Potash Minerals has what it takes to make it in the post-BPC era
The fall in prices in 2013 for many commodities has made business more difficult for many mining companies, especially in the potash sector. Potash has become one of the most important agricultural fertilizers. Modern food production would not be sustainable without the use of mineral derived potassium, given the quantities that are needed. Potash helps the soil retain water, while making crops more flavorful and resistant to disease. It is estimated that more than a third of the world’s current food production would not be possible; as the world population expands, therefore, potash will become even more important in order to match food production with demand. Economic growth in China and India and a resulting change in the diet toward more meat (meaning more animal feed) and carbohydrates have led to a sharp increase in potash. However, Uralkali’s sudden decision to abandon the BPC cartel has effectively changed the rules of the potash game. Certainly, the end of cartel pricing power means that price floors can no longer be guaranteed. Even if Uralkali goes against its own interest and sells more potash at lower prices, with inevitable ramifications on potash stocks (mostly the seniors such as PotashCorp and some juniors); the new potash market regime will be more amenable to market rules. This means that demand will have an even greater impact on prices. It also means that costs of production, CAPEX and OPEX have become all the more important.
Potash Minerals (‘Potmin’, ASX: POK) operating in Utah’s Paradox Basin has a number of advantages that will enable it to thrive in the new, post BPC, potash market environment. The first advantage comes from the fact that its ‘Hatch Point’ project is strategically situated to rail and road routes to one of the most intense agricultural areas in North America. Exploratory drilling in Utah state land yielded very encouraging results while its property on federal land, for which it received permission to drill from the Bureau of Land Management at the end of last April, is where the main resource is expected to be found. Potmin’s project covers a 146 square mile area and it sits on major deposits of sylvinite. Potmin projects a production of some two million tons/year of high grade potash for a period ranging from 25 to 50 years. While many analysts have expressed concerns about a potash over-capacity, Potmin notes that more than three quarters of the total potash used in the United States is imported from Canada, which means that its planned 2.0 million tons/year production would still only partially address US demand.
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What exactly is sylvinite? The key element in potash that makes it so valuable for agriculture is the presence of potassium (K). Potassium does not occur by itself in nature as it reacts with water and air. The two most common minerals producing potash are sylvinite and carnalite. Carnalite is the main mineral used to process potash from the Dead Sea salts in Israel and Jordan. The carnalite is separated through the solar evaporation of the Dead Sea waters, producing KCl. However, sylvinite is the one that miners and investors want. Sylvinite is easier to process, it will ensure the delivery of a higher quality potash that ultimately helps to offset costs often associated with other potash deposits, which require more processing to achieve anywhere near the desired potash quality.
The world’s principal potash producers in North America rely on large quantities of sylvinite ores and while many emerging potash plays are focusing on Africa, the main sources of sylvinite are in North America. Potash, from sylvinite, was discovered in Saskatchewan in 1943 and in the 1950’s, in the wake of intense oil exploration in the southwestern United States, potash was also discovered in Utah and New Mexico in the Paradox Basin. Intrepid Potash (NYSE: IPI) is the largest potash producer in the United States, operating three mines between Utah and New Mexico. Potmin has already identified key source of sylvinite and it expects to find the most significant sylvinite bearing zones (between 23.7 and 25.3%) in the Federal Land. In May, Potmin has issued an updated and JORC-complaint maiden resource of 902 million tons of potash at 20% potassium chloride (KCl). The estimate was determined based on resources located within an area of the property covering less than 20% of the total and includes peaks of 24.4% and 30% KCL sylvinite. The size and scope of the area and the results obtained from just a small section suggest that further drilling will only enhance the size and quality of the resource.
As for project economics, Potmin’s advantage is that its property is ideal for solution mining, whereby hot water is pumped in the ground to push up brine containing potash and NaCl (table salt), which is then separated through a process of heating, centrifuging and crystallizing, which also removes the water and recycles it with salt that is pushed back in the hole. Potmin has already identified the necessary water source with the additional benefit that it is on-site and non-potable, easing environmental and community concerns. In addition, Potmin has the advantage of being based in North America, which takes away a lot of the risk. The plant will use clean burning, natural gas available from nearby gas fields. Electricity will be purchased from local utility companies and according to plans unveiled at the White House, energy may soon be provided by solar panels thanks to a new push for renewable sources focused on Utah, Colorado and other southwestern states. Solution mining does not place personnel underground and thus does not have the risks, or costs, inherent to underground mining.
The Paradox basin and Utah are among the best mining destinations in the United States, marked by a very pro-business regulatory environment. Intrepid has run a large potash operation in the Paradox Basin for decades, offering an important source of experience and knowledge from which companies like Potmin can draw to help it develop the project more efficiently – including the availability of a labor force experienced in solution mining infrastructure and processing as well as the geography and climate.