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M&A moves could extend junior potash play rally
Sun Oct 11, 2009 10:48am EDT

http://ca.reuters.com/article/businessNews/idCATRE59A19C20091011?sp=true

By Euan Rocha

TORONTO (Reuters) - 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: Quote), Mosaic Co (MOS.N: Quote) and Agrium Inc (AGU.TO: Quote). 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: Quote), or with established miners looking to enter the potash sector, such as BHP Billiton (BHP.AX: Quote) or Vale (VALE5.SA: Quote).

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 potash producers.

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.

Two other Indian companies, MMTC (MMTC.BO: Quote) and Rashtriya Chemicals & Fertilizers (RSTC.BO: Quote), have also been engaged in talks with Athabasca Potash (API.TO: Quote).

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: Quote) 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 board.

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.

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 developments."

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: Quote), Allana Resources (AAA.V: Quote) and MagIndustries Corp (MAA.TO: Quote).

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 Winslow.

($1=$1.04 Canadian)

(Reporting by Euan Rocha)