Vale’s Rio Colorado Potash could attract Chinese Investment
Potash and Phosphate Week-in-Review: The evolving spat between Buenos Aires and Brasilia over the suspension of the Rio Colorado potash project in Argentina has served to highlight potash’s value as a strategic mineral. Brazil is one of the largest economies in the world and agricultural activity accounts for some 6% of GDP. Nevertheless, Brazilian agriculture is vulnerable because Brazil is also the second major importer of potash, which is an essential fertilizer needed to help Brazilian agriculture expand. This external dependence has become more threatening to Brazil because of rising potash prices. It is important to remind investors complaining of current prices that not a few years ago potash was trading at an average of USD 200/ton, while it is now considered ‘low’ at around USD 500/ton.
The collapse of the Rio Colorado project – originally budgeted at USD 6 billion – included the mine and the construction of 800 miles of railway line leading to a terminal at a port near Buenos Aires. Now, Vale has been forced to shut down the project because costs have ballooned to over USD 11 billion due to Argentine growing risk of hyperinflation that is only getting worse. Vale says it has invested $ 2.2 billion in the project. However, the resource remains open to bidders; 6,000 Argentinean workers need to keep their jobs and the Argentinean leadership cannot afford the political risks of letting the project fail. President Cristina Kirchner has adopted a highly populist program, which includes lowering the cost of food. Greater potash availability is essential to achieve this goal.
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The possibility of Middle Eastern sovereign funds taking over this project exists, as many of these are targeting agricultural sector investments. However, there is another more obvious direct player that may be eager to get involved: yes, China could step in. Chinese state capital is perhaps the only solution for the project. It takes a long investment view, 50 years would not be unusual, and it is the one country that is more dependent on potash than Brazil. Yanzhou Coal Mining Co., based in eastern China’s Shandong province, serendipitously, has been looking for international investment opportunities and given the projected drop in coal demand as China plans to bring 100 nuclear reactors ion line by 2020, the Company is looking for non coal assets. Canadian potash resources might well be targets, as China’s appetite for Canadian resources has grown in the past few years, but Vale’s departure from Rio Colorado has left a very eye-catching opportunity.
This leaves Brazil dependent on imports and it is no surprise that the main potash cartels from North America and Russia/Belarus have been targeting this market, along with some juniors such as Aguia Resources (ASX: AGR), to mention one, are very confident about potash demand growth in Brazil – and South America in general. In addition, potash production costs in Brazil are higher than Russia or Canada (in the latter case they are more than twice as high), which means that potash exporters will still maintain some leverage over those establishing projects in Brazil itself. This is good news for such companies as IC Potash (TSX: ICP | OTCQX: ICPTF), Magna Resources (CNSX: MNA) and Potash Minerals (ASX: POK) all of which are developing high grade potash assets (Sulfate of Potash in the case of ICP) in the southwestern United States close to infrastructure that would facilitate export to South America from the Gulf of
Elsewhere in the quest to acquire strategic potash assets, Potash Corp is still facing some opposition to its plans to gain control of the Israeli ‘Israel Chemicals’ (ICL). Potash Corp’s obstinacy in pursuing this deal at the expense of other potentially easier acquisitions in Saskatchewan itself (Encanto or Western Potash for example) betrays the Potash giant’s need to expand beyond Canada. While BHP Billiton has not confirmed its plans to develop the Jansen potash project, it is clear that Saskatchewan has saturated and there is little room for growth. The majors, starting with Potash Corp, will start to look for valuable assets in new emerging potash frontiers. PotashCorp already has a foot in ICL, but the Dead Sea potash reserves are subject to strong depletion risk from erosion and for the time being the powerful unions are blocking the deal. ICL may well represent the first of a wider expansion for Potash Corp.
Juniors that are reaching a close to production stage (within 1-2 years) that have launched projects in Africa – which is emerging as a new potash frontier – should expect calls by Potash Corp or other majors at their offices. In this context, it is not hard to envisage Allana Potash (TSX: AAA | OTCQX: ALLRF) as being one of those prospects, especially as it will face virtually zero competition for infrastructure and transportation, given that the relevant infrastructure developments in Ethiopia and Djibouti are already underway as noted in the NI 43-101 feasibility study technical report for its Ethiopia-based Danakhil project filed last week. The markets have been slow to realize the potash excitement and the average Potash & Phosphate Sponsor share price for last week was 0.93%.