* Deals would boost valuations in junior potash sector
* Indian, Chinese buyers appear to be interested
* Potash One, Athabasca seen attracting overseas interest
(In U.S. dollars unless noted)
By Euan Rocha
TORONTO, Oct 11 Early-stage Canadian potash
companies may have room to extend their healthy rally this
year, given the prospect of takeovers by established miners or
emerging market players hungry for supply.
But investors will need to cherry-pick those juniors that
are most willing and able to strike a deal with potential
partners or buyers.
Analysts see the companies with the most viable projects
attracting the first deals and securing the best terms.
"It's like going to a dance, if you don't partner up with
the pretty girls, then there might not be any pretty girls
left," said Wellington West analyst Robert Winslow.
Still, analysts said any concrete deal with one of the
juniors is likely to boost valuations across the group.
Small Canadian potash plays are typically overshadowed by
industry giants Potash Corp (POT.TO), Mosaic Co (MOS.N) and
Agrium Inc (AGU.TO). The big three producers of the crop
nutrient have plenty of reserves and argue that greenfield
mines are not economically viable at this time, as new mines
costs billions of dollars to build.
But those prohibitive development costs give smaller potash
explorers a strong incentive to seek alliances and engage in
deals that can produce a big payoff for investors.
These include deals with potash producers with aging mines,
such as Germany's K+S SDFG.DE, or with established miners
looking to enter the potash sector, such as BHP Billiton
(BHP.AX) or Vale (VALE5.SA).
Other possible buyers include customers in emerging
economies like India and China, who are looking to sidestep the
market dominance currently enjoyed by a small clutch of major
U.S. Awasthi the head of India's largest fertilizer
distributor, IFFCO, has said his company is looking at setting
up potash joint ventures overseas. [ID:nN23390880]
Two other Indian companies, MMTC (MMTC.BO) and Rashtriya
Chemicals & Fertilizers (RSTC.BO), have also been engaged in
talks with Athabasca Potash API.TO. [ID:nN07471037]
ON THE MARKET
Shares of Athabasca, which are trading around C$6.50, are
up 480 percent year-to-date, after it announced it was
exploring strategic alternatives, including the possible sale
of all or part of the company.
Despite the run-up, GMP Securities analyst Anoop Prihar
sees Athabasca's shares rising further and has boosted his
price target to C$8 from C$3.35.
But Winslow contends that shares of Potash One KCL.TO are
the ones most likely to outpace the rest of the pack.
"The reason we like Potash One more in terms of our rating
is that its CEO, Paul Matysek, is much more aggressive at
trying to find partners," said Winslow, noting that well known
mining promoter Robert Friedland is chairman of the company's
Moreover, Potash One is trading around C$2.35 well below
analysts' average price target of C$4.96. Its proposed Legacy
project is likely to be the first new potash mine in
Saskatchewan in decades. As a solution-style mine, Legacy would
entail lower capital expenses than Athabasca's flagship Burr
project, which is better suited to conventional shaft mining.
Though a conventional shaft mine is costlier to build its
operating costs are lower than that of a solution mine, which
uses water to dissolve the desired mineral from ore.
Bank of Montreal analyst Joel Jackson notes that although
the proposed Legacy project is not the cheapest in terms of
capital expenditures per tonne of annual production, it is less
costly than some mine expansions currently planned by Potash
Corp and Mosaic. [ID:nN07500323]
That said, Jackson still believes, "with capex estimates
for a new greenfield potash mine ranging from $600 to $1,500
per tonne, depending on mine plan and scale, financing still
remains the greatest impediment facing junior potash
Analysts expect that a deal for either Athabasca, or Potash
One is likely to boost the shares of other Canadian-listed
producers, such as Western Potash WPX.V, Allana Resources
AAA.V and MagIndustries Corp MAA.TO.
Western Potash is expected to have a resource estimate and
pre-feasibility study completed next year. While, Allana and
MagIndustries currently have preliminary agreements with
Chinese companies interested in developing assets that the two
Canadian companies own in the Congo and Ethiopia.
"I would say there is a good chance of a re-rating in the
sector, if any group gets a concrete offer tabled," said
(Reporting by Euan Rocha)