potash brazil_the_next_major_potash_supplier

8/7/2019 Potash Brazil_The_Next_Major_Potash_Supplier

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Special Situations - Agriculture

Brazil – The Next Major Supplier of Potash

Robert B. Winslow, CFA 416-847-3403, [email protected]

Eric Winmill, CFA 416-847-3404, [email protected]

August 19, 20

Why a Formidable Brazil Potash Industry is

Inevitable, and Which Companies May Benefi

• Brazil’s economic growth – overly reliant on imported potash…~36% of Brazil’s exports were agriculture-related in 2008, whprecariously ~90% of the nation’s required potash fertilizer was imported

• …yet the Amazon looks to contain a world-class basin of potash ore.

Petrobras claims the Amazon basin could hold 1B tonnes of K2O, makithe basin one of the largest mineable potash sources in the world.

• PV of transport savings could be US$1.0+B for a US$2B capex mine.We estimate US$40-US$80/t cost advantage for prospective Brazil potaproducers by avoiding freight & duty on Canadian/Russian imports.

• Several CDN jr. potash companies making strides in South America.Favoured firms should have access to: KCl deposits with solid economiclear permitting path, investment capital, & strong management/partners.

mailto:[email protected]








Agriculture Industry Update

Investment Summary and OutlookWe believe several economic and political factors position Brazil to becomethe next major global producer of potash fertilizer. Brazil is one of theworld’s largest agriculture-centric economies, yet is the second largest importerof potash, a fertilizer component essential for large-scale farming. While this

import dependency was seemingly of little national significance before potashprices escalated in the last couple of years, we now believe it puts the country’seconomic growth engine, driven in large part by agriculture, in a precariousposition. However, there is strong evidence that Brazil contains an undevelopedworld-class potash ore body within the Amazon basin, which if developed couldultimately give rise to Brazil’s potash self-sufficiency. We submit that domesticpotash mines could offer a material and sustainable transportation and duty costadvantage to imports from the major producers in Canada, the Middle East andRussia. Indeed, we estimate the cost advantage could be US$1+ billion of presentvalue (compared to mine construction capex of US$2 billion) assuming historicfreight rates and import duties, and possibly more than twice this value if weenter an era of sustained high oil prices. Given the potential economic and

political benefits at hand, we submit it is only a matter of time before governmentand private investment moves to develop a domestic potash industry that rivalstoday’s leading producers.

We identify several Canadian-listed junior companies who could benefitfrom an emerging Brazil potash industry, and note existing leaders could bechallenged should such an industry add meaningful new global KCl supply. We highlight several publicly-listed and private companies who could helpdefine an emerging Brazilian potash industry. While it is too early to know whichof these companies will prosper if and as Brazil’s potash industry evolves, wesuggest better-positioned companies are those that can claim one or more of thefollowing attributes: a) access to a potash resource with favourable economics, b)

ease of permitting or permits in place, c) availability of, and/or proximity to,infrastructure, d) strong management and/or public/private sector partner(s), ande) capital or access to capital. Alternatively, we suggest existing potash industryleaders who have benefited from market dominance in recent years stand to losethe most if Brazil becomes potash self-sufficient and the next major independentexporter of this strategic resource.

Why an Influential Brazil KCl Industry is Inevitable

Fertilizer Importance is Clear Given Brazil’s Ag-centric Economy…

Agriculture is an out-sized contributor to Brazil’s GDP, placing significantimportance on access to potash fertilizer. According to the US State

Department, agriculture accounted for an estimated US$110 billion or 5.5% of Brazil’s 2008 GDP (or ~25% when all agri-business is included) and ~36% of thecountry’s exports. This distinctive Ag focus has evolved from rising productionof many agricultural commodities owing to government reforms in the late 1980sand early 1990s, which liberalized the economy. An eventual devaluation of theBrazilian Real earlier this decade also helped stimulate export demand. As aconsequence of these and other factors, Brazilian production of many agriculturalproducts has demonstrated solid growth over the last 20 years (Exhibit 1). We

Robert B. Winslow, CFA (416) 847-3403; [email protected] August 19, 2009 – 2





note that Brazil is now among the world’s top exporters of many ag commodities,including coffee, sugar, orange juice, soybeans, tobacco, beef, and poultry.

Exhibit 1: Brazil has Exhibited Solid Production Growth Across many Ag Commodities Since mid 1980s

Growth in Brazilian Agri cultu re Production for Select Commodi ties (1985-2005)

0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200%

Vegetables, Fresh

Oranges

Bananas

Rice, Paddy

Hen Eggs

Corn (Maize)

Grapes

Sugar Cane

Tomatoes

Cow Milk

Tobacco Leaves

Cattle Meat

Soybeans

Chicken Meat

Pigmeat (Pork) 482%

299%

Source: FAO

…and this Importance is Expected to Increase

One of the few places with potential to materially increase arable land,Brazil plans to continue expanding agricultural production in the comingyears, driving further potash demand. As a nation with an abundance of renewable freshwater (Exhibit 2) and several million acres of untapped arableland (Exhibit 3), Brazil has the ability, and we submit the desire, to continueexpanding output of many of the agri-products noted earlier. This desire wasmost recently demonstrated in June 2009 when Brazil announced an impressive37% y/y increase in agricultural spending (to ~US$57 billion) in the country’s

Agriculture and Livestock Plan 2009/2010. These government funds are beingoffered to help farmers purchase crop inputs and market their produce. As thislatest government financial plan suggests, the agricultural sector is key toBrazil’s economic growth and as such the country’s future demand for potashfertilizer should remain robust and continue to grow for many years, if notdecades. On the back of these and other factors, industry leading analysts atBritish Sulphur Consultants have forecast Brazil’s potash demand climbing to~10 million tonnes by 2015 and ~12 million tonnes by 2020, demand levels thatrepresent 5%+ CAGRs over their respective periods (Exhibit 4).





Exhibit 2: Brazil has the Largest Renewable Fresh Water Resources in theWorld – Supportive of Continued Growth in Agricultural Production

Annu al Renewable Fresh Water Resources, Select Cou ntri es

0

3,000

6,000

9,000

Brazil Russia Canada United

States of

America

Indonesia China Colombia Peru

0 0 0 s c u b i c m e t e r s / y e a r

Source: Pacific Institute

Exhibit 3: Brazil’s Leading Arable Land Expansion Potential is AlsoSupportive of Future Robust Agricultural Production Growth

Select Countr ies with Sign ifi cant Arable Land Resource Potential

0

200,000

400,000

600,000

Brazil US Russia India China Canada Australia

A r a b l e L a n d

( 0 0 0 s ,

h a )

0%

20%

40%

60%

80%

Potential Arable Land (gross) Actual Arable Land Utilization (% of Potential)

Note: Potential Arable Land does not account for competing land uses such as urban, protected and forested areas. For example,

in 2008 the FAO estimated that global gross arable land potential is 4.1 billion ha while net arable land potential is 1.6 billion ha.

Source: FAOSTAT, TERRASTAT, WWCM





Exhibit 4: Brazil is Expected to Experience Robust Demand Growth for KClFertilizer (supported by Abundant Water and Arable Land Resources)

Brazil ian Potash Demand

0

2,500

5,000

7,500

10,000

12,500

2000 2005 2010F 2015F 2020F

T o n n e s K C l ( 0 0 0 )

~6% 15-yr CAGR

Source: British Sulphur Consultants

Lower Transport Costs Offer a Sustainable Competitive Advantage

Brazilian potash miners would have a material, sustainable competitivetransportation cost advantage over imports crossing the world’s oceans.Given most of Brazil’s potash imports are from Canada, Russia and the MiddleEast, local potash producers should have a meaningful transportation costadvantage. Earlier this decade ocean vessel freight rates to Brazil for KCl andother bulk commodities were in the range of US$20-US$40/tonne before sky-rocketing to over US$80/tonne during a period of record oil prices in 2008. Other

transport costs such as supplier rail and handling charges as well as importduties/taxes added US$20-US$40/tonne such that total delivered transportationand import costs to Brazil were ~US$40-US$80/tonne. A domestic KCl sourcewould materially reduce or eliminate these costs, giving local potash producers asustainable advantage. If we assume a 2 million tonne per year mine as well ashistoric freight rates and duties (ex-2008), the annual savings of such a domesticmine could approach US$160 million; if we assume a return to the higher energycosts of 2008 the annual savings could be US$240+ million. Discounting theseproposed savings at 10% over 20 years yields a present value of ~US$700million to US$1.4 billion (Exhibit 5) or more than US$2 billion under a period of sustained high oil prices. We previously noted the importance of this transportcost advantage as a primary motivator behind Vale’s purchase of Rio Tinto’s

Argentine potash assets. (New Major KCl Minor Forming – US$850M DealSecures Transportation Advantage, January 30, 2009.)

http://www.wwcmrad.com/reports/013009_Ag_Industry_Update_A_New_Potash_Player_Forming.pdf








Exhibit 5: The Value of Transportation Savings for a 2M tpy Domestic KClMine Could Exceed US$1 Billion on a US$2Billion Capex Mine

20-year Present Value of Transpo rtation & Import Cost Saving s (USD, millions)

Shipping Costs + Duties to B razil (USD/t)

$340.54 $20 $40 $60 $80 $100 $12013% $281 $562 $843 $1,124 $1,405 $1,686

12% $299 $598 $896 $1,195 $1,494 $1,793

11% $319 $637 $956 $1,274 $1,593 $1,911

10% $341 $681 $1,022 $1,362 $1,703 $2,043

9% $365 $730 $1,095 $1,461 $1,826 $2,191

8% $393 $785 $1,178 $1,571 $1,964 $2,356

7% $424 $848 $1,271 $1,695 $2,119 $2,543

D i s c o u n t R a t e

Source: WWCM

Domestic KCl Supply Could Help Ensure Economic Growth…

Brazil, which imports ~90% of its potash needs, is the world’s second largestpotash importer – eliminating this market dependency could de-risk growthin the country’s agricultural output. Brazil consumed an estimated 7.4 milliontonnes of potash in 2008, of which an estimated 6.5 million tonnes was imported(Exhibit 6). In comparison, China, generally the world’s largest importer of potash, saw those imports fall to ~5.0 million tonnes in 2008 from ~9.6 million in2007 as demand waned with the global economic slowdown and China drewdown domestic inventories. Given that Brazil must compete with China (and thatcountry’s ~US$2.1 trillion in currency reserves) and other emerging markets tosecure potash, we see clear incentive for Brazil’s government to help guaranteedomestic supply, thus mitigating risks to economic growth posed by potentiallystrained global potash supplies and the prospects of escalating potash prices.

Further, we submit that establishing lower-cost local potash supply (owing toreduced transportation costs and eliminated duties as identified earlier) couldhelp establish Brazil as a sustainable, lower-cost grain producer.

…and provide Additional Economic Stimulus

Development of a domestic potash industry would also presumably besupported by local governments, owing to the related job creation andeconomic stimulus. Potash Corp. (POT-T) owns and operates five potash minesin Canada, which employed ~2,000 workers in 2008. Similarly The MosaicCompany (MOS-N) operates three potash mines in Canada, which employed~1,500 total workers in 2008. Lastly Agrium (AGU-T) operates one potash minein Canada with ~400 employees. Combined, these three potash producers

employed nearly 4,000 people and paid an estimated US$1.3 billion in Canadianprovincial and federal corporate taxes and royalties last year. Given these datapoints, as well as the numerous trickle-down economic and political benefits thatdevelopment of a major potash industry could create, we contend it is a matter of when, not if, Brazil builds a meaningful domestic potash industry, (presumablywith considerable government support).





Exhibit 6: Historically Brazil has had the Second Highest (after China)Level of Potash Imports

Source: Fertecon, Potash Corp.

Brazil Appears to have an Abundance of Mineable Potash

Brazil may have a world-class potash basin of similar scale to Canada’sPrairie Evaporite; such a basin could support several million tonnes of annual KCl production that could afford Brazil potash self-sufficiency. While there are a number of potential sources of potash ore in Brazil (Exhibit10), we focus on the apparent world-class potash basin in the Amazonas region,which looks comparable in scale to that of the Prairie Evaporite in Saskatchewan,Canada (Exhibit 7). According to the results of prior drilling and surveyscompleted by Petroleo Brasileiro SA (“Petrobras”) (PBR-N) and others, theAmazon potash basin located in north-east Brazil appears to have relativelyconsistent and economic ore grades (~17%-30% K2O) and thickness, suggestingthe basin is amenable to conventional underground mining techniques. Initialestimates by Petrobras suggest there could be as much as 1 billion tonnes of K2Oin the Amazon region, which would rank this potash basin among the top five inthe world, along with the Saskatchewan Prairie Evaporite, the Russian/Belarusiandeposits, the Permian Zechstein deposits located in Germany and surroundingcountries, and the Danakil Evaporite basin in Ethiopia. We believe a basin likethat found in the Amazon, if the size and grades prove out, could support severalmulti-million tonne producing mines for decades, making Brazil self-sufficient inpotash and quite possibly creating another major global potash exporter.

Global Potash Imports





Exhibit 7: If Amazon Basin Proves to be Comparable to SK’s PrairieEvaporite, Brazil Could Support Several Multi-million Tonne KCl Mines

Source: Brazil Potash Corp.

Potash’s High Strategic Value Should be a Motivator

Brazilian government leaders (and state-run enterprises) are taking morenotice of potash as a strategic resource. We believe Brazil’s top policy-makersare urgently considering the options to secure domestic sources of potash given

the mineral’s strategic value as a vital nutrient for large-scale food production –potash represents fertilizer, fertilizer represents food, and food representspolitical stability. We contend this idea of “strategic value” was highlighted bythe August 2008 cancellation of the sale of potash mining rights in the Amazonbasin by Petrobras to Canadian company Falcon Metais Ltda. Petrobras, a state-run oil company in Brazil, cited government pressure as the reason behind thesale cancellation. We note that in late June 2009 Petrobras announced plans tocommence a feasibility study on the Amazon potash deposit for completion bythe end of 2009, with the ultimate goal of developing a mine.

Potential Hurdles to Potash Industry DevelopmentNotwithstanding the factors listed above and our view that an influential

Brazilian potash industry is a matter of when, not if, there are a number of hurdles that should not be overlooked on the road to developing a potash industryin Brazil.

Supporting Infrastructure is Key, yet Currently Insufficient

Brazil’s infrastructure may be challenged to meet the needs of a sustainable,large-scale potash industry. We understand that the Amazon potash basin lackssubstantive road and rail access, and in some areas is hundreds of kilometers




from the nearest major river port. In addition, we believe the existing river portfacilities throughout the country require significant investment before they canreasonably be expected to support a large-scale, multi-mine domestic potashindustry. That said, Brazil’s Growth Acceleration Plan (“PAC”) announced in2007 originally proposed transport-related investment of ~US$27 billion through2010 with a focus on constructing and rehabilitating highways, rail lines, airports,

seaports and riverports. Since then the investment target has been increased to~US$43 billion, and as of June 2009, the government has claimed that ~US$5billion has been invested in completed transport projects to-date. We view theinfrastructure stimulation undertaken by Brazil’s current Administrationpositively as it is critical to the future of a meaningful domestic potash industry.

Paradoxically, Potash’s Strategic Importance May Slow Development

Politicians may put burdensome restrictions on foreign investment targetedat developing Brazil’s strategic potash resources. As we previously noted, theBrazil government blocked the sale of potash mining rights by Petrobras toCanadian company Falcon Mines in August 2008 (for a potash deposit in theAmazon region). We believe this decision was in part a response to the perceivedstrategic importance of potash. While it is not out of the realm of possibility thatPetrobras, Vale (VALE-N), Votorantim (private) or some other Brazilian miningenterprise(s) could help stimulate a potash industry (eventually), we believeinvestment from, and cooperation with, foreign enterprises/investors wouldaccelerate the process. We further contend that if such foreign involvementincluded ready access to capital, world-leading industry knowledge andexpertise, and if production ear-marked for export was limited to some extent, therisk of burdensome foreign investment restrictions would be eased.

Resource Risk – Will Domestic Potash be Cost Competitive?

Initial indications are that Amazon potash deposits can produce potash atcomparable costs to those of the Prairie Evaporite in SK, but it is still tooearly to know with reasonable certainty. Early suggestions are that theAmazon potash deposits contain ores amenable to conventional undergroundmining techniques, though K2O grades are believed to be ~70% of those found inSaskatchewan, implying higher processing costs. Largely offsetting this, labourcosts (which comprise ~20% of the direct costs of production for a potash mine)are materially lower in Brazil than Canada. The net implication is that operatingcosts of a prospective Amazon potash mine should be comparable to mines inCanada’s Prairie Evaporite, near US$90-US$110/tonne. However, since theBrazilian industry is in the early stages of exploration it is too soon to knowwhether operating costs of Amazon mines will be globally competitive – webelieve detailed feasibility studies are at least two years away. Should Brazilianpotash mines have elevated operating costs due to lower grades, wage inflation,tailings disposal or other issues, which more than offset the transportation costadvantage over imported potash, returns on investment could be suboptimal,constraining large-scale industry development.

Environmental Risk – Protected Regions can be Source of Permit Delays

Some regions of Brazil (such as the rainforest) are ecologically sensitive,which could affect the pace and scale of resource development. A highlyecologically sensitive area in Brazil is the Amazon rainforest region, which is





also home to the Amazon potash basin. While underground potash miningtypically causes minimal disruption to the surface area, special interest groups arelikely to provide opposition to potential development and permitting. TheBrazilian government is acutely aware of the sensitive nature of the rainforest,and is currently working on a sustainable development plan in the Amazonthrough land-rights reform and the launch of recent policies known as “Plano

Amazônia”. In our view, these actions by the Brazilian government should bebeneficial to companies seeking responsible development plans in the area.

Possible Government Intervention May Hinder Investment

Perception that the government may look to control potential potash minescould deter investment. We expect potash fertilizer to play a pivotal role in thegrowth of Brazil’s domestic economy therefore there is risk that any domesticpotash mines developed by the private sector could ultimately experiencesubstantial government involvement. (Note: Brazil’s President is recently allegedto be seeking legal ways to re-nationalize Vale, the world’s largest iron orecompany.) Examples of government intervention may include imposed priceceilings and export restrictions on domestically-produced potash to protectBrazilian growers from global prices, particularly if the markets return to aperiod of price escalation. We submit the perceived risk of governmentintervention, while deemed modest by some, could deter investors, thus limitingaccess to capital and delaying or preventing mine development. Regardless of how Brazil’s government may act, we believe creative solutions by prospectivepotash mine developers such as special off-take agreements for domestic and/orinternational parties could be implemented to mitigate much of this risk.

Falling Fertilizer Prices Could Shelf Projects

Government officials may lack the foresight or political support to develop adomestic potash industry if potash prices continue their downward trend.The most recent potash prices for delivered potash to Brazil have been~US$525/tonne (down ~30% from orders earlier this summer), confirming thatpotash prices are not immune to price deflation as a result of global demanddestruction and rising inventories. Should potash prices continue to soften in thecoming year(s), any political will to pursue development of domestic potashsupply could abate. While we believe the current slack in the global potashsupply-demand situation is unlikely sustainable, and thus concerns of supplyconstraints will eventually return, we can not deny the risk that projects could beshelved in a deflationary fertilizer price environment. As per Exhibit 8, projectedIRR for a generic two million tonne per year potash mine in the Amazon(assuming US$2 billion of construction capex) is challenged (i.e. IRR ~20% andlower) at assumed global prices below US$450/tonne (FOB Vancouver).






Exhibit 8: Investment Returns on a 2M Tonne Amazon Greenfield Potash Mine are less Compelling (i.e.IRR < 20%) at Global KCl Prices below US$450/tonne (FOB Vancouver)

Amazon Potash Mine Economics Internal Rate of Return - Amazon

(USD) KCl Price, FOB Vancouver (USD)

KCl price/tonne $450 FOB Vancouver - world price 22.1% $175 $250 $350 $450 $550 $650 $750

LOM 40 years $600 9% 17% 26% 34% 41% 47% 53%

Capex/tonne $1,000 $800 5% 12% 20% 27% 33% 38% 43%

Mine production 2.0 M tonnes Capex/ $1,000 2% 9% 16% 22% 27% 32% 36%

Capex total $2,000 M tonne (USD) $1,200 0% 7% 13% 19% 23% 28% 32%

Construction to full production 3.0 Years $1,400 -2% 5% 11% 16% 20% 24% 28%

COGS/tonne $90

Opex/tonne $10

Freight/tonne $50 ocean to BRZ

$20 inland BRZ

Upfront working capital $50 M

Sustaining capex/yr $50 M

Taxes 20%

Amazon Mine, full production

Revenue $960 M; FOB Vancouver + ocean freight - inland freight

Op Costs $200 M; COGS + opex

EBITDA $760 M

Taxes $142 M; assumes all equity financed

Sustaining capex $50 M

W/C changes $0 M

FCFF $568 M

IRR 22.1%

Source: WWCM

Currency Risk – A Rising Real could Pinch Demand for Ag Exports

Growth in Brazil’s agricultural exports over the last decade was stimulatedin part by a depreciating Real – future robust appreciation of Brazil’scurrency could undermine Ag exports and thus fertilizer demand. Asdiscussed earlier, after the Real devalued ~40% v. the USD from 1999 to 2002,agri-products exports (traded in dollars) grew significantly. If the Real undergoesa period of rapid appreciation versus the USD, there is risk that the country’sagricultural exports could wane for a period of time, easing fertilizer demand. Asa partial offset to this currency risk we note the Brazilian government has inplace preferential grower credit schemes that can help alleviate farm cash flowissues when export prices are low. The government also has the option to conductintervention purchases whereby the government enters the market to buy andstore agri-products if the market prices fall below fixed targets.

Trying to Identify Potential Winners (and Losers)While many companies will attempt to prosper in an emerging Brazilianpotash industry, many will not succeed – we list five criteria that we believewill help identify those companies most likely to prevail. We believe theeconomic and political case is compelling for the future development of aBrazilian potash industry, and that industry participants will find creativesolutions to overcome the challenges we have discussed above. With that in mind





we list five criteria (Exhibit 9) we believe will be important to gauge theprospects of the many Canadian early-stage fertilizer companies(explorers/developers) active in and around Brazil. In addition, in the sectionbelow we provide brief descriptions of several of the private and publicly-listedCanadian companies who may ultimately help define an emerging Brazilianpotash industry. Companies that can demonstrate proficiency in the five criteria

of Exhibit 9 will, in our view, offer more compelling opportunity for investors.

Exhibit 9: A Guide to Identifying Potential Winning Participants in anEmerging Brazilian Potash Industry

Key criteria:

1) Access to a resource with favorable economics;

2) Ease of permitting or permits in place;

3) Availability of, and/or proximity to, infrastructure;

4) Strong management and/or public/private sector partner(s), and;

5) Capital or access to capital.

Source: WWCM

We submit current industry leaders will be challenged to continuegenerating outsized economic profits if Brazil becomes self-sufficient in, anda major global exporter of, potash. Arguably Brazil is at least five to sevenyears away from seeing the first large-scale potash mine (in the Amazon), and noless than a dozen years from becoming potash self-sufficient. However, shouldBrazil make strides to develop a world-class potash industry, and presuming

domestic producers do not join global marketing agencies Canpotex Ltd. andBelarusian Potash Co., current leading KCl producers are unlikely to repeat theeconomic profits of recent years, which were stimulated by what could be viewedby some as cartel pricing. (Example: Potash Corp.’s Potash division generated80% gross margin in Q4/F08, a period when global asset prices were collapsing –unusual margins for any commodity in a competitive market.) We would even goso far as to suggest the equity value of publicly-traded market leaders couldbegin to reflect long-term potash prices well below current contracts (i.e.~US$460/tonne to India) upon an announcement of a major Brazilian potashinitiative, particularly if such an initiative came with substantial political support.

Select Companies with Exposure to South American Potash Fertilizer

Public Companies – Small Cap (also see Exhibit 10)

Allana Resources (AAA.V) – Has a 100% interest in 154,000+ ha in the Nequenprovince of Argentina, a portion of which is adjacent to Vale’s Rio Coloradopotash project. We believe management is more focused on the Company’spotash exploration prospects in Ethiopia. Market cap: ~C$14M; cash: ~C$3M.

Amazon Mining Holding Company (AMZ.V) – Owns the rights to the CerradoVerde potash project (“Cerrado Verde”), consisting of 84 claims covering




165,069 ha in the western part of Minas Gerais state (SE Brazil). Vale (formerlyCVRD) controls a significant block of exploration licenses adjacent to CerradoVerde. Market cap: ~C$16M; cash: ~C$5M.

Atacama Minerals (AAM.V) – Industrial minerals producer in Chile with focuson iodine production and specialty nitrate fertilizers. Also hold title to the

Salvador Potash Project in Bahia, Brazil. Market cap: ~C$69M; cash: ~C$29M.

Talon Metals (TLO.T) – Recently acquired potash exploration rights on~21,000 ha and has applied for the exploration rights on an additional ~19,200 hain various project areas in the Sergipe and Alagoas states of Brazil, near Vale’sproducing Taquari-Vassouras potash mine. Market cap: ~C$9M; cash: ~C$6M.

Lara Exploration Ltd. (LRA-V), Sprott Resource Corp. (SCP-T; Buy rating,$3.50 target) – Acquired KCl exploration licenses on ~14,000 ha in SergipeState, adjacent to basin of Vale’s Taquari-Vassouras mine, which produced~600k tons KCl in 2008. Claims held through Lara Alianca Ltda., a Brazil firm100%-owned by Lara Alliance BVI Ltd., which is owned 50% by Lara

Exploration Ltd., 50% by Sprott Resource Corp. Lara Exploration Market cap:~C$12M; cash: ~$13M. Sprott Resource Market cap: ~C$244M; cash: ~$160M.

Western Potash Corp. (WPX-V; Buy rating, $1.25 target) – Have applied forBrazil potash exploration rights, which remain pending, though we believemanagement’s focus is more on potash exploration and development prospects inSaskatchewan and Manitoba, Canada. Market cap: ~C$47M; cash: ~C$30M.

Private Companies (also see Exhibit 10)

Brazil Potash Corp. – Control large land position (2,000,000+ ha) in Amazonbasin, adjacent to known Fazendinha and Arari potash deposits. Have acquiredand processed 27,000 km of seismic and data from 150 petroleum boreholes.

Lithium Americas Corp. – Over 83,000 ha of land claims comprising theSalares Potash-Lithium project, strategically located on the salt lakes of theArgentinean Puna adjacent to producing mines of SQM, FMC, Orocobre (ORE-AU) and Rio Tinto. Acquired properties from Latin American Minerals Corp. inJune 2009 (LAT.V). Lithium Americas raised $1.6 million in June 2009 andintends to go public by mid 2010.

MBAC Fertilizer Corp. (or “MBAC”) – Operates ItaFos, a phosphate mine incentral Brazil. MBAC also recently acquired the Aneba potash project and theApui phosphate project from Redstone Resources (RDS-AU), and made a 3million ha claim for offshore potash exploration.

Oxbox Holdings Corp. – Optioned the K-2 potash project in Nequen, Argentinafrom Marifil Mines Ltd. (MFM-V).

Sociedad Chilena de Litio Ltda. (or “SCL”) – Has existing production of 80,000 tonnes K2O annually from the Atacama region of Chile.

The Sentient Group – Developing the Rincon Lithium project, a major lithiumand potash brine resource located in the Salta Province of Argentina.






Exhibit 10: Select South American Potash Projects and Agricultural Growing Regions

Source: Googlemaps.com, WWCM

CERRADO Brazil (largegrowing region)

PAMPA Argentina(large growingregion)

Atacama, Chile – SQM, SCL potashproduction

Rio Coloradopotash project(Vale)

Puna potash project(Latin AmericanMinerals)

Brazil PotashCorp.(private)

Fazendinha, Araipotash deposits(Petrobras)

Cerro Verde potashproject (AmazonMining Holding Co.)

Vale potashclaims

Salvador potashproject (AtacamaMinerals)

Taquari-Vassouras mine(Vale) potashproduction

Bancor potash project(Talon Metals) andLara Alianca Ltda.claims.

Aneba potashproject (MBAC- private)

K-2 potash project(Oxbow/MarifilMines)

Allana Resources’potash project

Cauchari potashproject (Orocobre)

Rincon lithium-potash project(Sentient)




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next 12 months. Generally, Strong Buy rating is expected to produce a totalreturn of 25% or more, Buy a total return of 10% to 25%, Market Perform a totalreturn of 0% to 10% and Underperform a negative total return. Speculative Buyrating is expected to produce a total return of 25% or more, but is based onfactors and forecasts that have high degrees of uncertainty. The distribution of the recommendations for the last three-month period and their relationship withinvestment banking business are available on request by emailing [email protected].

Analyst CompensationResearch analysts receive compensation based on a number of factors asdetermined by WWCM’s management. Compensation is affected by all of the

firm’s business activities, including revenue generated from capital markets andinvestment banking. No part of the compensation of the analyst who authoredthis report is based on the specific recommendation or views expressed in thisreport.

Analyst TradingWWCM permits analysts to own and trade in the securities and/or derivatives of those companies under their coverage, subject to the following restrictions: notrades can be executed in anticipation of the initiation of coverage; no trades can






be executed for five days after dissemination of launching coverage or a materialchange in recommendation; and no trades can be executed against an analyst’srecommendation. Exceptions require prior approval of the Head of Research andcan only be executed for a reason unrelated to the outlook of the stock.

Dissemination of Research

WWCM endeavors to make all reasonable efforts to provide research,simultaneously and electronically to all eligible clients and potential clients.

Company Name Ticker Symbol Applicable Disclosure

Sprott Resource Corp. SCP-T Nil

Western Potash Corp. WPX-V 1, 2

Applicable Disclosure Details

1) In the last 12 months, WWCM, or its affiliates, have managed or co-managedan offering of securities by the subject issuer.

2) In the last 12 months, WWCM, or its affiliates, have received compensationfor investment banking and related services from the subject issuer.

3) The research analyst or a member of the research analyst’s household, or anyassociate or individual preparing the report, has a long position in the sharesand/or the options of the subject issuer.

4) The research analyst or a member of the research’s household, or anyassociate or individual preparing the report, has a short position in the sharesand/or the options of the subject issuer.

5) WWCM or its affiliates is a market maker, or is associated with the specialistthat makes a market in the securities of the subject issuer.

6) WWCM or its affiliates own more than 1% of any class of common equity of the subject issuer.

7) WWCM has a conflict of interest with the subject issuer.

8) The research analyst(s) has a conflict of interest with the subject issuer.

9) Over the last 12 months, the research analyst has received compensation basedon a specific investment banking transaction relative to the subject issuer.

10) The research analyst or a member of the research analyst’s household serves asa Director or Officer or Advisory Board Member of the subject issuer.

11) The research analyst(s) has visited and reviewed the operations of the subjectissuer.

12) A portion of travel expenses of the analyst were paid or reimbursed by issuer.

Analyst CertificationEach analyst of WWCM whose name appears in this research report hereby

certifies that (i) the recommendations and opinions expressed in the researchreport accurately reflect the research analyst’s personal views about any and allof the securities or issuers discussed herein that are within the analyst’s coverageuniverse and (ii) no part of the research analyst’s compensation was, is, or willbe, directly or indirectly related to the provision of specific recommendations orviews expressed by the research analyst in the research report.

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