Malcolm Bucholtz B.Sc, MBA Analyst

Trading Note

Potash One - Coverage Initiated with a BUY rating April 1, 2008

In a Trading Note issued April 1, 2008 we introduced a Canadian listed company called Potash One (TSXv:KCL) and assigned it a BUY rating. At the time, Potash One was trading at or near C$3.60 a share.

Our BUY recommend was based on the following observations:

• Each year in India and China, 40 million people attain “middle class status”. With increased prosperity comes a greater demand for an improved diet with more vegetable and meat protein. This drive to prosperity has seen vast tracts of agricultural land swallowed up in order to build factories, assembly lines and chemical plants. China has now given up so much agricultural land it is on the verge of becoming a Corn importer for the first time in its history. China is already a big importer of Soybeans which along with Corn is vital for livestock and poultry feed so that enough pork and poultry can be produced to feed the masses. Problem is, China cannot start importing all its foodstuffs. It has got to produce more and grow more from the agricultural land that remains. This will require fertilizer being applied to farm land.
• In India, food production has not kept pace with food demand. Shifting weather patterns are affecting the traditional monsoon rains that have been so vital to the Indian traditional farming methods. India too has got to squeeze more productivity out of its land through the application of fertilizer.
• With Europeans still refusing to accept genetically modified grains (GMO), Brazil has stepped up to the plate to supply more non-GMO grains. In addition the Brazilians are major producers of ethanol from sugar cane. The combination of non-GMO grains and a booming ethanol industry means Brazil is under pressure to increase its agricultural output.

In our initiation report, we further noted that Potash One had positioned itself right in the heart of the Potash action in the Province of Saskatchewan with its 97,400 acre Legacy Project which immediately adjoins the Belle Plaine potash solution mine operated by The Mosaic Company

(N: MOS). Belle Plaine has been in continuous production since 1964. We further noted that management of Potash One believe the Legacy property shares the same general geological characteristics as the nearby Mosaic Belle Plaine solution mine. A 43-101 Technical Report prepared in June 2007 suggests this property could host an indicated resource of 36.8 million tonnes and an inferred resource of up to 360 million tonnes of Potash.

We further based our BUY recommend on the fact that with just over 40 million shares outstanding, the market capitalization of Potash One is in the order of $144 million. With Potash fertilizer selling in the marketplace at over $400 per tonne, we felt the market capitalization fell short of the economic value inherent in the Legacy Project.

Increasing Target Price Based on Newly Available Valuation Data

The past couple weeks have brought news that BHP Billiton is acquiring the remaining 25% of Saskatchewan potash player Anglo Potash (TSX:AGP) for $284 million. Finally, this gives us a benchmark to use when valuating other Saskatchewan plays. If $284 million is the price paid for 25%, then by extension the entire project with its estimated 1.46 billion tonnes of extractable potash is worth some $1.136 billion. Some simple math to complete the exercise says that extractable potash in-situ is worth $0.77/tonne. (Note: Extractable potash differs from potash resource)

Now, let’s apply this to the situation with Potash One. The estimated resource is 396.8 million tonnes. This figure is actually the extractable amount of Potash in-situ as the calculated resource has been adjusted for mining anomalies and a 40% extraction ratio has been applied. Applying the valuation rate of $0.77/tonne gives a figure of $536.5 million. With 42.6 million shares outstanding, this gives a target price of $12.60 – well above current trading levels.

We are thus maintaining our BUY rating on Potash One. Technically, price action has been confined to a sideways channel. News of further advances on the exploration front or news of any increases to the size of the estimated recoverable resource will be sure to send price action higher. Watch carefully and give some thought to using the current trading range to further add to your position.

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