By Dick Phelps
16 Dec 2008 at 02:39 PM GMT-05:00

Mankind can forego many things, such as jewellry baubles—gold, silver, and diamonds—but eating isn’t one of them. Moreover, with rising world population of some 75 million/year, and the populace of developing nations wanting higher quality protein (grain converted to meat by poultry, pigs, cattle etc.), more productive agriculture is crucial. And, among the commodities, there’s a tacit recognition that bulk minerals like potash are different from metals and fuels. Indeed, one could say that, with lower cost agricultural inputs (steel, copper etc. for machinery and oil for fuel), farmers’ margins are somewhat enhanced by the world financial-sector downturn. So they can more readily afford greater outlays for fertiliser to enhance crop yields.

CHICAGO (ResourceInvestor.com) -- There’s an old adage in mining, if it can’t be grown it has to be mined. Potash (K₂O) is a ‘two-fer’ in that observation. It’s increasingly essential in the agricultural sector’s growing intensity of use of fertilizer, given the inexorable pressures for higher crop yields per hectare, i.e. phosphorous (P, from phosphate rock), potash (K, from K2O salt), and nitrogen (N) which are the principal elements contained in commercial fertilizer. Potash prices have risen in recent years and that trend is expected to continue. And one analyst has just boosted expectations for potash; see the news from Merrill Lynch.

Resource Investor interviewed Paul Matysek, CEO of contrarian company with a contrarian commodity, Saskatchewan-based Potash One (P1). No stranger to mining, Matysek has a geological background spanning and success in developing a new mining company (with a market cap of $1.8 billion when it was sold) and raising capital—some $200 million in less than a decade. He sees the current economic situation as an opportunity of sorts for P1 and, using a hockey analogy: ‘player’ costs (steel, energy, labour etc.) are lower, and the opposition (potential competitors) is more inclined to play defence than offence, waiting for brighter a ‘power play’ to come their way (rejuvenated national economies). Clearly in P1’s view, now is the time for a new entrant to get ‘on the ice;’ it’s ‘power play’ time for the potash junior—play with strength when the opposition is undermanned.

The bulk of the world’s potash is extracted from less than two dozen deposits. Saskatchewan is home to both the world’s largest reserves and producers of potash. And Matysek observes that, like other mines, new facilities for potash mining are a long lead time undertaking, taking from four to six years for solution facilities and upwards of 10 years for conventional underground mines. He said, “the last new potash mine came online in 1987; and after planned expansions at existing operations—plus P1 development, demand should be met for the next five decades. Barring the unforeseen, the company aims to have its new potash mine producing by 2012.

Some investors might think that the ‘bust’ on the ethanol side (corn derived) will impact fertilizer. Matysek commented that, “that notion is a red herring; corn-for-ethanol demand only takes 2% of potash supply.”

While no one sees financing as an easy proposition, Matysek is a realist and sees the equity:debt ratio as 70:30 these days. And he sees potash and its underlying demand more than adequately supporting finance. Moreover, since fertiliser is often bought by state-owned entities, e.g. China, there is less concern about the ability of the consumer to pay. Indeed, it’s quite possible that one or more nations may see an equity stake in P1 as a smart play. And it should be noted that the BRIC (Brazil, Russia, India, and China) nations constitute the globe’s largest potash consuming block.

The Resource

TSX-listed Potash One (KCL) has subsurface potash-exploration permits covering over 330,000 contiguous-acres in Saskatchewan. Its Legacy project comprises some 97,240 acres of those interests in the Regina-Moosejaw area of Saskatchewan.

For the primary area, its 43-101-compliant report shows nearly 400 million tonnes of potash. The three potash strata—which have remarkable geological continuity—can be mined singly or in combination. Moreover, solution mining allows a shorter, less costly development schedule as well as more flexibility in operations and lower labour intensity than a conventional underground mine.

P1’s Legacy project is situated in close proximity to the existing—and world’s largest—solution mine, Belle Plaine, operated by Mosaic Co. Matysek sees P1’s advantage as two-fold:

• It benefits from its neighbor’s hard-earned experience in developing and operating Belle Plaine; and
• Government regulators won’t be plowing new ground in reviewing P1’s plans. Nonetheless, the company has been conservative in allowing a year for the review and approval process.

Legacy project’s pre-feasibility work and technical management

P1 is drilling six to eight wells and will have its pre-feasibility study conducted by the respected SNC Lavalin group with scheduled completion by May 2009.

The project’s geology is suited to potash solution-mining and evaporation-crystallization production methods. The solution mining technology has the direct benefits of scalable production capacity, lower capital cost, shorter timeline to production and significantly less mining risk as compared to conventional potash mining operations.

Paul F. Matysek, P1’s CEO, has said: “We are very pleased to see the pre-feasibility work commence on our Legacy project. The quality of the project and potential of the NI 43-101 compliant resource has been instrumental in attracting and assembling a world-class group of individuals with such strong solution mining developmental and operational expertise.”

Complementing the low-cost, abbreviated timeline offered by solution mining, is a management that has extensive relevant experience. Two management teams commenced work in early October. Each of the teams are currently developing basic designs and generating fundamental deliverables such as trade-off study documents, design criteria, mass and energy balances, flow sheets (process flow diagrams), process descriptions and scope of work for on-going, along with more detailed engineering work. It is expected that these deliverables will be available in December 2008 and will provide a design basis for engineering work resulting in a pre-feasibility study report.

Heading the initial and ongoing team below is Max Ramey, PE, VP, Solution Mining:

• Doug Ruse, P.Eng. P.Geo., Cavern Engineering. He is a leading expert in solution mining with over four decades of solution mining and waste disposal well and solution mining cavern design experience including pioneering Canadian potash solution mining techniques.
• Michael Hardy, Ph.D, PE, Agapito Associates. Hardy is a leading expert in the geology and geo-mechanical design of solution mining caverns. He has extensive experience in designing solution mining caverns in salt, potash, trona, and nahcolite. Hardy is a co-author of Potash One’s 2007 NI 43-101 Technical Report.
• Norbert Grueschow, NG Consulting. Based in Germany, He is a leading expert in potash solution mining and brine processing. Grueschow has extensive experience in dissolution kinetics of rock salt, sylvinite, carnallite and trona and dissolution modeling. He will model the dissolution kinetics of the Legacy potash resource facilitating the estimation of optimum cavern temperature and subsequent cavern production rates.
• Steve Halabura, P.Geo., North Rim Exploration Ltd. He is a leading expert in the geology of the Saskatchewan Prairie evaporite formation. Halabura brings over two decades of potash geology experience and provides on-going geological oversight and consulting to the team. He is also a co-author of Potash One’s NI-43-101-compliant technical report in 2007.

An experienced process technology team has also been assembled and is led by Mike Ferguson, P. Eng., VP, Projects in conjunction with local experts and includes:

• Carlos Perucca, P.Eng., Process Consultant. He has over-15 years of experience in potash processing, including early work at the Potasio Rio Colorado project in Argentina in the 1990s. (now owned and being developed by Rio Tinto). In the field, Perucca participated in the original solution-mining pilot test, solar evaporation pond, and process engineering designs. Since that time, he has been involved in process design at most of Saskatchewan’s potash producing properties, including extensive work in the modifications of the existing crystallization circuits in the various Saskatchewan mills. Perucca will perform the overall process plant modeling and create the mass and energy balances for Legacy.
• James Majors, Swenson Technology, Inc. Swenson Technology and its worldwide licensees are claimed to have far more experience than most companies in the design of evaporators and crystallizers used in the production of potash from solution mining. Swenson technology has not only been part of potash processing but also has set the standard for evaporation equipment in Saskatchewan from the beginning of the industry there. Most operations utilize Swenson technology in evaporation and crystallization, with installations at Mosaic Belle Plaine and PCS Cory. Swenson will play a key role in process design as the evaporation-crystallization process for Potash One’s Legacy project is defined.

Global demand

End-user-oriented entities—the International Plant Nutrition Institute (IPNI) and the International Fertiliser Association (IFA)—project strong demand for potash (K20). Key ‘levers’ pushing demand include:

• Asia and North America comprise the largest potash consumers, with Latin American demand fast catching up;
• Agriculture in the BRIC economies, i.e. Brazil, Russia, India and China, have been under-fertilising for years, depleting the nutrient content from their soils (According to the GMP Report, the FAO estimates that global population will grow at 1.12% annually over the next 20 years. On a regional basis, the BRIC markets, which comprise over 40% of the global population, could account for more than 60% of global incremental potash demand by 2013);
• China needs to more than double its annual potash use to properly sustain its arable lands and maximize yields;
• A North American trend has been farmers’ substantial year-on-year increased use fertiliser to maximise production and profits due to sharply rising grain prices;
• India is expected to increase its potash consumption to improve crop yields for a burgeoning, more affluent population;
• Brazil’s major crops are large potash consumers, so the need to import more of this vital nutrient is especially pronounced; and
• Both Brazil and India increasingly rely on sugar cane output to produce ethanol.

Other producers’ views can be seen at these locations, both ca October from: Potash Corp, and Agrium Inc.

Global supply

Canada is the world’s leading supplier. The ‘capsule view’ on the production side is:

• Over 45 operations in 12 nations currently produce potash;
• Total global potash output was 55.4 million tonnes in 2007;
• Worldwide, potash producers operated at 85% of capacity in 2007;
• Of the dozen nations producing potash, Canada, Russia and Belarus account for approximately 80% of output. They feed over 150 nations’ demand for potash (According to the GMP Report);
• Global potash reserves total about 8.3 billion tonnes of K2O, with three countries—Canada, Russia and Germany—accounting for 84% of global reserves;

• Saskatchewan’s potash orebodies are claimed to be the world’s largest, richest and most economical to mine. For 2008, Canada is expected to reach another record year of production, possibly topping the 19 million tonne level;
• Canada is the most politically stable and strategically located of the world’s several major potash producers. And it offers reliable long-term supply; and
• Today’s potash flows from investments made 40-50 years ago--so the infrastructure is old and, as mentioned, operating at capacity.

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A bank’s perspective

A capsule view, according to Canadian Imperial Bank of Commerce (CIBC), is that as the world’s population continues to increase—to an estimated 9 billion people by 2050, developing countries are consuming more meat (which has a multiplier effect on grain consumption). Consequently, with the amount of arable land decreasing globally, farmers will need to produce higher yields from less land.

These factors combined require increased fertiliser application to maximize yield, supporting annual potash demand growth of 2–3%—or 1.5–2.0 million tonnes per year.

Moreover it sees existing potash production capacity operating at high levels, approaching 90% in 2008. This is up from the 1991-2003 period’s 55-73% range. And producer inventories are at historically low levels. The tightness in the potash industry is a reflection of relative inelasticity of demand

Potash supply has suffered from chronic oversupply for over four decades; but demand has finally caught up to supply. With the long lead-times for green-field (six to eight years) and brown-field (two to four years) potash projects, it seems the market will remain tight for at least the next four years.

CIBC research of the global potash industry indicates that brown-field (existing facility expansions) capacity will not keep up with an incremental 3% demand growth rate. Capex required for additional capacity is estimated at $1,000-1,400/tonne in order to develop a producing green-field potash deposit. At current potash pricing, this implies a payback of between one to two years.

The world’s top potash consumer: China. Just last year its consumption rose over 20%, with a 2% annual rate likely going forward. (In 2008 major producers had to place China on an allocation basis.)

‘Next door,’ India is also seeing strong demand, with a projected 7% rise for 2008-2009. And the governments of Bangladesh and Pakistan have parallel aims in fostering self-sufficiency in grain production through fertiliser subsidies.

In the Americas, potash demand has a Latin flavour: that regionr’s consumption surged over 16% in 2007 and the future looks bright. Expansion of soybean production is a regional driver.

In El Norte (North America), fertiliser consumption contracted in 2008 as U.S. farmers switched from corn to soybeans—which are less fertiliser intensive. With corn acres expected to recover next year, regional fertiliser consumption is expected to increase, with potash demand forecast to be up 3.6% year over year. Over the next five years, potash’s annual demand growth was expected to increase 1.5% driven by strong agricultural pricing and growth in non-traditional grain demand, i.e. bio-fuels. (Editor’s note: since bio-fuels' once glowing future is dubious now, both in the Americas and Europe, and constitute about 2% of U.S. corn consumption, it’s likely that North American fertilizer consumption might remain flat.)

Reference Data

The following graphs and tables were obtained various websites, analyst reports and Potash One website.

Source: Potash One

Table below Optimistically Presumes No Disruptions to Existing Supply and

No Delays to New Production We Estimate Global KCL Supply will Demonstrate a 5.5% CAGR Through 2018

Source: Wellington West Capital Markets Inc.

Global Supply/Demand Imbalance Estimates (000s tonnes K2O)