Western Potash (WPX-T) gained nearly 7% after publishing a positive feasibility study that showed the proposed Milestone potash solution mine near Regina, Sask., could produce 2.8 million tonnes of potassium chloride (KCl) a year for 40 years. But, while the project’s scope and timeline appear in line with the October 2011 prefeasibility study, the economics have dropped noticeably.
The study, completed by AMEC, indicates Milestone has an after-tax net present value (NPV) of $2.44 billion and 18.6% internal rate of return (IRR), based on a 10% discount rate. Despite being robust, it is considerably lower than last year’s $4.14-billion NPV and 22.7% IRR.
Payback has also increased from 5 years to 5.6 years.
The higher start-up costs and reduced long-term potash prices have likely affected the project’s returns, writes Salman Partners analyst Andrea Rubakovic in a note, adding the company attributed the drop in NPV mostly to more detailed modeling of taxes and royalties.
The feasibility study now assumes long-term commodity prices of US$450 per tonne for standard potash and US$470 per tonne for granular potash, compared to an average of US$511 per tonne previously. Milestone is expected to produce 80% granular and 20% standard potash.
Initial costs are estimated at $2.9 billion, including $550 million in contingency and escalation. Another $390 million that would be required to get the mine in full capacity has been deferred.
In comparison, the prefeasibility study predicted initial costs of $2.76 billion, including a $300-million allowance for a port facility. But the new start-up capital doesn’t include that allowance as a third-party is expected to provide a terminal, with the port use falling under transportation costs, notes Rubakovic. She explains some of the cost increase has been attributed to more expensive earth works and higher indirect costs.
The latest study forecasts operating expenditures (opex) of $62 per tonne, with total opex including port and transportation costs coming in at $121 per tonne, up 33% from last year. “The increase is largely due to a $59/t rail and port cost, which was previously accounted for in the port facility allowance in capital costs,” comments Rubakovic.
Construction is scheduled to start in 2013, upon financing and permitting approval, with first production expected in 2016. Ramp up to full production should take six years.
The Vancouver-based firm has also upgraded a portion of Milestone’s measured and indicated resources to reserves. The project now contains 137 million tonnes of KCl in reserves. It has another 52.5 million tonnes of KCl in measured and indicated.
The junior anticipates receiving an environmental assessment approval for Milestone in early 2013. After which the next catalyst should be securing a partner or off-take buyer.
“Our project is in an enviable, low-risk geopolitical and regulatory jurisdiction, which is a key advantage for developers that look for long-term investment predictability,” said Patricio Varas, the company’s president and CEO, in a release.
However, Rubakovic remains cautious of the project’s future given the high development costs.
“We continue to be skeptical of the project's final development; we view financing by a strategic investor/buyer (most likely one from Asia) to be the most likely source of funding for the construction of the project, but continue to view the project as unattractive to these parties due to the hefty $3.3-billion price tag, along with the risk of oversupply of potash projects in Saskatchewan,” she argues. Rubakovic maintains a price target of 40¢ on the stock and “sell” recommendation.
“However, with the feasibility complete, Milestone is one of the most advanced junior potash projects, and some parties may view WPX market capitalization as low relative to the cost to procure potash concessions and advance a project to feasibility,” notes BMO Capital Markets analyst Joel Jackson. He has a market perform (speculative) rating and 65¢ target on Western Potash.
Western Potash closed Dec. 6, the day the study was released, at 48.5¢, within a 52-week range of 41¢ to $1.42. It has a market cap of $87.9 million.
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