Submitted by Mike Anthony as part of our
contributors program
.
According to a
2008 geological study
by the State of Arizona, there are between 700 million and 2.3
billion metric tons of potash in the Holbrook basin of east-central
Arizona. The deposits have relatively shallow depths between
700 and 2000 feet
and lie in a 600 square mile area. The potash reserves in the area
are worth over $1 trillion.
There are four entities seeking to profit from the potash
industry of Arizona's Holbrook basin:
1. Prospect Global Resources (
PGRX
)
2. Passport Potash (PPRTF.pk)
3. HNZ Potash of Hunt Oil (private)
4. Native American tribes
Prospect Global operates over 90,000 acres of state and private
leases, followed by Passport with 81,000 acres, and HNZ Potash with
75,000 acres. (Native American tribes have small claims on
scattered property throughout the basin.)
This article will look at Prospect Global and why it appears
overvalued compared to Passport. Because HNZ Potash and Native
American tribes do not disclose financial statements or internal
reports, they will be omitted from this report.
Valuation And Fundamentals
Potash currently sells for $460 per ton and hit an all-time high
of $870 per ton last year. Prices have stabilized and are widely
expected to increase over time amid population growth and
corresponding demand for increased crop yields.
Prospect Global has 55.3 million shares outstanding with a
market capitalization of $153 million compared to 172.8 million
shares and a market capitalization of $34 million for Passport.
These two companies are comparable in terms of potash reserves and
land ownership, yet their valuation gap is four-fold.
Both companies hold similar land packages and expect to reach
production by approximately the same time (2016). Based on
estimated resources, both companies have significant amounts of
potash. According to Passport's NI 43-101 estimate, the company has
3.7 million tons measured, 37.8 million tons indicated and 87.3
million tons of inferred potash at an average depth of 800-1400
feet. By comparison, Prospect Global's mineral resource estimate is
3 million tons measured, 25 million tons indicated and 53 million
tons inferred at an average depth of 1427 feet. Passport's potash
inferred resource is larger and shallower than Prospect Global's by
a healthy margin, although Prospect Global's resource is more
definitive due to its more advanced PEA versus Passport's NI 43-101
report.
One reason cited for Prospect Global's higher valuation is the
company's prior release of its Preliminary Economic Assessment
(PEA) report. This pivotal document is a major milestone in the
progression toward mining. In contrast, Passport has completed its
NI 43-101 Mineral Resource Estimate (a precursor to the PEA) and
expects to complete its PEA during the first quarter of 2013.
Another reason for the valuation gap is that Prospect Global
entered into an agreement with Sichuan Chemistry Industry Holding
to buy a minimum of 500,000 tons (up to 1,000,000 tons) of potash
per year for 10 years. The amount represents about 25% to 50% of
Prospect Global's estimated annual production of potash. The
problem with this, however, is that it is contingent upon many
factors, including payments and negotiations that must occur with
Passport (its competitor).
Specifically, over 10% of Prospect Global's proposed mine lies
on Passport's land. Another 20% of Prospect Global's proposed mine
lies underneath National Petrified Forest land, which will require
an additional 5-10 years of negotiation with the federal
government. Finally, Passport's land holdings have gatekeeper
status for railway access to ship Prospect Global's mined potash to
the required ports. It will be forced to negotiate with (and,
presumably, pay) its competitor in order to ship its potash to the
announced buyer.
Recent Developments
Passport needs only approximately $40 million from now until
2014. Prospect Global, in contrast, has much higher cash needs.
Specifically, Prospect Global acquired 50% of American West in
August 2012; as a result, the company owes a promissory note in the
amount of $125 million to the former owner, the Karlsson Group.
Prospect Global needs to come up with $50 million by December 24,
2012 and the remaining $75 million by July 31, 2013. Prospect
Global has less than two months to obtain this $50 million and only
slightly more time to obtain another $75 million.
At the same time, Passport entered into a joint exploration
agreement with a third potash miner in the area, HNZ Potash.
According to this agreement, the companies will jointly (50/50)
explore and potentially develop 21 permitted parcel, in which
Passport holds Arizona State Land Department exploration
permits.
Land Permits, Rights and Owernship
When valuing both Prospect Global and Passport, it is important
to note the ownership structure and exploration permits. Prospect
Global owns via leases the mineral and surface rights of 94,000
acres (157 sections) it plans to explore for potash. Of these, it
leases 41 sections from the State of Arizona Land Department (on
which it will have to pay a royalty) and the rest from private
owners.
On the other hand, Passport owns or leases a mix of mining
rights, permits and land as follows:
* owns the mining rights (4 permits) for the Southwest
Exploration Property (7,055 acres of Federal land)
* leases the Twin Buttes Ranch (28,534 acres) with an option to buy
the land at expiration
* recently purchased the Fitzgerald Ranch (41,564 acres), which is
adjacent to Twin Buttes Ranch
* owns 8 permits including rights to mine on Arizona State land
that were formerly owned by American Potash (5 permits) and Mesa
Uranium (3 permits)
* acquired the Ringbolt Property (9,594 acres and 15 exploration
permits), the terms of which are under dispute, although the Utah
court has granted the company's request for preliminary injunction
and Passpor is still defending its rights under the option
agreement
Overall, Passport has 78 Arizona State Land Department
exploration permits (45,726 acres) and has a full/partial interest
in 132 private land sections and prospecting permits on Federal
land as discussed earlier (full list of permits).
Outlook
Both Prospect Global and Passport have comparable potash
resources (if anything, Passport's holdings are shallower and
therefore cheaper to mine). Furthermore, Passport has several
advantages over Prospect Global, including massively lower capital
needs at this point ($40 million versus $125 million by 2014).
Prospect Global will also need to negotiate with a competitor in
order to access a train line while also building about five miles
of railroad tracks in order to connect to that line; Passport has
no such needs. Lastly, Prospect Global's proposed mine lies
partially on the land of the federal government and a competitor,
which are significant operational risks.
Of course, both companies have tremendous upside potential iof
they achieve mining status. U.S. potash peer Intrepid Potash (
IPI
), with operating mines in Utah and New Mexico, has approximately
103 million proven and probable tons of potash and 50 million tons
of langbeinite as of the
end of 2011
. Its recent market capitalization was $1.65 billion. (Both
Prospect Global and Passport command less than $200 million of
combined market capitalization.)