Summary: A number of ASX-listed developers, including the Owen Hegarty-led Highfield Resources, believe potash is a commodity worth pursuing. Although the market is dominated by cartels, the hopefuls plan to undercut them on price. Demand for potash is strong as the fertiliser is used in food production.
Key take-out: New players might succeed if they can keep costs low and win ironclad contracts, but they might also find it takes a long time to break a cartel.
Key beneficiaries: General investors. Category: Mining stocks.
Most Australian investors have forgotten about potash thanks to BHP Billiton’s go-slow at its big Jansen project in Canada and low prices for the crop fertiliser, though some people believe it is possible to carve out a slice of a profitable business.
One of the believers in potash being a commodity worth pursuing is Owen Hegarty, a man better known for his work in copper at Oxiana Minerals (now the O in OZ Minerals), and more recently as a director of iron ore miner Fortescue Metals Group.
The Hegarty-led Highfield Resources, which has a market capitalisation of $180.5 million, is not alone in planning a potash mine. Other ASX-listed potential developers include South Boulder Mines, Potash West, Rum Jungle Resources, Reward Minerals, Elemental Minerals and Agrimin.
Apart from potash being the obvious thread connecting those small companies there are two other links: a belief that it is possible to find a niche in a market dominated by a handful of big producers, and that monopoly behaviour of the big producers is unsustainable.
If BHP Billiton had pushed ahead rapidly with Jansen it would have accelerated the end of the Canadian (Canpotex) cartel which controls the marketing potash from that country, and applied competitive pricing pressure on the East European cartel Belarusian Potash.
The potash cartels, like the oil cartel which is the Arab-led Organization of Petroleum Exporting Countries, are finding market control increasingly difficult.
Rather than encourage the development of new and lower cost mines, or even attempting to expand demand for potash through price incentives, the cartels have used rigid price-control mechanisms which have stifled the industry and annoyed customers.
BHP Billiton was attracted to potash partly because it saw a way to introduce modern mining and marketing methods to an agriculture-linked product. It believed it could become the low-cost leader, either by acquiring Canada’s top producer, Potash Corporation, or through the Jansen development after the Canadian Government banned the takeover bid to protect the local cartel.
What seems to be happening today is that customers are driving demand for new, more freely available and more competitively priced sources of potash, one of three key fertilisers used by farmers to boost crop yields. The other two are nitrogen and phosphorous.
Hegarty is confident that Highfield will be able to develop its Muga-Vipasca project near Pamplona in northern Spain because it will be a low cost producer close to the heart of markets in Western Europe, and close to ports for export.
Source: Highfield Resources
“It’s not a complicated business as far as the mining is concerned,” Hegarty said. “The key is in keeping costs down and in developing markets.”
What that means is that Highfield, which has four potential developments in Spain, plans to undercut the cartels on price and offer a new source of potash to a market keen to break from supplier control.
Potash basins in Spain. Source: Highfield Resources
The other potash hopefuls have a similar view though few are as closely located to essential infrastructure such as a rail network to shift a bulk commodity, and a well-established market with deep distribution channels.
Elemental has what looks like a good project at its Dougo deposit which is unfortunately located in Africa’s Republic of Congo. South Boulder has outlined a potentially world-class deposit at Colluli in the north-African country of Eritrea, an equally troubled part of the world albeit one well located to supply potash to India.
Potash West, Global Resources and Reward Minerals have projects in WA, while Rum Jungle is exploring the Karinga Lakes potash deposit in the Northern Territory. All of the Australian projects are a long way from world markets and face expensive transport costs.
Apart from a locational advantage over its rivals Highfield appears to have a stronger financial base.
EMR Capital, a fund management business set up by Hegarty and his associates, has committed part of a recently raised $450 million for the Spanish potash project while the development and operating costs at Muga-Vipasca are said to be amongst the lowest in the industry.
Cash costs to customers. Source: Highfield Resources
Highfield’s plan is to finalise mine design and obtain final government approvals before embarking on a fund-raising mission to attract the estimated $US350 million to develop the Muga-Vipasca mine and associated infrastructure.
Project capex and capital intensity. Source: Highfield Resources
A preliminary feasibility study was filed last May and a definitive feasibility study is nearing completion on a development which is in a region with a 100-year history of potash production.
Because it is a soft, bulk, material which was formed as a form of salt deposit on an ancient sea floor, potash is easy to mine, generally using equipment similar to that used in modern underground coal mines where a continuous extraction technique called longwall mining is used.
Potash at Muga-Vipasca (which was previously called the Javier project) is located between 200 metres and 1000m below the surface which means Highfield will need two declines (tunnels) to reach the material.
If Spanish government approvals are forthcoming, and nothing can be assumed when it comes to mining in environmentally-sensitive Europe, Highfield could become a source of potash within the next two years.
But that’s when the real game could start because existing producers will not welcome a new entrant even if it is only planning to sell one million tonnes of material into a 60 million tonne-a-year market.
Highfield will need water-tight marketing agreements to avoid being swamped by Canpotex, Belarusian or other existing producers such as Israeli Chemical Industries.
The winning card for the Australian venture in Spain could be its cost of production which Hegarty said is currently estimated to be around $US150 a tonne, low enough to provide a comfortable margin in an industry where the price can fluctuate from $US450/t to $US300/t.
“The thing about potash is that you don’t need to be big to succeed,” Hegarty said.
“Demand for potash is strong and would be stronger if the cartels had made an effort to develop the market rather than simply focussing on managing supply to keep the price high.”
“We believe the macro outlook for potash is good because it is a key ingredient in food production, and the world wants more food.”
The potential to become a supplier of a mined product to agriculture is also what keeps the lights on at the other small explorers, and in the Jansen development department at BHP Billiton.
But whether they can break into a tightly-controlled business will be the test because another connection between potash and oil is that in both cases there is an excess of potential supply hanging over the market.
Worldwide installed potash capacity is estimated to stand at 82 million tonnes, well above last year’s worldwide sales of 57 million tonnes, and subdued demand growth of around 2% a year.
Too much oil is what led to the collapse in its price last year with Saudi Arabia and other OPEC members refusing to cut production, hoping to regain market control by forcing high-cost producers out of the industry.
The potash business could go the same way if the Canpotex and Belarusian cartels boost production to the limit of their installed capacity as a means to driving competitors out of their industry.
BHP Billiton believes that at some point it will be able to bring Jansen into production as a low-cost leader using the skills developed in its iron ore coal units.
Small potential producers such as Highfield, South Boulder and Elemental hope they can slide into the business with low-cost operations able to supply potash at a price well below that of the cartels, and one which the big producers cannot achieve without destroying themselves.
The new players might succeed if they can keep costs low and win ironclad, long-term, contracts from customers.
But they might also find that it takes a long time to break an international cartel.