transit/sirius/k+s

I've been kicking this idea around for sometime and thought I'd post it here to see what you guys think. Give it a good drubbing if it doesnt tickle your fancy.
The focus is Sirius Exploration but you will see quickly enough why it might be relevant to Transit. All references are Sirius unless otherwise stated.

TDT :-o

--------------------------------------------------------------------------------------------------------

Still wondering where the shares are going?

http://www.scribd.com/doc/36053786/6degrees-Aug10

(Thanks to TMC).

Still wondering how they are going to mine at depth and get to production quickly?

The potash market is ripe for consolidation. The big players are maneuvering for position and the even bigger players are taking positions by exercising their considerable financial muscle (BHP, Vale, Rio Tinto). How will that affect Sirius and, more importantly how will Sirius achieve their clearly stated aim of coming to the market quickly?

If we look at the current players in the potash market one company in particular jumps out. A recent report on Germanys K+S, the fourth largest potash producer, by Tony Jones of Redburn & Partners highlighted the following:-

K+S cost position over 60% worse than peers

As expected during a period of lower volume, cash costs for K+S deteriorated sharply in 2009, so a short-term opportunity existed for investors to buy exposure to the most leveraged margin as analysts predicted a recovery. However, we now have more visibility on potash sales and prices for 2010, making this opportunity seem less appealing.

We have benchmarked the cash costs for K+S to produce one tonne of potash, not only to assess likely returns over the next few years but also to examine the discount or premium to the peer average.

Unfortunately, the companys cost position does not appear very attractive, being on average over 60% worse than the other major producers, as we highlight in Fig 23. The quality of the companys reserves are generally inferior to peers, which leads to a lower yield and ultimately is reflected in higher extraction costs/tonne of potash nutrient. Therefore, even if the issue of higher labour and transportation costs could be addressed (for example by M&A), there is no available remedy to address the lower-quality deposits.
Consequently, there are two issues to be wary of:

➢ K+S shares should trade at a significant discount: clearly, we should anticipate weaker margins at K+S resulting from its inferior cost position and this should translate into a lower valuation. We explore valuation in more detail in the next section, but on a P/E, Price/Book and EV/Sales basis, the shares appear 25% too expensive.

➢ K+S assets appear unattractive to acquire: periodically, the market anticipates M&A activity within the fertiliser industry, especially due to building interest from large- cap mining companies wishing to diversify from metals and ores. But in our opinion, K+S receives an excessive level of attention at least at the current valuation as the total European market for potash is only 13% of global demand, K+S cash costs are significantly higher than the companys peers but with capacity constraints too.


http://dl.dropbox.com/u/1713179/Screen%20shot%202010-08-18%20at%2011.58.28.png


K+S have a cost base far higher than their competitors, poor quality deposits, 30 year mine life low by industry standards 940 years according to K+S)) and currently selling predominantly into a stagnant market, Europe.

Factor into the equation recent comments by Deutsche Bank :-

K+S AGs cost base is too high and internal growth prospects are too limited for the company to become the potash industrys next big takeover target, according to Deutsche Bank AG analystMartin Dunwoodie

http://www.bloomberg.com/news/2010-08-17/k-s-s-growth-prospects-limit-appeal-to-possible-buyers-deutsche-bank-says.html

and you see the 4th. largest potash producer in the world facing a problem.

We also have K+S stating:-

K+S itself has said it would focus on finding a joint-venture partner to set up new potash mines abroad to secure long-term growth as its German potash mines are expected to be depleted in roughly 40 years. The CEO declined to comment on the progress of such talks. (Reporting by Ludwig Burger and Andreas Kroener).

http://www.reuters.com/article/idUSLDE62N0IJ20100324

If you factor into the equation a recent rights issue to pay down debt and strengthen the balance sheet after their Morton Salts acquisition in America for $1.7B you start to get a picture of a company backed into a bit of a corner:-

http://www.agrimoney.com/news/k+s-seeks-ratings-fillip-after-cash-call-answered--1103.html

Also factor into the narrative the following, K+S share holders recently, 12/05/2010, rejected a proposal to issue new shares to raise $4.1B in new capital. In other words no new CAPEX projects for K+S.

The largest single shareholder in K+S is an Andrei Melnichenko, owner of Eurochem. Eurochem will bring on stream a 2m ton per year conventional long wall potash mine in south-eastern Volgograd in 2012. Melnichenko voted against allowing the board of K+S to issue shares to raise $4.1B.

http://www.xe.com/news/2010-05-12%2012:33:00.0/1141765.htm?c=3&t=

We have the 4th. largest potash producer sitting on a poor resource, with limited mine life, high production costs, selling into a stagnant market. Add to this the fact that they are an unattractive take over target, recently rated just above junk bond status by Standard & Poors and Moodys with a share holder base unwilling to allow them to raise further capital.

Now, this is where it starts to get interesting.

How does Catlow achieve his declared aim of getting Sirius into production as quickly as possible? We have already seen how extended the time line from inception to production are 5 7 years so how can Sirius do this:-

Cheaply?

Where do they do it?

How do they do it?

As a reminder, our leader has expressly stated:-

We intend to become a significant potash producer as quickly as possible. We will continue to develop (existing) opportunities whilst also potentially acquiring other potash projects to diversify risk and ensure we move rapidly towards our goal of becoming a significant potash producer.

A bit of background first.

TMCs vein diagram shows the relationships that exist between three former directors of FMG, all now in potash, our own Chris Catlow, Richard Monti at Transit Holdings and Gordon Toll at Satimola Ltd. The respective titles of these individuals when they were are FMG should be borne in mind.

Transit Holdings have pre JORC potash tenements in Utahs Paradox Basin just south of Moab. Transits overall Exploration Target range for the two Potash beds is 2.5 to 3.8 billion tonnes of sylvinite at an average grade of 19% to 28% KCl (12% to 18% K2O).

On March 16, 2009, Transit Holdings acquired 100% interest in Citadel Potash Pty Ltd. Citadel had the right to earn a 75% interest in the Paradox Basin Potash Project. The Paradox Basin Potash Project covers applications for 93,000 acres in the Paradox Basin in south eastern Utah. Citadel Potash Pty Ltd was owned by Citadel Australia Pty Ltd. The sole share holder of Citadel Australia Pty. Ltd. is an Indian national from Tamil Nadu, George Vincent Gnanasigamony. George lives in a flat in a suburb of Melbourne! Just the sort of person youd expect to own the company that holds mineral rights to billions of dollars worth of potash! Lucky George.

K+S through their recently acquired US subsidiary Morton Salts, have 15,000 acres of evaporative ponds approximately 100 miles from Transit Holdings potash tenements. Morton Salts have a comprehensive logistics and marketing infrastructure through out North America. At present they sell salt

K+S sold $19m of potash into the American market last year, a fraction of 0.1% of the annual potash market in the USA. The value of potash sold into the American market annually is in the region of $3.2B. Over 75% of this is imported potash, mostly from Canada.

K+S do not mine/produce potash outside of Germany.

We have three seemingly separate entities doing their own thing in the same sector. How do we tie them together?

Why would Sirius and Transit get it on?

We know Richard Monti and Chris Catlow are connected via their time at FMG together. The Transit website credits Monti with generating the iron ore project for FMG in the Pilbara region which has developed into a 2 billion tonne iron ore resource. Monti was Head of Resources while Catlow raised the cash.

Weve established the good likelihood that two ex-FMG directors, who have quit the company in the last 4 years to head up potash ventures, might be in cahoots.

But why would Transit be a likely acquisition or partner in Catlows game plan?

Catlow wants to get into production as quickly as possible, he simply cannot do it with our existing resources in Oz and North Dakota. Even if he was privy to a revolutionary solution mining process (or study) that has proven viability at unprecedented depths, there are huge legislative and environmental hurdles to overcome before Catlow could press the green button on production in Oz or North Dakota.

Transit, however, has just secured an initial 75% interest in the Paradox Basin Project (Utah), which comprises potash mineralisation in two beds of interest, Potash 13 and Potash 18, ranging in depth from approximately 1,500 to 2,000 metres below the surface.

We know from Intrepid Potash at Cane Creek that solution mining at these depths, and in this vicinity, is viable.

Transits overall Exploration Target range for the two Potash beds is 2.5 to 3.8 billion tonnes of sylvinite at an average grade of 19% to 28% KCl (12% to 18% K2O). (Big Ticks on Size of Resource and Grades).

In fact, this looks staggering when set against Transits peers

Potash One MC C$220 million, with 852 million tons inferred resource.

Athabasca Potash Inc MC C$148 million, with 424 million tons inferred resource.

Transit with potentially in excess of 2 billion tons inferred resource just quietly sitting at US$5.3m.

While Transit has no JORC compliant resource in place, a Scoping Study on the resource delivered results on 10th December, 2009.

The Study confirmed the potentially robust financials of a conceptual 2 million tonnes per annum potash solution mine delivering independent potash supply to the international potash market leveraging off the Projects close proximity to key infrastructure.

The projects close proximity to infrastructure could be alluding to its good proximity to railroads, power lines and oil/gas pipelines. But it could also be an allusion to its proximity to existing evaporative ponds in Utah, and we know that K&S own these through their acquisition of Morton Salt in April 2009. So in that respect, it still stacks up.

The big problem for Transit will be raising the estimated CAPEX of $2.4bn to bring this resource into production. Is this where Catlow/Sirius + Third Party (K&S) comes in? And is this the likely reason that Monti cant simply go direct to a Third Party that he just doesnt have the requisite financial clout of a Catlow?

The Paradox Basin: Transit Seizing the Initiative

Transit arent the only ones exploring potash in the Paradox Basin -

Red Metal is 6 months away from getting exploration permits for their proposed projects. But they have a conceptual JORC Exploration target for beds 5,6,9 and 19 (130 sq.m) that proposes a 200k-2m tonne p.a. potash solution mine (same as Transit at the upper end). Their grades and depths are very similar.

Mesa Uranium is still awaiting the issue of exploration permits for their 116 sq.m of proposed potash, just 1.5km north of Intrepid.

Ringbolt Ventures lags further behind. They received 9 State of Utah mineral leases totalling 6,277 acres (9.5 sq.m) on lands located in Lisbon Valley of the Paradox Basin.
Intercontinental Potash Corp. has applied for and is first in line for federal prospecting permits and state lands, comprising about 12,940 acres in Utah and Colorado.
American Potash LLC. has acquired Utah State trust land potash lease units in the north of the Paradox Basin in Grand County, Utah. These total just 9.5 square miles (26.6 sq km) or 6,090 acres. Final approval and award of the BLM potash prospecting permits to American Potash is pending, but expected by year end or early next year.

This shows that Transits potash project, covering 390sq.km (243 sq.m) dwarfs all of the above. They have by far the dominant land position. And they are now seeking to expedite their exploration programme for 2010.

Red Metal look like the only credible threat to Transit securing first mover advantage as the next potash producer in the Paradox Basin. They still await exploration permits. And they lack a connection to Catlow, who could be the difference in terms of raising the necessary finance for virgin production.

Interestingly, Intrepid Potash's Cane Creek mine produces a comparatively diminutive 80,000 tonnes of potash and 100,000 tonnes of by-product salt annually. Just consider that Transit is targeting 2m tonnes pa. Also, Intrepids mine has been producing potash for 40 years. So why have they not sought to expand their operations in the Paradox Basin? Is it because Potash prices have only risen in the last 2-3 years to a level that makes new mining attractive? Still surprising that they havent sought new targets.

Conclusion

There is a strong likelihood that Catlow sees Transit as part of his plan to become a potash producer as quickly as possible. And not just because his skills and shared experience dovetail perfectly with Monti. Solution mining in the Paradox Basin is proven. Transit has secured the dominant land position in the Paradox Basin. They have executed a Scoping Study that confirms one of the largest potash prospects of any junior. The proximity to infrastructure (including evaporative ponds) is attractive. The only thing they lack to get into production is around $2.4bn CAPEX and a defined market.

Sirius cannot get into production quickly with current assets. They almost certainly could by acquiring or forging a joint venture with Transit.

K+S

Where do K+S fit in to this equation? K+S provide the logistics, the marketing, the infrastructure. It could simply be an off take agreement which, in turn would give investors the confidence to back a large CAPEX requirement. Sirius secure the funds based on Transits resource and K+Ss ability to bag and sell the stuff.

How do we tie Sirius into K+S?

Stikeman and Elliot the M&A specialists.

http://dl.dropbox.com/u/1713179/Stikeman%20%26%20Elliot_MA%20copy.pdf


Gordon Toll

Where does Gordon Toll and Satimola fit in? Tolls project is in north west Kazakhstan. The Verkhnekamsky potash basin in the Urals extends over the north west of Kazakhstan and into the south east of the Volgograd region. This is where Eurochem, remember them, are building their new potash mine, at the Palashersky and Balakhontsevsky areas of Verkhnekamskoye, in the Perm region of central Russia.

Catlows statement:-

We intend to become a significant potash producer as quickly as possible. We will continue to develop (existing) opportunities whilst also potentially acquiring other potash projects to diversify risk and ensure we move rapidly towards our goal of becoming a significant potash producer.

Transit and Dakota Salts for the Americas, Adavale and Derby Salts for India, China and South East Asia, Satimola for everywhere else.

What is this based on? Nothing other than speculation. Speculation based on three former FMG directors heading up three different potash projects.

And this:-

Vale, BHP and Rio Tinto all principally iron ore miners moving into potash and this.

While a furious round of i-dotting and t-crossing is underway at (FMG) there is, perhaps, an even more interesting point to note; the low profile being kept by Forrest. Most recent statements from the company have come from people like Catlow, or an executive director, Graeme Rowley, or chairman, Gordon Toll, or company secretary, Rod Campbell, the man who made the all-important ore reserves statement, backed up by a report in the name of Jim Williams, head of mining. Nowhere to be seen was Forrest, the man synonymous with Fortescue.

http://www.minesite.co.uk/nc/uk/minews/singlenews/article/fortescue-metals-benefits-from-rumours-of-further-price-rises-for-iron-ore/80.html?tx_ttnews%5BpS%5D=1136073600&tx_ttnews%5BpL%5D=2678399&tx_ttnews%5Barc%5D=1&cHash=2c98a5cb79

It all comes back down to one thing IMHO, where are the shares going.

TDT :-o