Potash & Phosphate Month-in-Review: The month that made project economics fashionable again
Potash & Phosphate Month-in-Review (August 2013): The InvestorIntel Potash & Phosphate Sponsors’ members averaged up for the month of August — +2.77%. The increase itself is not especially noteworthy at first glance; however, this result is rather exceptional, considering the bombshells from Uralkali and BHP Billiton that were dropped on the potash market between the end of July and the end of August. Since the beginning of the year, the potash market delivered a performance that can at best be described as ‘reluctant’. Potash suffered an overall malaise felt by the commodities sector in general, which have dropped steadily in value since 2011, making it very sensitive to the slightest hint of unfavorable developments or uncertainty.
Aguia Resources (ASX: AGR) saw the biggest gains in percentage terms — up +37.50% for August. Aguia announced that it had intersected new and very favorable phosphate zones at its Três Estradas South Project in Brazil. Aguia sees opportunities in the fact that its phosphate projects are located in some of Brazil’s most important fertilizer consuming states/markets. Rio Grande, and neighboring Santa Caterina and Parana account for 30% of Brazilian consumption, while there are no active phosphate mines in the three southern states. Evidently, Aguia will have an advantage in getting its phosphate to market, seeing the closest active phosphate mining projects are based in Minas Gerais, much further north. Upon confirmation of the favorable beneficiation results, Aguia will proceed with the production of concentrated rock phosphate.
Galileo Resources rose +17.31%. Galileo Resources (‘Galileo’, AIM: GLR) is developing phosphate and rare earths projects in South Africa and Zambia. Its flagship project is the Glenover Rare Earths and Phosphate Project, in South Africa’s Limpopo Province. A preliminary economic assessment (PEA) issued last March suggested that it had a value of USD$ 512 million based on phosphate stockpiles from abandoned operations at the site. However, the property will be able to develop as an open pit mine, which allows for a faster and cheaper ramp up to production stage. It is not surprising that the two biggest gainers of the month are developing phosphate projects. The phosphate market has been more steady than potash in all the major producing regions, including Russia, whose potash industry has seen considerable turmoil in the since last July 30.
The short and long term outlook is favorable in the short term. This is because inventories for the fertilizer have remained steady, implying a normal level of demand. The situation may change when a series of new and large scale producers such as Saudi Arabia’s Ma’aden Resources come on line, potentially causing inventories to go up as supply could outpace demand. In the longer term, the various dynamics associated with population growth, middle class growth in emerging economies and the maximization of land productivity, should cause demand to rise. Phosphate projects are also cheaper than potash to bring to production, while rock phosphate itself can be used as a direct fertilizer, requiring little processing.
Indeed, the project economics factor was highlighted over the past month by the breakup of the Russian-Belarusian potash cartel, BPC, as OAO Uralkali decided for as yet unclear reasons to break the pricing mechanism that along with its North American equivalent, Canpotex, had managed to maintain potash prices at levels of no less than USD 400/ton even in the topsy-turvy commodity markets of the past two years.
Chances are, even if the Uralkali saga ends in its favor – the arrest of the CEO Vladimir Baumgartner in Belarus suggests there are some obstacles to overcome – that the potash market will be less bearish than some analysts had predicted when the story first broke out. Allana Potash (‘Allana’, TSX: AAA | OTCQX: ALLRF) actually managed to gain 12.09% in Toronto trading, returning to a price floor closer to the yearly average of about CAD$ 0.50/share. Allana is steadily moving toward start of mine construction, for which it has already announced that financing arrangements are well underway, securing about two thirds of the capital needed. Magna Resources Ltd. (CNSX: MNA | OTCQX: MGRZF) started trading on the OTCQX International exchange under the symbol ‘MGRZF’. Investors were evidently pleased by the announcement as shares rose 9.09% on the CNSX. The OTCQX listing will make it easier for US investors to consider Magna, as brokers will be better able to access home country disclosure and market shares. Last July, Magna announced that the US Bureau of Land Management (BLM) environmental assessment – examining all environmental issues associated with the exploration plan – for its Green River Potash Project in Utah ended on July 8, meaning that final approval is forthcoming. The BLM submission marked the end of Magna’s process for the application of all relevant prospecting permits ending in a decision of “Finding of No Significant Impact” (FONSI).
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Allana’s and Magna’s gains last week might have been greater, but were still impressive at +12.09 and +9.09% — but were impacted by industry news 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, which has put all potash company valuations under pressure following the breakup of the Russian/Belarusian BPC pricing cartel last July 30. 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.
Allana is one of these because its project based in Ethiopia’s Danakhil region may well be the one best suited to benefit from the new potash market dynamics triggered by the BPC collapse. If potash prices actually do drop as predicted to below the current USD 350/ton (the test will come when Belaruskali signs its next contract with China) level, potash will become more affordable for those many potential customers who have stayed away because of prohibitive costs. Companies with favorable project economics such as Allana Potash have a head start.