INDUSTRIAL METALS / MINERALS
The ‘pink gold' rush for potash
After a tough five years, the price of agricultural potash is rebounding again as demand for new sources of the pink potassium salts rises. Energy Report interview.
Posted: Wednesday , 01 Aug 2012
TORONTO (THE ENERGY REPORT) -
The Energy Report: Fadi, the International Fertilizer Industry Association is reporting that the fertilizer market is on the mend, with demand for potash rising 3.7% per year. Today, U.S. potash prices are at about $575 per metric ton (mt), compared with $380/mt last year. What caused the upswing?
Fadi Benjamin: Let's look at what caused the potash crash: Back in 2008-2009, potash prices had risen to almost $1,000/tonne, driven by Chinese demand. Crop prices were relatively low at $3.50 corn, $10.25 soy and $4.44 wheat. Farmers around the world retaliated as they could not justify the economics of these high potash prices and low crop prices. Many farmers, particularly in North America, took a "potash holiday." They stopped applying the mineral to cropland for a couple of years. The holiday was possible because crops do not consume all of the fertilizer immediately, and the remainder stays in the soil as a reserve. But now, all around the globe, the potash content in soils is too low. The demand for potash has returned, and crop prices have significantly increased. We are now in a world of $7.90 spot corn prices, $16.65 spot soy and $8.89 spot wheat. It may take two to three years of aggressive potash application for North American soils to reach 2008 soil levels.
TER: Will the predicted slowdown of growth in China and other developing countries impact the outlook for potash?
FB: Slowdown or not, people need to eat. Population is on the rise in developing countries, including China and India. There is a push to grow more crops, to utilize more of the arable land, to improve yields and to raise cattle for meat. Agriculture requires potash.
TER: Which countries and regions are the largest potash consumers, and which are the largest producers? Is there a regional or global synergy between networks of production and consumption?
FB: Canada and Russia are the two largest potash producers. India, China, Brazil and the United States are the largest consumers. There are synergies in the form of two marketing organizations. One represents North American producers, and the other represents Russian producers. Russia and Canada are the gorillas in the potash cage. They ship potash around the globe, especially to China, India and Brazil, the areas of greatest need.
TER: Saskatchewan holds about 40% of the world's known potash reserves. Should investors look first to Canada for potash production? Which countries are delivering the most bang for the potash investor's buck?
FB: Junior potash miners are quite active in Africa, which is rich in resource commodities. There are a number of explorers in Brazil. Even in highly developed Saskatchewan investors will find a spectrum of companies, from early-stage developers to those that are fairly advanced and in search of financing to build a mine.
TER: The Hangingwall Seam is sylvinite-bearing. Can you talk about how sylvinite and carnallite affect potash grades?
FB: Not all potash is the same. Two types of minerals produce the chemical compound known as potash: Sylvinite is a mixture of potassium chloride and salt. Carnallite is a potassium magnesium chloride. Carnallite is, at best, considered an impurity. It tends to dissolve in water a lot more easily than sylvinite, but it takes energy and time to break the magnesium element out of the brine. Potash producers generally seek sylvinite and avoid carnallite. Carnallite is only sought out for mining in countries where there is no sylvinite.
TER: What kind of potash is being mined in Ethiopia, and what are the prospects for junior miners there?
FB: Sylvinite. However, some sylvinite layers sit on top of carnallite, so solution mining in these deposits brings along the carnallite, too. One cannot selectively mine for the sylvinite in certain seams. Producers have to liberate the potassium chloride from the brine mixture.
Furthermore, Ethiopia-based deposits lack infrastructure support. They sit in a desert far from roads and rail lines, and water is difficult to come by.
TER: What is the Brazilian government's attitude toward potash mining in its own backyard?
FB: Brazil is very supportive of domestic potash and phosphate exploration. The government is good at removing red tape surrounding permits and licenses.
TER: What is the ratio of production cost to market price for potash?
FB: There is a spectrum of operating costs. For example, the current market price is $575/mt.
TER: Approximately what kind of internal rate of return could one expect from a $575/mt price?
FB: Anywhere in the low 20s after taxes. The beauty of potash is in the high margins. However, there is also a high capex.
TER: What will be the likely effect on junior firms of U.S. Interior Secretary Ken Salazar's proposal to create oil- and gas-drilling islands in areas of the American Southwest, where potash can also be mined?
FB: Companies are looking for potash in areas of Utah and New Mexico. Inevitably, they overlap with oil and gas producers in those areas. This has been contentious. The new rules give junior potash companies a more defined idea of what they should expect when exploring for a deposit.
TER: The complaint was that oil and gas companies were harming the potash reserves in areas where the deposit layers coincided.
FB: The oil and gas layer does not have to be in the same layer as the potash. More than likely, the two are in separate layers. However, if you are developing an underground potash mine near oil and gas reserves, fracking and horizontal drilling can interfere with the potash mining operation. The idea of the proposed rule is to create a buffer zone around the potash deposits.
TER: Great, Fadi. Thanks.
FB: Thank you.
Fadi Benjamin is a mining analyst with Northern Securities Co., an investment bank based in Canada. He worked at Stifel Nicolaus & Co. in equity research, and at Wardrop Engineering (now Tetra Tech WEI Inc.) as a project engineer. He is a graduate of the Rotman School of Management at the University of Toronto and the University of Colorado, Boulder.
Article published courtesy of The Energy Report - www.theenergyreport.com