Passport Potash – Low Cost Potash Producer Potential

Siddharth (Sid) Rajeev heads research at Fundamental Research Corp. which provides coverage for over 250 companies. Fundamental currently has a buy rating on Passport Potash Inc. (TSXV:PPI) with a fair value price target of $0.81.

Potash Investing News: Sid, thank you for taking the time to speak with us this morning. Before we get into Passport, I wanted to ask, is the potash sector simply following the TSX venture market trend or is it being held back by other issues?

Sid Rajeev: Potash is one of the commodities we are strongly bullish on because its long term outlook is very strong. the investment rationale is very simple: developing countries are growing at a healthy pace, their diet is improving, and most importantly, the total arable land is decreasing, therefore demand for fertilizers will continue to increase.

Potash used to trade at about $800 per tonne in 2007-2008. Prices crashed to $300 after that, during the recession time. Then it picked up again, jumped over $500 per tonne. For the last few months, prices have dropped to $460 to $480 per tonne. Our long term forecast has been $425 per tonne. So we haven’t had to make any downgrades in the potash sector

A lot of analysts downgraded potash stocks especially because they were using much higher long term potash prices. That kind of downgrade also led to a negative sentiment on the potash sector in general.

PIN: So, you were accurate with your long-term price over the last little while. Do you expect the same volatility or do you think it’ll even out going forward?

SR: We expect quite a high volatility in the potash market, especially since the potash segment is an oligopoly. It’s controlled by a few major producers: Canada, Russia and Israel. The big consuming nations like India and China don’t have sufficient long term stable potash supply, so their buying prices fluctuate a lot as they are controlled by the producers. So we do expect price volatility but having said that it’s a good thing for advanced-stage potash players especially in North America. We think that Chinese and Indian consumers would be looking at acquiring or doing some kind of partnership or offtake agreements with advanced-stage potash projects in order to secure their potash supply for long term.

PIN: Makes sense. So Passport is exploring in the Holbrook Basin in Arizona. What are some of the factors that make this basin special?

SR: Holbrook Basin is known to contain a large amount of potash, but it is relatively under-explored compared to Saskatchewan. Saskatchewan is considered the Saudi Arabia of potash. Potash was discovered in Holbrook in the 1920s. In the 60s and 70s, exploration was quite aggressive. There are reports that the basin could contain up to 2.5 to 3 billion tonnes of potash. In terms of the geology, the Holbrook Basin has an advantage because it’s much shallower than Saskatchewan.

To put things in perspective, you would find potash below 500 meters in the Holbrook Basin but in Saskatchewan you are looking at much deeper, at more than 1,000 meters. So the extraction cost in the Holbrook Basin is going to be lower than Saskatchewan. Also they can do underground mining which has a recovery rate of anywhere from 65 percent to 80 percent compared to the solution mining techniques used in Saskatchewan which have a lower rate of 30 percent to 35 percent. The disadvantage is the grades. You’re going to see much lower grades in the Holbrook Basin of about 5 percent to 20% while in Saskatchewan you would see anywhere from 25 percent to 35 percent K₂O. The second disadvantage would be the tonnage. In Saskatchewan, you have huge massive projects which would carry about one billion tonnes of potash (KCl) but in Holbrook you’re going to see much smaller, less than 300 million tonnes.

PIN: Passport controls about 20 percent of the basin but they are working with some of the land holders. What are the developments there?

SR: There are two key players in the basin. There is a company called Prospect Global headquartered in US and the second one is Passport Potash. Passport has been acquiring a massive land package in the area. Recently they signed an agreement with a Hopi Tribe. This means that Passport can include that land’s potential resources in Passport’s upcoming PEA( Preliminary Economic Assessment). Another development is that they are also acquiring some land on the West of the property called the Fitzgerald Ranch. The acquisition price is about $15 million. And the third development I would say is that they signed an exploration agreement with a private company there called HNZ Potash. Passport will give some interest on the property to HNZ and they are going to jointly develop that piece of land.

PIN: There is a dispute between Passport and North American Potash Developments regarding the joint venture agreement between these two companies. How did this arise and what’s the current status?

SR: Few days ago Passport put out a press release that everything is now solved. They did come up with an understanding with North American Potash Developments. Basically, Passport will have to pay $3 million to $4 million to North American Potash Developments and in return they get the complete ownership on the property with no royalties. So in the end, on that issue everything is cleared up which is good news for Passport.

PIN: That’s great. Recently, Passport’s neighbor Prospect Global Resources signed a two-billion-dollar offtake agreement with Chinese company Szechuan Chemical Industry Holding Group. What message should this send to Passport shareholders?

SR: The fact that a Chinese group has signed an agreement for two billion dollars is very significant for Passport. After the announcement of this offtake agreement, Prospect Global announced a financing of about $100 million from Apollo Management in the form of a convertible note. This financing shows a huge vote of confidence by third parties on the Holbrook Basin.

PIN: So that’s in line with what you were saying before about China and India going out and finding sources of potash.

SR: Exactly.

PIN: What are the things that make Passport stand out for you when you’re looking at potash exploration companies?

SR: As I mentioned earlier, we have a bullish outlook on advanced stage potash projects in the US and Canada. The key thing in the potash segment is that projects are highly capital intensive. The exit strategy for most is to either sell the project or do a partnership with a major company that can provide enough financing. For investors who get in before that event, it’s a good way to get exposed to a big development like a merger or a JV partnership. Another factor is Passport’s shallow deposit, which means the capital cost and operating cost is lower than Saskatchewan-based projects. We can combine all that with the fact that it has identified a decent-size resource and is coming up with a Preliminary Economic Assessment in early next year. I think these three aspects make Passport an attractive junior potash investment.

PIN: From a capex perspective, has Prospect Global figured out what their capex is likely to be?

SR: Yes. Prospect is well ahead of Passport. Their capital cost is between $1.3 and $1.5 billion; compared toany Saskatchewan project where you would see anywhere from $2.5 to $3.5 billion. The Jansen project for example, could be one of the biggest potash projects in the world. That has a capex of $12+ billion, so relative to the other potash projects out there, Holbrook Basin projects are smaller but the capital cost and the operating cost can be lower.

PIN: But still, way too big for a junior exploration company.

SR: It is. So, Passport is going to have to come up with some kind of financing strategy again either a merger or a partnership. They will need that because without that they will not be able to progress these projects. It’s not like small gold projects or copper projects which aren’t as capital intensive, for potash you do have to find a strong partner.

PIN: Passport has some milestones coming up that might be catalyst for the stock price. What do you see the company announcing by the end of the year?

SR: They have two things that we are closely monitoring. The company is currently working on a $12.5M financing.. And the next the most important one is the scoping study that’s going to come out early next year. It’s going to be very crucial for the company. It will be interesting to see their operating costs, capital costs and the economics of the project. A merger candidate or a JV partner will be closely looking at the economics of the project before they would make a move on the project.

PIN: For investors who want to read your reports on Passport, what’s the best way for them to do this?

SR: Our reports can be accessed through subscription. Investors can go to our website at www.researchfrc.com. Subscribers will have access to all our reports on the over 250 companies that we cover.

PIN: Okay. Perfect. Thank you very much Sid.

*FRC provides fee based coverage to PPI.