Monday, April 4, 2011

Investors Guru Small Cap Stock Observer

(TSXV: EPO) Encanto Potash - Encanto Potash Offers Profitable Solution

The market loves certainty. When a company says, "We are going to do one of two things" - investors tend to get nervous - even if both options are beneficial to shareholders.

So it is with Encanto Potash (TSXV: EPO) which just released NI 43-101 Technical Report with two resource calculations based on two different mining methods (conventional and solution).

According to the March 21, 2011 press release, "Encanto decided to evaluate and report the two resource calculations in order to determine, at a later date in future engineering studies, the most economically viable method for extraction".

Simply put, the geology of Encanto's land package gives it the flexibility to entertain two different mineral extraction scenarios. This isn't a bad thing, and it doesn't need to be confusing. Whichever extraction method is chosen, Encanto will mine the potash to maximize shareholder value.

The dual mining model can be looked at as an internal competition. To value the company you simply need to know which horse is winning.

At the current time, that would appear to be solution mining because of the lower capex, shorter time-line to production, higher tonnage, quicker to cash flow, higher opex energy costs. This could change, based on further drill results and engineering studies, but currently solution mining would bring maximum benefit to the shareholders.

The March 21 resource estimate is based on 5 holes, on 17,000 acres land position. Encanto anticipates adding an additional 15,500 acres to their land package.

Solution mining intervals -- Patience Lake and Belle Plaine members, excluding interbeds -- are calculated as follows:
  • Indicated resource: 79.1 million tonnes of recoverable KCl
  • Inferred resource: 60.5 million tonnes of recoverable KCl
  • Total Resource: 139 MMt recoverable

With the additional 15,500 acres - given similar geology - the total potential recoverable KCL resource would be 265.74 MMt. At 3 Mt KCL production/year that would give a 50 year mine life.

With potash prices at $400 a tonne, that's about a billion dollars of product - not bad for a company with a market cap of $96 million.

The Encanto NI 43-101 resource numbers compare favourably to the initial NI 43-101 resource calculations of Western Potash (TSX: WPX), Potash One (TSX: KCL) and Athabasca (TSX: API).

According to the International Monetary Fund, global food inflation is running at 12% per annum. 180,000 people a day move from rural to urban areas. Farmland is shrinking, meat consumption is surging.

Encanto is in a sweet spot. The world needs what they have. By one method or another, the potash resource will be mined. More at .

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1 comment:

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