PDAC: India and China Moving into Potash Acquistions
March 5, 2013 (Source: Mining Business Media) Toronto, ON — Undeveloped Canadian potash projects are drawing investment from a new and unexpected source, as buyers of the crop nutrient in India cross over to the industry’s supply side.
The strong interest by Indian fertiliser companies in equity stakes and agreements to take a certain percentage of a supplier’s production is a welcome development for junior miners that are not getting the same attention from senior potash producers that they did a few years ago.
China, the world’s biggest potash consumer, is also exploring ways to secure supplies through juniors. “This is a great opportunity for the buyer side because those guys consume huge amounts of product and they are prisoners of the big 2 distribution groups from Canada and Russia,” Western Potash Corp CEO Patricio Varas said on the sidelines of the Prospectors & Developers Association of Canada mining convention.
Three years ago, as forecasts grew of soaring demand for the crop nutrient, mining giant BHP Billiton and German potash producer K+S AG bought juniors Athabasca and Potash One, respectively, and started construction on new mines.
But today, major mining companies are delaying or shelving their own projects as potash prices weaken, never mind kicking the tyres on junior projects. BHP has yet to give final approval to its Saskatchewan potash project, while Vale has put its own Saskatchewan project on hold.
Junior potash companies, like senior producers, are facing investor doubts, given concerns that too much mining capacity for the nutrient is already in the works for the near term. Existing producers such as Potash Corp of Saskatchewan, Mosaic and Agrium have expansions well underway.
Get our daily investorintel update
In the longer term, however, demand for fertiliser looks strong as populations grow especially in China and India, straining food production. BHP viewed potash as such a strategic commodity to own that in 2010 it launched a $US39B bid for Potash Corp, which the Canadian govt ultimately blocked.
The current unfavorable winds leave the remaining juniors to dig up other means of funding their mines.
Karnalyte Resources has found that even if mining majors aren’t returning calls these days, companies that import potash into India are a lot more interested. In Jan, the Okotoks, Alberta, miner sold 20% of its Wynyard, Saskatchewan, potash solution mine to India’s Gujarat State Fertilizers & Chemicals, along with an off-take agreement for 350,000tpa.
A 2nd potential partner, also a potash buyer, is close to making a similar commitment that would push the project closer to reality, with debt and equity raising the balance, according to Ron Love, Karnalyte’s CFO, declining to offer further details. “One of the big mantras they have in India is food self-sufficiency,” he said. “They want to set themselves up for the future and fertiliser is a big part of that. Investing in new mines allows them to avoid regular negotiations of contracts which are sometimes a little painful.”
India imports potash to boost yields of its crops of rice, cotton and wheat, since it produces none of the crop nutrient itself. Its buyers collectively negotiate supply contracts with marketing agencies Canpotex and Belarussian Potash, which represent the big producers in Canada and Russia/Belarus, respectively, and who use their clout to drive hard bargains.
Karnalyte’s project, Wynyard Carnallite, also looks appealing for its relatively low cost at $C600M, due to its small scale and use of less-conventional solution mining.
Encanto Potash is working toward signing an off-take agreement with a consortium led by India’s Rashtriya Chemicals and Fertilizers for its flagship Muskowekwan project in Saskatchewan, according to exploration VP Ross Moulton.
The agreement is expected to commit 2Mtpa of the project’s 2.8Mtpa potential capacity and should lead quickly to financing, he said. “Our fear from day-1 is that the big boys (of potash mining) would come in, buy us and shut us down for pennies on the dollar,” Moulton said.
Encanto is seeking govt approval for Muskowekwan on environmental grounds and completion of a BFS by the end of the year. Western Potash has struggled to attract capital because of the steep $C3.3B price tag on its Milestone project in Saskatchewan, according to analyst Andrea Rubakovic of Salman Partners. At the end of 2012, it had a cash balance of just $5M and in January it hired UBS Securities to help search for financing.
The price tag simply reflects the large size of the resource, according to Western’s CEO Varas. However, the company is in investment talks with numerous parties, from hedge funds, to fertiliser companies in China and India, Varas says. Unlike its junior rivals, he says Western has turned down offers of off-take agreements from fertiliser makers as it looks for a comprehensive plan to build Milestone.
China’s state-owned Sichuan Chemical Industry signed an off-take agreement last autumn with Prospect Global Resources, which is planning a potash mine in Arizona, US.
To be sure, big fertiliser producers aren’t completely ignoring juniors. Last spring, Norwegian nitrogen maker, Yara International ASA, bought a 1/5th stake in IC Potash, which is developing a potash mine in New Mexico.
Several other Toronto-listed potash companies are taking another tack — developing projects that are closer to the buyers. Verde Potash hopes to start mining potash in 2015 in the Minas Gerais state of Brazil, one of the world’s agricultural powerhouses and one of its biggest potash importers. Rio Verde Minerals Development and MBAC Fertiliser Corp are also eyeing potential Brazilian potash projects.
InvestorIntel is a trusted source of reliable information at the forefront of emerging markets that brings investment opportunities to discerning investors.