Gensource: Going Small for Potash

Gensource logo, potash

When you think of potash you can be forgiven for seeing mega mines with huge CAPEXs and millions of tons of production every year. The team behind Gensource (GSP:TSXV) worked on a project of just that sort at Potash One. They brought the Legacy project in Saskatchewan to the point where giant German company K+S are investing 4.1 billion dollars to bring it online.

In the process CEO Mike Ferguson and his team learned a lot about the economics of potash and began to wonder if the “big is better” model was, in fact, right for a changing world.

“The potash market is dominated by the cartels. They sell millions of tons of potash to national distribution groups and those groups have effective monopolies in their countries. Which means that the end users, the farmers, have to pay what the distributors demand.” said Ferguson.

“We come at it a different way. We see “demand” as what the soil needs in terms of potash. The farmers know what the soil needs but they also know what they can afford. Only in North America and Europe is the soil getting the K it needs. In the rest of the world there is a disconnect between what the soil needs and what the farmer chooses to buy. In places like China and Brazil, which don’t have good farm financing structures, potash is an upfront cost to the farmer. Which means he might have to choose between buying potash and feeding his family.” said Ferguson.

Beginning with that premise, Gensource developed a very different business plan. “Every successful potash mine has a market. You need to know where you are going to sell the potash before you build the mine. Even large companies like BHP, Vale or Rio Tinto, for whom the CAPEX of a conventional mine is not a large issue, are in the position of having to look for a “partner” before they can begin a mine. Because “partner” really means “market”.

“Conventional mining methods, both rock mining and solution mining, are not economical at a small scale.” said Ferguson. Large scale potash mining is very expensive and only works with really large tonnages. And that, in turn, means that the only realistic market for the big mine potash are the cartels who are able to deal in millions of tons at a time.

Big potash mines are huge. Their footprint is measured not in acres, but in square miles and, in their wake, they leave enormous piles of environmentally problematic salt tailings, which is lifted along with the potash in a conventional and conventional solution mining operations.

Gensource understood the need to have an offtake agreement in place before proceeding with a mine. However, instead of having to search for a multi-million ton deal, with a mine designed to produce 250,000 metric tons a year, the off take possibilities expand. “We are looking at micro sized mines selling directly to end users. Rather than trying to run through the brick wall of the cartels we’re working around it. We’ve spoken to a number of end user groups including a farmers’ co-op in Brazil.”

The key to thinking small is the use of selective mining methods which only bring the potash to the surface and leave the salt in place. “These are methods which are already being used in the US.” said Ferguson. It is a huge saving. Conventional mining methods bring two tons of salt to the surface for every ton of potash. Using selective mining methods leaves the salt in place which, in turn reduces the mine’s surface footprint and environmental impact.

Gensource has two large very prospective properties in Saskatchewan: the Vanguard project located northwest of Moose Jaw and the Lazlo area which is located along the highway running from Regina to Saskatoon.

The first trial of the Gensource business plan comes with the announcement of an agreement to purchase two potash exploration permits (which will become mineral leases – now named the Vanguard Project) from a Chinese firm, Yancoal Canada Resources, and the conclusion of an off take agreement with Yancoal for the full production of a mine to be constructed on this land. Ferguson states in the press release announcing the deal,

“The APA and Term Sheet announced today fit Gensource’s business plan perfectly. The assets being purchased, if the conditions are satisfied, are two Leases where significant geological data has already been collected by YCR through recent and professionally executed drilling and seismic programs. The geological data collected may be the foundation for a future formal resource definition on the Lease(s). Additionally, the Term Sheet represents a key aspect to the transaction, providing for 100% of the planned future production to be purchased by YCR over a set period of time – one of our key foundational business concepts.”

By going small, mining 250,000 metric tonnes per year rather than millions, Gensource believes it will be able to bypass the cartels, keep its CAPEX low and deliver potash directly to end users. “The demand is in the soil.” said Ferguson.

Thinking small also means that as suitable end user markets are identified, new, small, mines can be brought online. Gensource sees the possibility of multiple small mines, each with its own end user market, being built close enough to each other that they would be able to share infrastructure investment and transportation.

“Our entire mine is under two sections of land with the processing facility taking up only ten acres. We don’t have any salt tailings so our environmental footprint is minimal.” said Ferguson. Combined with a low CAPEX and access to non-cartel end users, Gensource seems to have the business plan to change the face of potash mining in Saskatchewan.

At time of writing Gensource shares were trading at $.08 with 169.94 million shares outstanding for a market cap of $12.75 million.

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