The Big Australian & the
Brazil Consortium
By Richard (Rick) Mills
February 16, 2010
As a general rule, the most successful man in life is the man who has the
best information
In the spring of 1869 a German Chemist named Charles Rasp immigrated to
Australia for his health. Unable to find work in his chosen trade
Charles learned to ride a horse and began wrangling sheep. One day, while
out riding his horse at Broken Hill, he discovered mineralised rock.
He took out a mining lease, punched holes in the ground and eventually
found rich veins of silver. The Broken Hill Proprietary Company - BHP -
was incorporated in 1885 while mining silver and lead at Broken Hill in
western New South Wales.
Billiton was a mining company that got its start in September 1860 when
the articles of association were approved by a meeting of shareholders in
the Groot Keizerhof Hotel in The Hague, Netherlands. Shortly
afterwards the company acquired the mineral rights to the tin-rich
islands of Banka and Billiton off the eastern coast of Sumatra.
BHP Billiton - also known by the nickname "the Big Australian"
- is the world's largest mining company. It was created in 2001 by the
merger of Australia's Broken Hill Proprietary Company and Anglo-Dutch
Billiton. Today BHP produces - oil, natural gas, bauxite, aluminum,
copper, silver, lead, zinc, uranium, diamonds, coal, titanium, well, you
get the idea, they're miners, they pull "stuff" out of the
ground and sell it.
Last week BHP paid $341 million, C$8.35/share, to acquire Saskatoon's
Athabasca Potash (TSX: API). This acquisition will give BHP Athabasca's
Burr Project, which is located next to BHP's Jansen Project to which the
company just committed $240 million. BHP likes big stories, the unfolding
potash story is one of the biggest and in this author's opinion it can
only get bigger.
"We cannot rule out further acquisitions of potash juniors: With
over half a billion dollars committed to potash within the past week,
it's clear that BHP Billiton are favourable towards the commodity."
Macquarie analyst Sam Catalano
Vale S.A. - formerly known as Companhia Vale do Rio Doce (CVRD) - of
Brazil is the second largest mining company in the world. It was founded
by the Brazilian Federal Government in June 1942. The company was
privatized in 1997 when the Brazil Consortium bought just over 40% of the
Federal Government's stock.
Even though Vale has operations in the energy and logistics sectors both
sectors combined contribute less than ten percent to Vales total
revenues. Vale is a miner and controls the Brazilian iron ore industry
owning all Brazilian iron ore exporters.
In recent years, in an attempt to diversify its operations, Vale has made
a string of purchases getting into copper, kaolin, nickel and coal. In
October 2006 Vale bought Canada's second largest mining company, Inco,
for $18.9 billion. Vale also produces manganese, ferroalloys, bauxite,
potash (Sergipe mine in Brazil), alumina and aluminum.
Lately Vale S.A. has moved into the fertilizer business in a big way:
In January of 2009 Vale bought Rio Tinto's potash assets in Argentina and
Saskatchewan Canada for $850 million US.
In January 2010 Vale announced it will acquire all the shares of Bunge
Participacoes e Investimentos S.A. (BPI). Vale will pay $1.65 billion US
for BPI - for its wholly owned phosphate mining operations in Brazil -
and another $ 2.15 billion US for its 42.3 percent in Fertilizantes
Fosfatados S.A. (Fosfertil) - a leading Brazilian fertilizer company.
The U.N. calls the global food crisis a "silent tsunami" and
faith in the ability of local and global commodity markets to fill 6.6
billion bellies, never mind the projected 2.7 billion more by 2050 (U.N.
projections say the world's population will peak at 9.3 billion in 2050)
has been shaken.
Most of this population growth will be seen in developing nations.
As income in these developing nations grow people will demand a more
protein rich diet - which means more people eating more meat. This
has an amplifying effect on the demand for fertilizer, because it takes
about 10 kilograms of grain to produce one pound of meat. As meat
consumption soars, more grain is needed to feed more livestock. 75
million more people per year are going to have to be fed and all this
while our arable land base is shrinking and fresh water supplies in many
areas of the world are under tremendous strain.
In order for a plant to grow and thrive, it needs a number of different
chemical elements. Three of these are the macronutrients nitrogen,
phosphorus and potassium (a.k.a. potash, the scarcest of the three). Potassium
makes up 1 percent to 2 percent of any plant by weight and is essential
to metabolism. The availability of nitrogen, phosphorus and potassium in
the soil, in a readily available form, is the biggest limiter to plant
growth.
The United Nations Food and Agriculture Organization (FAO) reported they
think that the total world demand for agricultural products will be 60
percent higher in 2030 than it is today.
"This is a solid business and the big mining companies agree. If
they can find a way to participate in it, they will." Mark
Connelly, New York brokerage Sterne Agee.
As I've just shown you, the world's two biggest miners are moving into
fertilizer in a big way. The reality is the potash story is just
starting. Unlike other resource plays there is no cycle, demand is always
going to be there and its rising year over year making potash an
excellent play in what will be a long term agricultural commodities bull
market.
Besides the developing, across the board, interest in potash - a rising
tide lifts all ships - there are some pretty interesting stories
developing around a few individual companies.
I believe a question we should be asking ourselves is: are there any
potash juniors out there - that for whatever reason - seem to stand out
from the crowd?
Encanto Potash (EPO - TSX.v)
The Muskowekwan Prospect in Saskatchewan, Canada, is EPO's main focus.
The company has acquired historical data from 6 oil and gas wells which
almost completely surround the Muskowekwan Project (The wells range from
as far as 15.6 km away to as close as 11.4 km away from the Muskowekwan
property boundary).
The grades and thicknesses of the potash beds in these historical oil
wells were estimated in an engineering report prepared by Chapman
Petroleum Engineering of Calgary.
"Based on the report, estimates of the Patience Lake Member
has average thickness and potash grade in the four drill holes of 13.7
feet of 32% KCl *(20% K2OS); 11.9 feet of 30% KCl (19% K2OS) in the Belle
Plaine Member; and 8 feet of 29% KCl (18% K2OS) in the Esterhazy
Member. Assays are based on a 23.7% KCl (15% K2OS) cut off."
From Encanto's website
EPO's first drill hole into its 43,000 acre Muskowekwan potash property
returned values of 25.2% K2O (39.9% KCl) over 3.6 metres in the Patience
Lake potash bed, and 25.5% K2O (40.4% KCl) over 2.4 metres in the Belle
Plaine potash bed.
The total thickness of the Patience Lake and Belle Plaine potash beds is
6 meters having an average grade of 25% K(2)O. As a comparison the
recently purchased Burr Project of Athabasca Potash averaged 5.14 m of
21.04% K(2)O and 4.79 m of 23.39% K(2)O on their upper Patience Lake and
Lower Patience Lake potash beds respectively.
"These results on Muskowekwan have added greatly to our belief
that it has the potential to establish a substantial and economic potash
resource. The Muskowekwan First Nations and Encanto management are very
excited about these grades. This is a fantastic start to 2010." states
CEO James Walchuck.
This was taken directly from Potash Corp's 2008 annual report: "In
2008, our conventional potash operations (excluding Esterhazy) mined
23.119 million tonnes of ore at an average grade of 22.88% potassium
oxide ("K2O"). The potash ore....lies about 1,000 metres below
the surface....the potash beds of approximately 2.4 to 5.1 metres."
Results from a 3-D seismic will be released in March and a
43-101compliant resource calculation is scheduled for September of this
year.
Encanto is backed by Endeavor Financial (EDV: TSX), a merchant bank that
specializes in the natural resource sector.
Conclusion
When mixed with phosphate and nitrogen potash makes it possible for
fertilizers to boost crop yields by as much as 60% (USGS). Potash Corp
(TSX: POT) claims that each dollar spent on fertilizer returns $3 worth
of improved crop yields, POT also says that for every $100 added to the
price of a tonne of potash only three cents is added to the price of a
bushel of corn - potash is a high margin product and there is no
commercial substitute.
"Companies involved solely in exploration of potash are likely
take-out candidates, either by diversified mining companies seeking a way
into the potash industry or by countries looking to lock-in supply."
Jacob Bout, fertilizers analyst for CIBC World Markets, Global Potash
Supply - A Focus on Saskatchewan Exploration
I think potash is a story Charles Rasp would like. Is it on your radar
screen?
Full
Article
For more information, please contact:
Vanguard Shareholder Solutions
Tel: 604.608.0824
Toll free: 1.866.918.0824
www.encantopotash.com
ir@vanguardsolutions.ca