Interview: Patricio Varas from Western Potash (TSXV:WPX)

President & CEO Patricio Varas describes the company's May, 2008 IPO as "impecable timing".

Western Potash, as its name suggests, is developing a potash project in Saskatchewan, the sparsely populated province in Western Canada that produces about a third of the world’s supply of the stuff. The company’s Milestone Potash Project is located in the central part of the province, about 35 kilometres southeast of Regina.

Saskatchewan potash deposits are deep, typically a kilometre or more underground. For deep deposits, a range of factors must be considered over and above the pure economics associated with building a processing facility. Historically, underground mining was not considered feasible if a deposit was deeper than 1100m below surface. Western Potash’s deposit is way underground; the potash rich ore is located at a depth of 1,700 meters.

So what’s the solution for Western Potash? Solution mining. Solution mining is a process used to extract minerals using an aqueous leaching solution. The solution is pumped into a deposit and makes contact with the ore. The resulting solution is then pumped to the surface and processed. The process was discovered in the 1960’s and is only now being used to mine salts such as potash, copper and uranium. Australia’s Beverley Uranium Mine is the first operating solution, or in-situ mine in the world.

Solution mining can be tricky business. Certain temperature conditions, for example, need to be available in order for solution mining to work. Generally a temperature greater than 50 degrees Celsius is required, implying a depth of at least 1,450 meters. Solution mining begins by undercutting the mineralized zone by dissolving an initial cavern below the seam of interest within the potash beds. This is followed by dissolving the salt and potash upward and through the mineralized beds while utilizing a “ceiling cap”. The oil or gas ceiling cap inhibits vertical cavern growth until a large area is undermined. Mining then progresses vertically by raising the cap and dissolving mineralized portions of the roof. The minerals are then recovered from the saturated fluid by recrystallization. After mining the empty caverns may be useful for underground storage, and are sometimes more valuable than the minerals produced during cavern development.

Western Potash management believes its potash properties are top notch candidates for solution-mining. A NI-43-101 resource estimate determined the Milestone Project had 41 million tonnes of Measured Resource, 133 million tonnes of Indicated Resource, and 560 million tonnes of Inferred Resource with an average grade of around 30% KCl. The resource estimate, prepared by Agapito Associates, suggests an annual potash production rate of 3 million tonnes for well over forty years.

But building a potash mine is not an inexpensive proposition, the price tag associated with Western’s project is estimated at $2.5 billion. To that end, the company recently completed a $20 unit financing at $1.10 and, with the proceeds, has initiated their feasibility study for Milestone Project, engaging engineering consultants AMEC Americas. The connected with Western Potash President and CEO Patricio Varas for an exclusive interview.

Western Potash went public in 2008 just before the financial crisis hit the markets – can you tell us a bit about that experience?

It certainly was an exciting period for Western Potash. We raised a significant amount of capital ($20 million) privately prior to our ($23 million) IPO in  May 2008. With hindsight we had impeccable timing as the markets fell apart a few months after. So we were able to weather the financial storm and begin the exploration work that the project demanded.  We were able to discover 3 new and distinct potash deposits. 2 in Manitoa and 1  in Sasaktchewan. We settled on the best potash address in the world- Saskatchewan Canada. We were offered a plethora of potash projects, from Alberta to Africa during this period. Our philosophy ws simple – if we found a beter project we would snap it up. We never found anything to match our Milestone Sk. project.  We have a stable supportive government , a clearly defined potash industry, predictable and manageable environmental permitting and regulation, an independent and large Tier 1  NI  43-101 potash resource and a solid technical and financial  team behind it all.  So far it’s been a great experience.

At the depth of the crisis shares of Western Potash traded all the way down to $0.15 but it has been a slow and steady recovery since the beginning of 2009. Apart from the rebound in the overall markets – what do you attribute your success to during the period?

I certainly believe it’s due to the slow recoginition of the quality of our Milestone project and the steady progress we made developing it. Today, we have clearly established a significant and unique  Tier 1 NI 43-101 compliant potash resource that is gaining attention from a variety of global fertilizer, mining and state owned enterprises.

Another key component is that Western Potash has a great depth of exploration and development experience that we have been able to drawn on.  Each one of our top 4 mining executives has spent time with Rio Tinto and has been involved in the process of bringing a mine into development. Whether it be 0ur discovery of diamonds at Diavik, gold at Lahir or copper at Sto Domingo Del Sur our exploration team has proven it can deliver results.  The Western team knows what needs to be done and, perhaps more importantly, we also understand what the majors are looking for. That’s why we parked our claim on top of a geothermal heat anomaly.  This one factor should contribute enormously to lowering our cost of production as a viable solution mining operation; and, low cost production is  major  factor for Tier 1 companies looking for new project entry points. Our Scoping Study does a good job of encapsulating this fact.

Could you tell us about the current status your project?

We have begun the Feasibility Study Process. We have engaged AMEC Americas Ltd as the lead consultant for this process. Headquartered in Saskatoon they are completing expansion work at Potash Corp’s mines and understand the potash sector and know saskatchewan intimately. We are now in  the process of updating our NI 43-101 resource calculation (41 M t of measured, 133 Mt Indicated and 560 Mt of Inferred) to plug into the study. In Februaray we completed a small 2 well program to gather geotechnical information  and expand the resource.  In addition we have brought considerable new land into the resource area which will definitely enhance our Measured and Indicated resource estimates.   We are also conducting trade-off studies with regards to water, energy, process technology, etc. Considerable focus is on our water, we have just signed an MOU for delivery of the water with the city of Regina. Fresh water for solution mining is critical and this new option will lower our CAPEX and potentially our OPEX.

In December last year the company completed a $20 million financing – do you have sufficient money to complete your feasibility study?

We have raised enough money to complete the prefeasibility study portion of the Feasibility Study Process and, with the execution of outstanding warrants, will bring in the remainder required to take us to Feasibility.

Given your strong financial position, is the company considering partnering as a mechanism for fast-tracking the project? If so, what type of capabilities would an ideal partner have to compliment Western Potash?

We are definitely actively pursuing a partner to work with to capitalize the project. Unlocking the value is a major part of the process with a project of this size and scope. The attributes of the “ideal partner” would be a purchaser of potash as a consumer or trader, project development and engineering expertise, and have the financial ability to cooperatively finance a $2.5 billion project. However, it is more likely that each one of those components will be spun out of the project and developed in association with the other components. Regardless of the partnership structure, going forward there will be a debt and equity component, an enormous EPCM contract; and, a long term secure supply of potash. Our mangement tean has just returned from a 2 week trade mission with the Saskatchewan government  in India and we are our continuing to build our strategic relationships in China with yet another road trip to Beijing and Hong Kong next week.  There is plenty of global interest in the Milestone project  and we hope to convert that into long term shareholder value.

This interview appeared in 5 Potash Stocks to Watch in 2011 – Part 2 – CLICK HERE for the article.

Mike Luft

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