Having seen their markets shrink dramatically during 2009, potash producers are once again predicting strong sales as the world’s farmers catch up on their fertilizer application.
By Simon Walker, European Editor
The global financial crisis that began in 2008 unleashed market uncertainty across the mining industry, as in other major economic sectors. Its effect on agriculture was marked by a significant slow-down in fertilizer application, as the financial institutions tightened farmers’ credit, and farmers themselves drew back from spending too much on fertilizers in times of economic uncertainty. And, while most of the mining industry bounced back promptly from the general downturn as demand for commodities such as base metals and iron ore returned strongly, potash producers continued to have a difficult time right though 2009 and into 2010 as they waited for their customers to come back.
Right at the beginning of the downturn, the main potash companies retained a sense of optimism, at least for the longer term. Speaking in early 2009, the CEO of U.S.-based Mosiac Co., Jim Prokopanko, provided an up-beat assessment of the future. “Despite the turmoil in the commodity markets, “we remain confident that long-term agricultural fundamentals are excellent,” he said. “This is a self-correcting cycle because demand for crop nutrients can only be delayed for so long. Large crops are still required to secure the world’s food supply, and crop nutrients will play an essential role in achieving that objective.”
And so it has turned out to be, with agricultural demand for potash—one of the three key nutrients needed by crops across the board—having picked up again as 2010 progressed.
To illustrate this, the world’s largest potash producer, Canada’s PotashCorp, reported potash production and sales for the fourth quarter of the year running at double the levels for fourth-quarter 2009. “Our industry moved past an important inflection point in the third quarter and, as farmers around the world became more active in addressing the critical issue of soil fertility, we demonstrated our ability to deliver in a strengthening market environment,” said company President and CEO Bill Doyle. “With global food demand as the powerful engine, we believe we have moved into the next stage of growth for our business.”
For many years, potash was widely perceived as a Cinderella commodity—something real mining companies did not really want to be involved with. Since the start of the 21st century, that has all changed, initially through acquisitions of operations that led to some consolidation, but more recently as some of the majors—notably Vale and BHP Billiton—seem to have realized there are market opportunities to be gained here. Although BHPB failed rather spectacularly in its attempt last year to buy PotashCorp, smaller players in the field have been picked off one by one, as the allure of strong long-term markets has attracted the industry’s big fish to the potash pond.
Supplying the World
Despite its universal demand, potash production is concentrated, with just 13 companies operating in 12 countries having a significant level of production. Of these 12, Canada, Russia and Belarus account for more than two-thirds of the world’s potash production, according to PotashCorp, and between them hold more than 80% of the world’s reserve base.
Data from the USGS show world potash production reached an estimated 33 million metric tons (mt) (as muriate of potash, or KCl) last year, compared with the dismal 20.8 million mt achieved in 2009 as companies across the board cut back on their capacity in response to markets that had evaporated. Top producer-country data are shown in Table 1.
Longer-term data compiled by the British Geological Survey show potash production remained on a gradual upward trend over most of the past 10 to 12 years, as shown in Table 2.
The BGS data reinforce the dominance of Canada’s producers in terms of world supply: with the exception of 2009, Canada’s mines have supplied over 8 million mt of potash year-after-year. Chinese production has increased the most during the period, on a relative basis, from a low base level of 218,000 mt in 1999 to 2.1 million mt 10 years later (or nearer 3 million mt if the USGS data are more accurate). Russian output has also risen, while production in Belarus has remained remarkably consistent, perhaps reflecting a lack of investment to take production to the next stage.
The doubling in output from Chile, from an estimated 345,000 mt in 1999 to some 700,000 mt last year, reflects the growing development of the country’s salar resources, as described in the review of lithium markets in the March edition of E&MJ (pp.102-109). As noted there, lithium is usually a by-product from brine production, with potash salts comprising the bulk of the product mix.
The World’s Potash Endowment
With the exception of salar brines, the world relies on vast evaporite-hosted resources for its potash. The first recognition of the potential of this type of deposit came in Germany in the 1840s, but it took a further 20 years for the first commercial extraction plant to be built. The development of potash industries in both Germany and France was a result of a new understanding over the role of potassium in plant growth, and as agricultural demand worldwide increased, so new potash resources were brought on stream.
U.S. production began during World War I, initially from brines, with the first mine to work the major deposits in New Mexico coming on stream in 1931. Coincidentally, the first mine in the Urals was commissioned the same year, with new production also being won from operations in Poland and Spain, and from the Dead Sea, by that time.
Development of the potash resources in Saskatchewan began in 1958, and although the first mine to be commissioned was short-lived, it paved the way for the current portfolio of operations in the province. Mining began in Italy in 1959, in what is now Belarus in 1963, in the Republic of Congo in 1969, in Australia in 1973 and in the UK in 1974, while the recovery of potash from the Jordanian side of the Dead Sea dates from the 1980s. Some operations were successful; others less so for a variety of reasons, including flooding. The last operations in France closed in the 1990s.
By the 1980s, however, potash was in serious over-supply, a situation that was not helped by the collapse of the Soviet Union and the subsequent fall-off in demand from farmers in the CIS countries. Prices slumped as producers fought for market share, higher-cost capacity was weeded out and there was producer consolidation. For much of the late 20th century, prices stayed at levels that really did not provide any incentive for either expansions at existing operations, or the entry of new players into the market.
This situation continued into the 2000s. As illustrated in the graphs on p. 37, data from the potash-industry consultancy, Fertecon, show that between 2000 and 2004, the FOB Vancouver price was constant at around $120/mt, with a gradual increase that started in mid-2004 and broke through $200/mt at the beginning of 2008.
After that, the picture changed dramatically: by late 2008, potash prices had reached around $870/mt as demand surged—especially from developing markets such as China (see graph). And, following their peak, prices plummeted precipitously as farmers across the board postponed their fertilizer purchases. Producers cut their prices to $700/mt in early 2009, and to below $500/mt later in the year, with the market bottoming out at just over $300/mt in the first quarter of 2010. Since then, Fertecon’s data show, there has been a gradual recovery, such that FOB Vancouver prices stood at just under $400/mt in February.
The Juniors Fall Prey...
The growth in potash prices since 2004 acted as a catalyst both for existing producers to look at expansions, and for a crop of junior companies to get new projects off the drawing-board. Among the majors, Rio Tinto pushed ahead with its Potasio Rio Colorado project in Argentina, while in Canada, juniors such as Potash One, Anglo Potash and Athabasca Potash all increased the exposure of their respective projects.
One by one, though, several of the juniors have gone, while Vale was quick off the mark in acquiring Potasio Rio Colorado and some Saskatchewan exploration properties from Rio Tinto during Rio’s fire-sale of assets in early 2009. BHP Billiton also moved further in to Saskatchewan by buying out first Anglo Potash, with which it had been in joint venture in the province, and then in March last year, Athabasca Potash, which held land adjacent to BHPB’s Jansen project. Russian fertilizer company JSC Acron bought the oddly named 101109718 Saskatchewan Ltd. in 2008 with the aim of gaining exploration ground in the province, with a name change to a more modest Pacific Potash Corp. in early 2011. The most recent of the juniors to have been snapped up has been Potash One, whose shareholders received a C$430 million payout earlier this year from the German potash producer Kali & Salz.
And it has not only been junior companies being eyed up by predators. Earlier this year, the oligarchs behind Russia’s big potash producers, Uralkali and Silvinit, announced a merger that would propel the new company to No.2 in the world league, behind Potash-
Corp. There is some history here, since the two were part of one Soviet-era organization until 1983.
The merger involves Uralkali buying a 20% holding in Silvinit, which it completed in February at a cost of $1.4 billion. The plan is for the two companies then to merge under the name of Uralkali to create a single firm with a market capitalization of some $24 billion. However, not everything has gone smoothly, with one of the minority shareholders in Silvinit, JSC Acron, having gone to litigation over what it considered to be an under-valuing of the company during the merger. A final court hearing was scheduled for early April, although with 90% of Silvinit shares having been voted in favor of the merger, it is hard to see what impact any judgment would have on the outcome.
...but PotashCorp Escaped
The face of world potash production could well have been changed in a big way if BHP Billiton had succeeded with its $39 billion bid for PotashCorp last year. The fact that BHPB was prepared to spend this amount on securing access to a commodity that only a few years ago was considered to be wholly uninteresting speaks volumes for the recent turnaround in corporate perceptions.
In the event BHPB was unsuccessful with the Canadian government effectively blocking the takeover on the grounds it would not have been in the national interest. BHPB’s $39 billion bid equated to a value of $130 per PotashCorp share, a value PotashCorp rejected outright as being significantly too low, despite the price representing a 20% premium on the company’s share listing at the time.
The cost of the failure was high to both sides, with BHPB booking some $350 million on its part, and PotashCorp a further $64 million for its defense. With BHPB’s bid out of the way, PotashCorp promptly carried out a $2-billion buyback of its shares, then a three-for-one split to improve liquidity. In the event, it seems as though its defense was soundly based, since by April its stock had moved ahead to give it a market capitalization of over $50 billion—well above BHPB’s valuation and the premium offered.
The Big Players
As several of the major potash producers point out, published numbers can be confusing, with some companies citing nameplate capacities while others use operational capabilities as their yardstick. Actual output is another matter, dependent on market demand. The world ranking for producers is shown in Table 3.
With five mines in operation plus the mineral rights to the Esterhazy property in Saskatchewan, and one mine in New Brunswick, with strategic holdings in Israel Chemicals, the Arab Potash Company (APC) in Jordan and SQM in Chile, PotashCorp is the world’s leading potash producer. The company estimated that last year its operations represented 17% of world production and 20% of world potash capacity, with attributable production totaling 8.08 million mt of KCl. Its Canadian operations include both conventional mining and solution-mining units, with its ore output having rebounded from cutbacks announced in 2009 to 22.4 million mt at an average grade of 22.62% K2O.
PotashCorp increased its stake in Israel Chemicals from 11% to 14% last year, while holding 28% of APC and 32% of SQM. It also has a 22% stake in Sinofert, a Chinese fertilizer company, which gives it exposure to the end market in China as well as supplying the raw material.
Current development projects, all scheduled to come on stream by 2015, include the construction of a new 1.8-million-mt/y mine in New Brunswick, at a cost of C$1.66 billion. Capacity is being expanded to 2.7 million mt/y at both the Allan and Cory mines in Saskatchewan, while capacity at Ro-
canville is being increased by 2.9 million mt/y to 5.7 million mt/y. In all, PotashCorp is investing more than C$7 billion to increase its capacity to 17.1 million mt/y, with the company claiming it is developing more than 50% of the world’s incremental capacity that will be commissioned by 2015.
Meanwhile, at Esterhazy, which Mosaic operates under a long-term lease agreement from PotashCorp, capacity was expanded by 1.1 million mt/y in 2006. Two further expansion phases will add an extra 1.8 million mt/y by 2016, by which time capacity will have reached 6.36 million mt/y. Sinking work on the K3 shaft is scheduled to begin next year, with the operation’s fleet of five four-rotor miners being increased to nine.
Mosaic is also increasing capacity at its Belle Plaine solution mine in the province, from 2.8 million mt/y to 3.5 million mt/y, with a further 3 million mt/y of additional capacity scheduled to come on stream at Belle Plaine and at its Colonsay mine between 2016 and 2020.
In the U.S., Mosaic operates one of the nation’s largest underground mines at Carlsbad, New Mexico, which produces two separate potassium minerals, sylvite and langbeinite, and a potash-salt solution mine at Hersey, Michigan. In total, the company reports its attributable output of 5.2 million mt of potash products from 19.3 million mt of ore last year represented around 12% of world production, with its 10.2 million mt/y capacity equivalent to 14% of world capacity.
Third in the production league table, Belarus Potash Co. (BPC) is majority-held by the Belarus state and the Russian potash producer, Uralkali. BPC operates four mines in the Starobin evaporite basin at Soligorsk, 130 km south of the national capital, Minsk. Capacity that is being lost through reserve depletion at some of the company’s older mines is being replaced by the development of two new ones, Krasnaya Sloboda and Beryozovski,
Both Uralkali and Silvinit have their operations in the Perm region of central Russia. Uralkali is currently working on a 27% capacity expansion from 5.5 to 7 million mt/y of KCl, with completion scheduled for next year, and in the longer term has expansion opportunities at its Ust-Yayvinsky project, which lies near its existing operations.
Silvinit is also in expansion mode, with an increase in capacity from 5.1 to 5.6 million mt planned for this year and to 6 million mt for 2012. It also has greenfield development potential at its Polovodovsky prospect. The proposed merger between the two companies would result in Uralkali having some 13 million mt/y of KCl capacity by 2013, with five mines in operation.
In Germany, some of Kali & Salz’s operations date from the late 19th and early 20th centuries. Output from the company’s six mines make it the largest potash supplier in Europe, with reserves remaining for a further 38 years at current production rates. In 2010, however, potash accounted for around one-third of its revenues, with rock salt taking an increasing share—reflecting its acquisition of U.S. salt producer, Morton Salt, the year before.
Its buyout of Potash One also signals further geographical diversification, and gives it access to the Legacy solution mining project. Situated next to Mosaic’s Belle Plaine operation, this has the potential to produce up to 2.7 million mt/y of potash, albeit at an investment cost of around $2.5 billion, with production beginning sometime after 2015.
Also Important are...
Both Israel Chemicals Ltd. (ICL) and the Arab Potash Co. (APC) win their potash from the salt waters of the Dead Sea. In addition, ICL has production capacity in Spain, which it acquired in 1998, and in the UK, where it bought Cleveland Potash from Anglo American in 2002. APC, meanwhile, is planning to produce at above its nameplate capacity this year, as it continues to fine-tune its solar evaporation and refining facilities on the Dead Sea shores.
The smallest of the Saskatchewan-based producers, Agrium is currently in the process of expanding its Vanscoy operation in the province from 2.1 to 2.8 million mt/y of KCl, with completion targeted for 2015. U.S.-based Intrepid Potash is also working on capacity expansions, aiming to augment production from its existing mines in New Mexico and Utah with solution mining and solar evaporation at its mothballed HB underground mine in New Mexico. The company already uses this system at Cane Creek in Utah, while at Wendover (Utah), it recycles salt brine from its solar potash production unit to resurface the Bonneville Salt Flats.
As well as potash, Intrepid produces langbeinite (potassium magnesium sulphate) from its operations in New Mexico, and in 2010 committed capex of some $85–$90 million to improve langbeinite recoveries at its plants there.
In Brazil, Vale has set itself the challenge of becoming one of the world’s largest fertilizer producers over the next seven years, with the target of producing 10.7 million mt/y of potash by 2017. Given that last year’s output from its only operation, Taquari-Vassouras, was just 662,000 mt—8% lower than in 2009—this seems to be ambitious, especially with the recent appointment of new, more domestic-focused senior corporate executives.
Nonetheless, the company has an impressive project pipeline that includes Carnallita in Brazil (1.2 million mt/y by 2014), Regina (Saskat-
chewan; 2.8 million mt/y by 2015), and two projects in Argentina: Rio Colorado (2.4 million mt/y by 2013) and Neuquén (1 million mt/y). All of these remain subject to corporate investment approval.
As noted in the lithium review in March’s E&MJ, Sociedad Química y Minera (SQM) is Chile’s principal potash producer, recovering potash from salar brines. The company produces both potassium chloride and potassium sulphate, which between them contributed nearly 30% to its pre-tax profits last year.
And so to China, the world’s largest potash consumer and the largest importer as well, with imports running at 8-9 million mt/y. Domestic production has increased significantly over the past 10 years, with a number of companies now recovering potash and potassium sulphate from Qarhan Lake in Qinghai province. The state holding company, SDIC, is one of the larger producers, with SDIC Xinjiang Luobupo Potash Co. currently developing a 3 million mt/y potassium sulphate brine-based operation at the Luo Bu Po salt lake.
Aside from the relatively few, but extensive, deposits that support current production, other parts of the world host potash potential. Potash mineralization is known to occur, and in some cases has been evaluated in the past to the point of production, in countries as geographically diverse as Mexico, Morocco, Tunisia, Libya, Ethiopia, Republic of Congo, Gabon, Laos, Thailand and Italy.
Of these, the deposits that lie inland from the Congolese port of Pointe Noire, are currently attracting significant interest. Congo is a past producer of potash, with the Holle mine having operated briefly in the 1970s before it was flooded.
Companies now involved in project development there include Canada’s MagMinerals, which has received permitting for its 1.2-million-mt/y Kouilou solution-mining project. The company plans to develop this in stages in conjunction with an adjacent 600,000-mt/y magnesium-production plant. Late last year, however, it said it was re-evaluating its options for the project, following the failure of a Chinese company that had agreed to buy a majority holding to get approvals from SDIC.
Also from Canada, privately held Congo Potash Co. has been working on a 500,000-mt/y project at Holle, with indications that it plans to begin production in 2013 to supply the Brazilian market. Holle Potash Corp., also privately held, is another player in this area, having acquired the Tchitondi and Manenga concessions from local company, Afrimines, in 2008. Elsewhere in the country, Australian-listed Elemental Minerals is exploring its Sintoukola prospect.
Another country not renowned for its mining sector, Ethiopia has become a focus for potash prospecting in northeast Africa. In February, Canadian juniors Panorama Resources and Ethiopian Potash Corp. (EPC) amalgamated in a reverse takeover by EPC, with the C$11 million proceeds of a private placement financing being targeted at fast-tracking exploration at the Danakil Basin concessions in Ethiopia. Both surface- and solution-mining potential exist there, EPC says.
Another explorer in the basin, Allana Potash, recently attracted a C$10 million injection from the International Finance Corporation, and is now aiming to carry out a feasibility study on its Dallol project.
Both Thailand and Laos are known to host potash resources, although development of the main deposit in Thailand has been on the cards for years, but has never materialized. The company that had been working on the Udon Somboon project, Asia Pacific Potash, sold its interests to local contracting company, Italian-Thai Development, in 2006 following NGO-organized opposition to its development plans, with no recent indications of progress.
Laotian potash resources, in the Vientiane Basin, also remain under-developed, although the first Chinese-backed project now seems to be under way. A 50,000-mt/y plant was reportedly commissioned there late last year.
In Russia, EuroChem (which has a 15% holding in Kali & Salz) is developing its Gremyachinskoe and Verkhnekamskoe projects, with the aim of bringing 7.7 million mt/y of capacity to the market when both are on stream. The fertilizer company has budgeted some $3.2 billion to gain its own potash production, with the first 2.3-million-mt/y stage at Gremyachinskoe in the Volgograd Basin scheduled for commissioning in 2013.
And so back to elephant country—potash elephants, that is. In February, one of the remaining independent juniors in Saskatchewan, Western Potash, appointed Amec Americas as the lead engineering consultant for a prefeasibility study on its Milestone solution-mining project, close to both Belle Plaine and Vale’s Regina project. Scoping studies completed last year indicated the potential for a 2.5-million-mt/y operation.
Notwithstanding its PotashCorp debacle, BHP Billiton has its own extensive portfolio of Saskatchewan properties. Leading the field is Jansen, already with a $240-million development budget and now the subject of a final feasibility study. Other projects include Boulder and Young, as well as the Melville and Burr properties that it acquired from Athabasca Potash last year. In March, BHPB awarded engineering firm SNC-Lavalin a multi-year contract to help it manage its potash projects in the province.
World Trade Dominates
According to the International Fertilizer Industry Association, world potash production jumped by 52% last year. Predictions across the board suggest that demand is growing steadily as world agriculture resumes investment to give higher yields. And it is not just for food production; greater use of bio-fuels in countries such as Brazil is driving potash demand as well.
One fact dominates the discussion. The world’s population is continuing to increase, and because of this, we need to produce more food. Looked at in such basic terms, potash producers appear to be in a no-lose situation, since in the long term, demand for their output is guaranteed to grow.
Writing in February, Scotia Bank Vice President Patricia Mohr said: “The outlook for potash markets (demand and prices) over the coming year is extremely positive, with high crop prices incentivizing farmers to apply more fertilizer. World potash shipments in 2011 could climb to 55-60 million mt amid one of the best fertilizer-application environments ever seen.
“Prices will likely advance more strongly in the second quarter, with Canpotex [the Canadian producers’ export vehicle] announcing another US$30 price increase for Asian and Latin American spot markets (effective immediately),” she said. “With Canpotex currently sold out on volumes for overseas markets, the price increase will go into effect around April. In addition, BPC [in Belarus] has announced another US$50 price hike from May onward (on top of the US$30)—a move likely to be followed by Canpotex.”
Her opinions were shared by those of Uralkali CEO Vladislav Baumgertner. “We see very strong fundamentals for the potash business now and for the next five years,” he said. “The business and economic environment is very similar to that of 2008.”
A good business to be in, then.