By Alistair MacDonald 

Two investment banks have threatened legal action against a Canadian potash miner for allegedly not paying advisory fees, in an unusual move sparked by a deal that was once hailed as a potential harbinger of Chinese investment into the cash-hungry junior potash industry.

Lawyers for Swiss banking giant UBS AG and Montreal-based Lockwood Financial Ltd. separately sent letters to Western Potash alleging nonpayment of fees on the June 2013 deal. China BlueChemical Ltd. and a Chinese partner took a 19.9% stake in the Vancouver-based firm, in a high-profile transaction that triggered hopes of further Chinese investment in the potash sector, where exploration companies have struggled to raise cash. That increase in Chinese investment into the sector never materialized and Western Potash's deal is now the subject of legal complaints.

On Wednesday, lawyers for Lockwood, a boutique firm, sent a letter to Western Potash alleging breach of contract for not paying for an introduction to China BlueChemical or for general advice on raising funds, according to a copy of the letter seen by The Wall Street Journal.

The firm said it signed an advisory agreement with Western Potash on September 2010 and that it was terminated in March 2012. In its letter, the firm alleges that advice and introductions from that period formed the basis of the agreement with China BlueChemical, which is a subsidiary of oil giant Cnooc Ltd. Lockwood said it would pursue legal action unless the situation is resolved.

Western Potash and its lawyers, Borden Ladner Gervais LLP, declined to comment. China BlueChemical couldn't immediately be reached for comment.

In January 2012, Western Potash hired UBS to also advise it on raising funds. Last September, lawyers for UBS sent a letter to Western Potash demanding fees for that advice, according to a regulatory announcement made by Western Potash. The filing said that fees would be based on certain "triggering events" that didn't occur, and that UBS's case against the miner was weak.

UBS declined to comment. Western Potash and its lawyers declined further comment.

Western Potash is trying to develop a potash mine in southern Saskatchewan. That province has almost half the world's reserves in potash, but aside from a few established giants such as Potash Corp. of Saskatchewan, few miners have been able to raise the funds to mine it. The recent drop in the price of potash, which is used as an ingredient in fertilizer, has added to the sector's woes as investors mainly steer clear.

Western Potash shares have lost almost two-thirds of their value since the company went public in 2008.

Write to Alistair MacDonald at alistair.macdonald@wsj.com

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