Is a big potash play in the offing?

The world's two biggest miners continue hunting, and acquiring, in this exclusive area.

JOHANNESBURG -

BHP Billiton's USD 320m cash bid for Athabasca Potash once again highlights the growing intensity around potential consolidation in the global fertiliser industry. The first two key constituents of stock-standard "NPK" fertiliser are potash and phosphate, which are mined, and nitrogen, which is scrubbed out of the air.

There are hundreds of phosphate mines around the world, but only a handful of potash miners, of which all but one, Belaruskali, are listed. Also on the fertiliser hunt is Vale, the world's No 2 miner, by value, after BHP Billiton, which this week announced an all-cash USD 3.8bn bid for 100% of BPI, a division of Bunge, which owns phosphate rock mines and phosphates assets in Brazil, and a 54% stake in Brazil's Fosfertil.

Vale has long ranked as Brazil's sole potash miner, at Rosario do Catete. In early 2009 Vale bought Rio Tinto's potash assets in Argentina and Canada, for USD 850m. For its part, BHP Billiton in May 2008 bought for USD 282m Anglo Potash, which held 25% of a Canadian joint venture company, in which BHP Billiton already held the other 75%. The Jensen project is adjacent to the Burr Project, now under acquisition from Athabasca Potash.

While Rio Tinto described the Potasio Rio Colorado potash deposit in Argentina (now owned by Vale) as "the largest potash discovery in South America", it is well known that the two biggest potash fields in the world are found in Saskatchewan, and in a field that runs across the Russian border into Belarus.

Rio Tinto's other sale to Vale was of its Regina potash property in Saskatchewan. BHP Billiton CEO Marius Kloppers has repeatedly made it clear that his group only looks to acquire Tier I global assets, and reminds that such assets rarely come onto the market.

So far this decade, BHP Billiton's biggest buy has been the USD 7.2bn cash take out of Australia's WMC in 2005, mainly for Olympic Dam, which ranks as the world's No 4 copper, No 4 gold, and No 1 uranium, deposit. Then, in September 2008, there was the largely unnoticed acquisition, where BHP Billiton invested USD 1bn, via the BHP Billiton Mitsubishi Alliance, in acquiring the New Saraji coking coal exploration project from Australia's New Hope.

Two relatively modest potash forays by BHP Billiton are no coincidence, but is a big potash play likely? PotashCorp, based in Saskatchewan, ranks as the leader in global potash production, with around 20% of world capacity, amounting to around 40m tons a year, during a normal year (2009 was not a normal year). PotashCorp mines and produces the holy three; it also holds 28% of Jordan's Arab Potash, 10% of Israel's ICL, 32% of Sociedad Química, all potash miners, and 20% of Sinofert, the biggest distributor of potash and other fertilizers in China. Unlisted Belaruskali follows PotashCorp in terms of percentage of global potash output, followed by Mosaic.

From a global competition viewpoint, PotashCorp may pose issues for potential predators. But potash is not only exclusive, is it also a hugely capital intensive game, requiring monster long-term capital investments. According to calculations by PotashCorp, it requires USD 2.8bn to finally commission a 2m tons a year potash mine from scratch, a process that takes seven years; the cost quoted excludes costs outside plant gates - rail, road networks, utility, port systems, and so on.

At Agrium's Vanscoy Potash Operations, potash is only encountered after mine shafts have been through 80 meters of glacial deposit, 440 meters of shale, 120 meters of water-bearing sandstone (the Blairmore formation), 420 meters of limestone, and 15 meters of salt.

A couple of years ago, before Wall Street's goons went on the rampage, possible consolidation in the potash sector was under the spotlight in and around Russia. Talk was that the Russian government would agree to form a mega mining entity where government would hold 25%, plus a vote, in return for absorbing the debt in a number of big mining names, including Siberian nickel miner Norilsk, plus Metalloinvest (unlisted), Evraz, and Mechel, three of Russia's biggest names in iron ore and steel.

There was also a similar plan to merge Uralkali and Silvinit, two big potash miners, along with Apatit, a phosphate miner, and also possibly also Acron, a major distributor. Uralkali and Silvinit combined would hold around 20% of global potash capacity, roughly equal to that held by PotashCorp.

Phosphate mining is far less concentrated, being produced in at least 40 countries; here, PotashCorp ranks third in the world, but contributes just 5% of global output. A new 2m tons a year phosphate mine costs around USD 3bn, and takes three to four years to build. Nitrogen, produced in at least 60 countries, requires about USD 2.8bn for a new 2m tons a year facility, and a build time of about three years.