Categories: Base Metals
Topics: General Base Metals

Potash Power Plays: Russia and China Act Boldly

Marc Davis, a financial news reporter for BNWnews.ca and former investment industry mining analyst, discusses the future of the junior potash sector with John Costigan,  Vice President of Corporate Development for Vancouver-based Western Potash Corp. (TSX: WPX).

MD: Just recently, potash stocks took a big hit across-the-board with the announcement that Russia has decided it may significantly undercut the current price floor of around $400 a tonne for potash by 25 percent or more. Why is this and what does it mean for the global potash industry?

JC: The long-term fundamentals for the potash business suggest there will be very healthy growth well into the future. At Western Potash, we believe that lower potash prices in the near term will logically stimulate demand that should translate into sustainable returns in the long run.

That all said, there’s a current oversupply of potash in the short-term. And we see that reflected in Potash Corp having scaled back its business with mine closures. But they do that on a regular basis in terms of managing the demand/supply ratio. In other words, they’re always cutting back when they need to, in order to support the price of potash. 

MD: There’s been a very pronounced downturn in the mining sector over the past two years as the global economic recovery continues to remain quite anemic. This correction has hit precious metals developers and producers particularly hard. Has this also been the case for emerging potash projects in Canada?

JC: Again, we’re still seeing expansion in the fertilizer sector. In fact, global potash consumption is predicted to increase. But we’re seeing a contraction in the mining companies entering the potash sector. Industry players like BPH, Vale, and Rio Tinto are pulling back, partly because of their exposure to iron. By which I mean, they’re unable to fund some of these capital-intensive projects. So they can’t really open up new markets when their conventional markets are falling apart with them posting lower returns in the iron ore business. 

Removal of these large in-development capital intensive projects from the line-up will certainly impacts the supply scenario globally. For instance, if you take an in-development eight million tonne-a-year project like Jansen out of the future supply scenario, you now have room for up to three projects the size of Milestone. Hence, we believe potash supply/demand fundamentals will be balanced going forward.

We also believe that lower prices implied in the most recent news out of Russia will take time to hit the market and that the price really only needs to find the level that discourages new entrants in order for it to have a strategic effect. In fact, this is their strategy. This again will impact supply demand ratios. High-cost operators and projects of course are most at risk. But it’s worth noting that Milestone has been engineered as a low-cost producer with a relatively high volume of output, and will not be impacted by this particular move.

MD: In North America, funding for potash juniors and other in-development mineral projects has dried up. Canadian investment banks in Toronto and Vancouver have become risk-averse over the past two years in response to a cyclical downturn in the mining industry.  How has Western Potash responded to this development?

JC: Before this downturn took hold and essentially paralyzed much of the mineral development sector, Western Potash started talking to end users of potash in Asia to see if we could partner-up with a deep-pocketed player that could finance the development of the Milestone project in return for a piece of the action. And we selected a credible Chinese company that has committed to the process of making our Milestone Potash mine a reality. The company is called China BlueChemical Ltd. And it’s a significant player in China’s fertilizer industry. In fact, it generated nearly $2 billion in sales in 2012.

MD: Why exactly did Western Potash choose China BlueChemical as a joint venture partner? In other words, what is it about this particular company that is compatible with Western Potash’s mandate?

JC: China BlueChemical is a fertilizer producer that distributes nitrogen and phosphate throughout China. But they don’t’ have their own potash supplies. So our future together fits very well with their mandate. There are also other large corporate entities that are interested in partnering with us and participating in a future potash sales off-take agreement. This is an incredible vote of confidence, giving us a very clear direction forward. 

Furthermore, the CEO of China BlueChemical is now on our board of directors. It’s a very important move that is yet another tremendous vote of confidence in terms of their participation in the Milestone project.  We take that as a clear sign that this mine will be built.

MD: What is so compelling about your Milestone project that China BlueChemical wants to be a part of its future success?

JC: Our Milestone Project in Saskatchewan is now among the most advanced independent undeveloped potash asset in the world. And it sits at the heart of the richest potash fields in the world. So the endorsement of Milestone by China is an indication that the necessary capital for big-scale mining project is still very much available through China. On this note, it’s worth mentioning that China BlueChemical is a subsidiary of CNOOC, an oil-producing flagship SOE that operates in international markets.

This approval of this investment is a tremendous endorsement of the Milestone project. We’ve signed an agreement for $32 million which of course doesn’t make a dent in the financing of the mine. And it’s not meant to. Instead, it’s meant to allow us to pave the way for the major investment which is forthcoming once we finalize the business agreement between China BlueChemical and us and other allied partners that we’ll need to bring on to spread the risk in terms of who will participate in the off-take agreement.

MD: Keeping in mind that China BlueChemical is a 60-per-cent owned subsidiary of CNOOC, how does the relationship between the two companies ultimately benefit Western Potash?

JC: When a company such as CNOOC gives you approval, that’s very powerful. It may be possible to take that endorsement, when the time comes, to the banks in order to give them a high level of confidence in the viability of our project.

MD: What’s the ultimate payoff for China BlueChemical?

JC: What they get is a technically de-risked project in Milestone. That being said, we may look at bringing on additional partners to complete to total output of the off-take in order to spread that risk. 

And we’ve identified structures that will allow them to participate on a non-dilutive equity basis.  Western Potash’s equity contribution will be the project, itself. 

MD: What kind of timeline are we talking about for the building of a 2.8 million tonne-a-year mine at Milestone?

JC: Once we complete the major transaction by getting the initial capital infrastructure monies in the bank, then we can figure out exactly how we’re going to build the mine. The formation of the mine development syndicate to build the mine is the next major milestone for us.

MD: Why is it important to China to help bring into existence a mine at Milestone?

JC: Potash has been identified as a strategic asset for China’s burgeoning agriculture sector. Yet it seems that China will never be able to produce more than 60percent of its overall potash needs. So China will have to continue to import about 40 of its potash needs. Thus, the Chinese are focused on securing long-term potash supplies because it’s an indispensible ingredient in fertilizers. Not only does it significantly boost crop yields, but it also ensures meaningful cost containment. In which case, farmers need to significantly increase their use of potash-based fertilizers. The solution is to capitalize on Canada’s potash riches and its political stability via direct ownership.

MD: Do you foresee an increase in fertilizer applications in China to boost crop yields for a fast-growing population that is increasing demanding feed-intensive animal protein?

JC: They’re currently under-applying their potash application.  So they need to balance that fertilizer use. By which I mean that over-application of phosphate and nitrogen which can leach into the soil and into the water table, which is detrimental to the environment. This can be remedied by using less of these minerals with the addition of potash. Which remarkably improves fertilizer efficiencies.

China is also increasing their agricultural land base by bringing back land that has been out of production for some time. For these reasons, they need to create more yield per acre. 

MD: Is Western Potash in the process of incrementally becoming a foreign-owned company?

JC: We will always be a Canadian company in many different ways. We will always have Canadian management. The company will also continue to be a Canadian-regulated TSX-listed company that’s governed by Canadian laws and regulations.

It’s also worth noting that the province of Saskatchewan will reap all the benefits in terms of job, taxes, and of course our commitment to being a good corporate citizen.

MD: Is it too late for new investors to benefit from Western Potash’s future success?

JC: We’re trading at a significant discount in the marketplace with a market capitalization of less than a $100 million. And in light of the fact that we’re building a $3 billion mine that promises to be a very lucrative business venture for decades to come, there’s a lot of room for improvement in the share price.

Long-term investors should take note of this fact, especially since we’re no longer an exploration company. I believe that most of the hype is out of the potash sector now. We’re now moving into the development space. Also, we also have a clear sense of direction in terms of future funding and how we’re going to build the Milestone mine.  But investors need to be patient. Those who can see this opportunity could be well-rewarded over time.

MD: Thank you, John, for your time.

John Costigan leads the corporate development team at Western Potash Corp. The company is developing a world-class 226 million-tonne potash deposit that is capable of yielding up to 2.8 million tonnes of potash per annum at pre-tax mining costs of around $62 per tonne for at least 40 years (based on its feasibility study).Additionally, the project is has received full governmental environmental approval. Hence, it is now poised for the commencement of mine construction.

Disclaimer: The principals of BNWNews.ca do not own any shares directly or indirectly in any of the companies mentioned in this interview.