Buried deep in a recently released 70-page report is the following statement from analysts at CIBC (TSX: T.CM, Stock Forum), Canada’s fourth-largest bank:

“With the lack of announced greenfield projects needed to match growing demand in the next six to eight years, we believe the race is on to ramp up capacity, to take  advantage of current potash prices of US$1,000/t or more.”

CIBC goes on to detail the now all too familiar macro-fundamentals that have made potash into the top story so far in 2008. This is great news for Potash One (TSX: T.KCL, Stock Forum), which was one of the earliest movers into potash.

Potash One secured its prospective potash land package in 2005, long before the fertilizer story started attracting all the “hot” money moved into the sector. Potash One’s early mover status has put it on course to take its 330,000 acres of solution mineable potash deposit and compete right alongside the big boys.

Potash One’s deposit sits right in the heart of the world’s most prolific potash mining region, Saskatchewan’s Potash Basin. Potash Corp. (TSX: T.POT, Stock Forum), Mosaic (NYSE: MOS, Stock Forum),and Agrium (TSX: T.AGU, Stock Forum)all have significant operations in the region.

Potash One has got a lot going for it. But most importantly, Potash One is developing a solution mine. That is the key, and I’ll explain why in a moment.

By now I’m sure you’re familiar with the global agri-boom story…

Corn, wheat, and soybean prices are at or near multi-decade highs. Skyrocketing wheat prices have caused bread prices to double. Fertilizer stocks have soared more than 500% across the board in the past two years. Despite recent pullbacks, these five factors assure that that the agriculture boom is a long way from being over:

• Record global population growth
• Decrease in arable (farmable) land
• Biofuel boom: Crops for fuel instead of food
• Soaring demand from growing global middle class
• Government intervention to “solve” the problem

Across the globe, hungry voters are rioting for affordable food. Politicians are under massive pressure to provide solutions.

And according to CIBC, the solution to the global food crisis may be – excuse the pun – “solution mining”.

Potash is mined from deposits left behind when ancient sea beds evaporated.

In a solution mine, instead of spending billions of dollars to dig a shaft thousands of meters into the ground and scoop the stuff out, they pump water into the ground, dissolve the potash, and then pump it back to the surface.

Solution mining has been around for decades. It has been used to mine uranium in the United States since the 1960s. And fertilizer giant, Mosaic Co., also uses solution mining to extract potash from the ground at its mine in Saskatchewan (just a few miles away from Potash One’s land).

There are a lot of benefits to solution mining. This method incurs significantly lower up-front costs than traditional mining. It has a quicker timeline to production. And it costs less overall.

CIBC states, “We estimate that the break-even potash price for a solution mine is US$200 [per tonne] and for a conventional underground mine US$235 [per tonne].”

“We prefer potash solution mining over conventional mining,” CIBC adds, “due to lower engineering risk and a shorter construction time period, thus capturing the benefits of higher potash prices. Based on our calculations, solution mines have a greater net asset value compared to conventional mines.” 

With the “race to ramp up capacity” in the potash mining industry, speed to production is key. Analysts predict the price of potash could double in the next five years, and farmers are willing to pay. At current potash prices, farmers spend about $40 per acre on fertilizer. Considering they average $850 in revenue per acre this year, the cost of not using potash fertilizer is far greater than the extra $40.

As you can see, potash demand isn’t going to wane for a very, very long time and supply isn’t keeping up. CIBC believes solution mining is the answer.

CIBC stated benefits of solution mining

• Low operating costs
• Low capital costs
• Well-known and well-understood procedure
• Reduced time to production
• Low demand for manpower
• Can mine deep or irregularly shaped deposits
• Flexible operations

A few weeks back I identified Potash One as a possible buyout target (The Majors Go Shopping: Who’s Next?). Since then, shares of Potash One have traded flat as the junior resource markets experienced one of the worst months in the past five years.

CEO and President of Potash One, Paul Matysek, is an experienced geologist with a sparkling track record of creating shareholder value. Matysek biggest success was as the CEO of a uranium company that was bought out in 2007 for $1.2 billion.

The CIBC report confirms what many have been whispering. And it looks like Matysek is working on something pretty big…again.

When you look at junior companies, there are always a lot of risks. But if you can eliminate as many risks as possible, investing in the junior sector can be very profitable. By scouring for companies like Potash One, that are led by people with excellent resumes, who were very early into the region, and have a few years of development already completed, the rewards can certainly offset the risks.

We’re still in the third inning of the agriculture bull market. Potash will be one of the top performers, but it’s not the only one. There a lot of opportunities in the sector that haven’t taken off yet and Q1 Publishing has recently released a report on how to take advantage of the ongoing agri-boom. And you can claim the report here, 100% free of charge.

Make money, not war,

Guy Bennett

President, Q1 Publishing