BHP adds pressure on potash prices but some relief is on the way
Potash & Phosphate Week-in-Review: The InvestorIntel potash members gained +0.92% for the week ending on August 23rd. Aguia Resources (ASX: AGR) saw the biggest gains at +19.30% for the week after it announced new and very favorable phosphate intersections with a peak of 16 meters at 14.4% P2O5 from surface at its Três Estradas South Project in Brazil. Aguia says the resource’s mineralogy is similar to what is produced at world-class mines worldwide including Yara’s Siilinjarvi mine in Finland and Vale’s Cajati mine in Brazil. The second stage of drilling confirmed the initial findings showing a continued strong phosphate mineralization ranging from 9.5% to 23.2% phosphorous penta-oxide (P2O5) and all within a high-oxide area extending from the surface. Aguia’s geographic positioning gives it a clear advantage. Aguia’s phosphate resources are close to Brazil’s main fertilizer consuming states of Rio Grande, Santa Caterina and Parana which alone account for 30% of Brazilian agricultural production.
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Brazil is also considered one of the top growth markets for mineral fertilizers, such as phosphate and potash. However, Allana Potash (TSX: AAA | OTCQX: ALLRF) was the one that made the most significant gain, at +5.38%, because that increase brought the share price closer to the yearly average of about CAD$0.50/share. Allana shares could see a steady increase over the next few weeks and as the project moves closer toward the mine construction phase. Allana announced that it has secured financing to begin mine construction securing “loans in excess of the target amount of 60-65% debt contemplated to finance the initial construction of Allana’s Danakhil potash project.” The lenders include large multilateral and regional development finance institutions and export credit agencies from North America, Europe and Africa. Allana’s CEO expects that the credit metrics will be in line with the Company’s targeted amount of project debt financing in order to increase “the potential returns to Allana shareholders.”
Allana’s gains last week might have been greater if not for an the fact that BHP Billiton said it would pursue plans to open its huge potash mine in Saskatchewan (the Jansen mine), even if the production stage has been delayed until 2020 – at the earliest. BHP has already invested CAD$1.2 billion into the Jansen mine project and will invest an additional CAD$2.6 billion over the next four years. BHP’s announcement put more pressure on the potash market, which saw a dramatic change last month, and has put all potash company valuations under pressure following the breakup of the Russian/Belarusian BPC pricing cartel last month. Incidentally, the fact that Allana managed to overcome the downward pressure that OAO Uralkali’s decision, with relatively minor price drops in comparison to the rest of the sector, is testament to the confidence that its investors have in the project.
The sudden arrest of Uralkali’s CEO Vladislav Baumgartner on August 26th in Belarus has already started to boost potash prices across the board, and signals the return of a cartel pricing mechanism that will stress high prices rather than high volumes. Uralkali’s decision had sent the potash market in turmoil as Uralkali decided to increase its sales, acting on its own, by boosting production and by forcing a lower potash price, taking down all other potash producers. Since Baumgartner’s arrest, prices have started to recover and the assumption is that Belarusian President Aleksandr Lukashenko, fearing the economic collapse of his country (potash represents an major percentage of foreign-currency earnings for Belarus), will succeed in persuading Uralkali to rethink its entire strategy. Certainly, investors in the West are hoping for this very development – further warranted by the fact that more Uralkali officials are being investigated and that the company’s investors and officers appear to have lost confidence in the new strategy.