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Potash One (KCL-TSX) and Potash North (PON-TSXV) 
A Dynamic Duo

Last summer when potash stocks were taking the market by storm, we followed two red hot emerging companies, Potash One and Potash North.

As fate would have it, these two companies have proposed a merger to become the largest prospective, financially sound, leader in the junior potash development market.

The benefits to shareholders on both sides are bullish.

Summary

On January 22, Potash One announced a business combination with Potash North. Each Potash North shareholder will receive 0.3125 common shares of Potash One for each common share of Potash North. The exchange ratio upon the announcement gave a 29% premium over PON's 20 day average price.

That's a nice pop right there but it gets better. You see from the Potash One perspective, they are moving forward on a feasibility study on their Legacy Project that has a resource of ~400 million tons of potash. By mid-2009 Potash One would have needed to complete a $15 million financing in order to facilitate this. But with the amalgamation, Potash North brings $30 million to the table to add to the $21 million Potash One has in the bank.

This means there should be no financial risk for Potash One to complete the final feasibility study by early 2010. Something competitors cannot brag about.

The New Potash One (KCL-TSX)

Potash Primer - One of the most important commodities on the planet.

"33 countries around the world face potential social unrest because of the acute hike in food and energy prices, there is no margin for survival for these countries" - The World Bank

Our planet is now facing a critical food shortage. The basic staples that feed the world - wheat, rice and corn are trending up in price and becoming scarce. The factors associated with this dilemma are multiple. Higher fuel costs, weather shocks, more meat consumption, and shifts to bio-fuel crops are some of the key reasons.

But the most glaring problem as we head into 2009 is the fact that food production is dropping. Farmers worldwide have been faced with reduced access to credit since the financial crisis last fall. This has delayed planting of crops and a subsequent delay in ordering potash. This in turn has put a tight squeeze on getting potash to the market in a timely fashion due to transportation limitations, thus compounding the food shortage further.

Because of the slowing orders, the world's leading producers like Potash Corp. of Saskatchewan have dialed back their production thus keeping the price of potash high.

Economic news this year is showing clear signs of a full blown recession as consumer spending is waning. Though consumers may reduce their purchases of luxury items, the demand for food will remain. And if you do the grocery shopping for your family you've seen how the cost of food has inflated over the last few months.

With agricultural inventories at 40 year lows and the food consumption growth rate at about 3%, food commodity prices are destined to increase and along with it, the price of potash.

In order to alleviate the world wide food shortage dilemma, more crop production is required and with that, the use of potash isn't an option, it's a necessity.

The Potash One Properties

The lead property is still going to be the Legacy Solution Project. It is situated adjacent to the largest potash solution mine in the world (Mosaic's Belle Plaine), in the richest potash basin in the world. Potash One also controls three exploration permits contiguous to the Legacy Project covering ~230,000 acres in areas amenable to solution mining. Vast exposure to this part of the basin has effectively blocking potential junior competitors from gaining the advantages of entering the solution mining market.

The latest technical report has estimated the following Indicated and Inferred Mineral Resource for the 97,400 Acre Legacy Project:

• Indicated Mineral Resource: 36.8 million tonnes of K2O
• Inferred Mineral Resource: 360.4 million tonnes of K2O

This is an excellent resource. To put these numbers in perspective, this project could possibly produce 2 million tons per year and operate for 200 years.

Taking Mosaic's lead, Potash One is building a "solution mine" which has been shown to be a faster and more economical way to enter production. This mining method involves dissolving potash with salty water. With this technology they potentially could be in production by 2012. Other conventional greenfield projects could take as long as 7-8 years utilizing traditional mining methods.

Eastern Saskatchewan

In eastern Saskatchewan two Potash North mining permits are located on some cherry ground located right in the heart of the world's largest reserves of potash and adjacent to the world's largest producer of potash.

These permits have two properties to the north of Mosaic's Esterhazy K1 and K2 underground mines - the world's largest producing potash facility just 20 kms away that produces 5.3 million tonnes per annum.

A couple of historic drill holes on the permitted ground do confirm the presence of potash. Though a couple of drill holes don't make a mine, here's what we do know about the geology of potash deposits in Saskatchewan:

"The potash deposits...are characterized by their remarkable consistency of grade and thickness over many tens of kilometers. It is therefore possible to characterize a deposit with relatively few drill holes, supplemented by sufficient seismic coverage to establish continuity between the holes."  - Canadian Institute of Mining and Metallurgy and Petroleum   

The Potash North permits give KCL shareholders exposure to conventional potash mining opportunities while Potash One shareholders have exposure to a developing solution mine.

Majors Stepping Into the Potash Industry

Blue chip mining companies are more than aware of the highly profitable potash market and we've seen a couple of significant deals go down over the last several months.

Last May BHP Billiton announced a buyout of Anglo Potash, another junior potash company in Saskatchewan, for $8.15 per share. Anglo's only asset was its 25% interest in a joint venture project with Billiton who controlled the other 75%. Anglo's 25% interest in the inferred, measured and indicated resource equates to 365 million tons. The sale price implies a $284M fully diluted aggregate transaction value for Anglo and a C$1.1B for the Prairie Potash JV, valuing the potash resources at about 78 cents per ton.

Given the same parameters, that would mean Potash One's 400 Mt resource estimate may be worth $309 million. Divided by their fully diluted market cap of nearly 72 million shares (post merger), and that could mean a valuation of $4.29 per share on the resources at Legacy alone. Plus, there is still the exploration upside on the Legacy AND the conventional assets from Potash North. 

More recently, Rio Tinto signed an agreement to sell its undeveloped potash assets, largely comprising the Potasio Rio Colorado project in Argentina and the Regina exploration asset in Canada. Vale, a Brazilian mining company is paying US $850 million for these potash assets or roughly CDN $1.02 billion.

6 months after a global credit meltdown, Potash assets are selling for even more, potentially giving Potash One even a higher valuation than the previous BHP transaction.

Conclusion

The proposed business combination between Potash One and Potash North looks like it will create a clear leader in the junior potash exploration market. They both have excellent liquidity which is very important for the big Agriculture funds.

With the proposed merger complete, the company will have $51 million in the bank, while moving the Legacy Project toward the final feasibility stage.  

SNC Lavalin was commissioned to complete a pre-feasibility study which should be complete sometime in Q2 2009 which should give a better feel for economics and a early base case NPV of the project. 

Aside from the Legacy Solution Project, the conventional potash permits have additional large blue sky potential to give ample growth for

Everyone knows my very bullish stance on Potash Corp, if you are looking to move into the junior space for Potash exposure - Potash One should probably be the only one considered.

For a detailed quote on Potash One (TSX: KCL), click here and for Potash North (TSX-V:PON), click here.