the UK, could add 30mtpa to supply and seriously depress the market. We do not think either will see production. Why? They were planned at the $700 per tonne level and demand the massive capital cost that comes with deep mining. Meanwhile, smaller operations which fit the new price-demand profile are coming forward. Gensource is one such. Its obvious advantages are:

1. It is based in a safe political jurisdiction. Canada ranks No 2 in the world in terms of safe mining destinations.
2. It is close to infrastructure.
3. It has massive measured and indicated resources.

Above all these, it is using solution mining. This is the use of vertical and horizontal boreholes to pump the nutrient containing brines to the surface for treatment. This technique brings major economic benefits. The company calculates:

1. OPEX of $40 per tonne.
2. EBITA margins of 55%-60%.
3. Net profit back to minesite of $150 per tonne.
4. CAPEX of $240m including closing costs.

Marketing plans are innovative. For each production unit there will be a binding, 10-year offtake agreement with the client, direct to farmers, with no middlemen. The pricing is FOB minesite, so no transport risks.

The environment. What must be appreciated is that no excess salt tailings (NACL) are brought to surface, they stay in situ. Hence no brine ponds or ground water contamination. This feature has greatly assisted the permitting process.

Development. The initial project, known as Vanguard One, is a modular 250,000tpy unit in the heart of Canada’s potash belt in Saskatchewan. Commissioning is expected by Q4 2020. It is close to a major railway line, with only a short spurline required for connection. The target market is the massive Midwest farmland belt. Transport costs are of course critical to bulk products and Vanguard is well placed. The unit can be replicated not only in Canada, but in similar locations worldwide.

Finance. The assessed total of $274m will comprise senior debt (53%), mezzanine (16%) and common equity (24%) plus an overrun allowance of 7% (Total 100%).

Share price. The current share price of C$0.09 sits in the 52-week range of $0.08-0.16 and provides in our opinion, a sound entry point at this stage in the company’s development and ahead of further financing.

Please note that this is the personal assessment of David Hargreaves, a mining engineer, stockbroker and mining analyst.

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