Potash: is enthusiasm here to stay?

Potash has made a remarkable return at the small end of the mining market even as BHP Billiton's interest fades in the fertiliser.

Over the past two months there has been a rush into potash-exposed explorers. Some have effectively doubled in price with investor demand ensuring the success of opportunistic share issues.

But whether the potash revival is being driven by fundamental factors such as the price of the crop nutrient, or is simply an example of speculative share trading, is a critical question for cautious investors to consider.

Two of the hottest stocks have been Salt Lake Potash and Goldphyre Resources, which have adjoining tenements in central WA where potash has been found in the bed of a remote playa, or dry salt lake.

Salt Lake shares have risen from 21c early last month to 35c, but were trading at 40c last week. Goldphyre jumped from 5.8c to 11.5c before settling back to 7.2c.

Both have been quick to capitalise on the revitalised interest in potash.

Salt Lake raised $8.4 million in fresh capital last week, 62 per cent more than the $5.2 million it had originally been seeking with investors keen to back a business led by Ian Middlemas, a mining-company promoter with an enviable track record of success in delivering higher share prices.

Goldphyre was less ambitious, with a raising of $1.1m thanks in part to it attracting the financial backing of Australia's most successful prospector, Mark Creasy.

Other potential potash producers have capitalised on demand for their shares. Plymouth Minerals raised a fresh $3m earlier this month when its share price spiked upward from 6c to 12c and Danakali is finalising a $5.5m raising.

Plymouth is exploring the Banio potash deposit in the West African country of Gabon. Danakali is exploring the Colluli potash deposit in the North African country of Eritrea.

The sharp share-price moves and successful capital raisings are what makes potash interesting news today, but if you take a deeper look there is not much positive to say about the fertiliser which remains over-supplied and under price pressure.

BHP Billiton continues to invest in its Jansen potash project in Canada but has reduced its annual spend from $US330m to $US200m, as it studies the feasibility of a project which could cost up to $US3.75bn.

Potash Corporation of Saskatchewan (Potash Corp), North America's biggest potash producer, has mothballed three mines over the past six months including its newest, the $US1.5bn Piccadilly project in New Brunswick.

What's influencing decisions at the top end of the market is the price of potash which has fallen from around $US450 a tonne to $US350/t over the past year and looks like staying low for some time.

Morgan Stanley, an investment bank, warned in mid-March that the potash price appeared to have bottomed but over-production remained a problem for the medium term.

Another worrying sign in the potash sector of the ASX was a sharp share price fall by Highfield Resources, a stock backed by high profile mine developer Owen Hegarty.

Since hitting a peak of $2.08 earlier this year, Highfield shares have dropped to $1.24 amid uncertainty over the government approvals process for its Muga project in Spain.

A similar situation is evolving at a big British potash project proposed by London-listed Sirius Minerals with investors ducking for cover after the company revealed higher than expected capital cost of $US3.6bn.

Capping off the run of negative news was a warning from the chief executive of Potash Corp, Jochen Tilk, that while he expects a demand and price recovery, the outlook remained tough and he was not ruling out more production cuts.

Australian speculators have been ignoring the warning signs in the belief that the mining market has turned and that potash is a mineral that will benefit from increased interest in agriculture and a drive for increased crop yields and greater food security.

There is also a belief that some of the smaller potential potash producers could have a cost and quality advantage over the big producers with the key difference being the mining method.

Big miners such as Potash Corp and BHP Billiton prefer deep developments to access big deposits that can support a bulk-mining project with decades of resource life.

Smaller hopefuls are focused on shallow potash deposits, which are generally dry salt lakes such as the Colluli project of Danakali in Eritrea and Lake Wells, which has attracted Goldphyre and Salt Lake Potash in WA.

Whether any of the small companies can make the transition from explorer to mine developer is an important question.

Colluli is a rich potash deposit sitting on the surface and should be easy to mine as well as producing a type of potash in demand in Asian markets – but Eritrea is a country isolated from world financial markets thanks to an ongoing dispute with neighboring Ethiopia.

Lake Wells, despite attracting Creasy to Goldphyre and Middlemas to Salt Lake Potash (along with another mining promoter making a return, Mark Hohnen) is a seriously remote location some 180km north-east of Laverton with few of the services required to develop a mine.

For any investor attracted to the re-energised potash sector there are warning signs that should not be ignored.

The sharply higher share prices and successful capital raisings are a positive pointer to an improving mood at the small end of the resources market, but the problems of an over-supplied potash market and a low price for the commodity are obstacles to a long-term revival.