Western Potash (WPX-T) has lined up $32 million for its Milestone potash deposit in Saskatchewan, giving it some breathing room to secure more ample funds to advance its hefty $3.3-billion project.
On June 2, the junior said CBCHC, a joint-venture between ChinaBlue Chemical — 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. That 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 offtake agreement, where it will purchase the lesser of the two: 30% of annual production or 1 million tonnes of potash a year. That offtake agreement will be automatically renewed for five-year intervals until either party chooses to cancel the extension.
Overall, analysts view the $32-million cash injection positively but remain cautious about Western’s ability to build the capital intensive $3.3-billion project. Milestone is estimated to churn out 2.8 million tonnes of potassium chloride a year for 40 years, with first production slated for 2016.
“While we are clearly encouraged by this latest strategic development, we caution that this investment, on a standalone basis, does little to address WPX’s largest challenge: project financing,” writes Raymond James analyst Steve Hanson in a note to clients.
He adds the investment covers roughly 1% of the total capital requirement for Milestone, noting “a cavernous financing gap still needs to be addressed.” Hanson has reiterated a market perform rating and 75¢ target price.
BMO Nesbitt Burns analyst Joel Jackson told clients that despite the new found cash, he believes the probability of Western building the project remains low, suggesting the investment was largely “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 essentially meaningless when it comes to actually building the mine,” he explains in an email.
Jackson assumes the project would cost over $4 billion to construct 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 writes.
Jackson points out 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 roughly $1 million in cash.
In January this year, India’s Gujarat State Fertilizers & Chemicals Ltd. dropped $45 million on Karnalyte’s Wynyard project in Saskatchewan for a 19.98% stake in the junior and a 20-year offtake of 350,000 to 600,000 t/y, depending on the mine’s size, Jackson writes.
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 offtake 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 continues to prefer Karnalyte out of the Saskatchewan potash juniors because of Wynyard’s “relatively low” start-up cost of $600 million.
“We continue to 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 the junior ended at 71¢ a share and since then it lost over 23% to close June 4 at 57¢.
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