Gensource Potash: Feasibility Study Complete – Ready to Move Ahead

V.GSP, Gensource Potash, potash, Saskatchewan, Mike Ferguson

You can hear Gensource Potash’s (TSX-V: GSP) CEO Mike Ferguson’s smile on the phone. He’s just released the full feasibility study for the company’s Vanguard One potash project in Saskatchewan.

“When you go through the feasibility process you are digging deeper into the project,” said Ferguson. “You are going into greater detail. You start optimistically but you expect that optimism to end.”

Instead, the newly released feasibility study confirmed Ferguson’s early expectations. “Our initial assumptions were very close. The CAPEX is up about 10% but the OPEX is actually lower than our previous study work.”

“We have very conservative assumptions about potash price.  We believe the price will stay below $US 300/t for an extended period.  We make other conservative assumptions too, like not inflating the price over time, while at the same time inflating our input cost assumptions by 1.5% a year. Overall, because our assumptions are so conservative, when we get to this level of detail it is clear this is a fundamentally sound project.”

“We’re working with a 40-year life of mine but the fact is that the resource is plentiful in Saskatchewan and mine life, through an evolutionary process of geological confirmation, is essentially unlimited – as evidenced by the existing industry,” said Ferguson.

The successful completion of the feasibility study is a key milestone for Gensource. From this point, the development of one of these new, small-scale facilities is open to any group who is interested in controlling its potash supply chain – from distributors to farmer co-ops.   Gensource has an agreement with Essel Group ME Limited (EGME) to be a partner in a joint venture, called Vanguard Potash Corp., to develop one of the projects.   Now that Gensource has completed the feasibility study, Vanguard Potash Corp. can move ahead with the construction of the actual mine.   The construction schedule was determined to be 20 – 22 months, so depending on weather, environmental permitting and a few other factors, the first project could start initial work in the fall before freeze up and then work through 2018 with production commencing in mid-2019.

The great advantage of Gensource’s approach is that because, in terms of potash mines, the Vanguard project is so tiny, the “market partner” in any joint venture can easily take all 250,000 tonnes of potash the project will produce every year. “Right now the price of potash is at the marginal cost of production in the industry,” said Ferguson. Which means that higher cost mines are in danger of having to close.

Ferguson does not see much likelihood that the price of potash is going up anytime soon. “There is enough existing supply and new supply coming to the market, that there is not going to be a big price rebound.”

At the same time, a small, lean mine with a relatively low CAPEX and an assured buyer can make sense where it can keep its costs contained. The Gensource model of a small mine with what amounts to a pre-sale of production makes sense. What makes more sense is to spin the mine into a joint venture with the company financing it and then retaining 30% of the new company. Which is exactly what Gensource has done.

With the completion of the feasibility and the near certainty of work beginning on the Vanguard One project in the fall, Gensource investors can look forward to full “proof of concept” for the mini-potash mines and the joint venture model to finance those mines and sell the potash.

Taking this modular approach means that Gensource can line up, finance and construct additional mines quickly and very efficiently. “The first module is the most difficult,” said Ferguson. “The next module will be easier. You get a whole lot better the more you do.”

Next on Ferguson and Gensource’s agenda is moving towards the next Vanguard. And the next. Palisade Research commented, “Because of its joint venture with Essel Group ME (EGME), Gensource will now be carried to production and own 30% of Vanguard 1.

However, the market still is not giving any value to the multiple Vanguards on Gensource’s prolific acreage package. We still estimate there are 6 Vanguard clones, and Gensource’s next steps will be to prove this.

With the FS declared, it will not take a lot of work to get there. The geology remains the same, but still needs to be confirmed with some 2D seismic and a couple of wells.”

Ferguson himself is unphased by Gensource’s relatively low share price. “We’ll be doing some marketing on the back of the feasibility study. But there is negative sentiment in the market about potash, and we’re new and espousing new approaches to a staid old industry, so there is a natural skepticism out there ” said Ferguson.

With production costs at the very lowest end of the potash spectrum, Gensource can keep building profitable, small scale, potash mines and wellfields for years. While the price of potash is not expected to rise a great deal, it is also unlikely to fall beneath its current range. That range, between USD 200 and USD 250 gives a producer with operating costs of less than USD 40.00 per metric tonne, a lot of margin.

Gensource just completed the first tranche of a $6,000,000 private placement. That money will be used for “drilling, seismic and engineering work for the next stage of development in the general Vanguard area” which strongly suggests Gensource is going forward with its second and subsequent mini potash mines.

Step by step, milestone by milestone, Gensource is changing the way potash is mined and sold.

At time of writing Gensource shares were trading at  $0.16 with 294 million shares outstanding for a market cap of 48 million dollars.

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