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Potash juniors look to importers for cash injections

Big miners shelving projects as prices weaken

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 fertilizer 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 two distribution groups from Canada and Russia," said CEO Patricio Varas of Western Potash Corp., on the sidelines of the Prospectors and Developers Association of Canada mining convention in Toronto.

"They're thinking, 'We consume all this potash, why not own some?,'" he said.

Three years ago, as forecasts grew of soaring demand for the crop nutrient potash, 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 tires on junior projects. BHP has yet to give final approval to its Saskatchewan potash project, while Vale SA has put its own Saskatchewan project on hold.

Favourable long-term demand

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 PotashCorp, Mosaic Co. and Agrium have expansions well underway.

Junior mining companies are typically involved in exploration and development but lack capital to build their projects.

In the longer term, however, demand for fertilizer 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 US$39 billion hostile bid for PotashCorp, which the Canadian government ultimately blocked.

The unfavourable winds leave the remaining juniors to dig up other means of funding their mines.

Karnalyte Resources Inc 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 January, the Okotoks, Alta. miner sold a 20 per cent interest in its Wynyard, Sask. potash solution mine to India's Gujarat State Fertilizers and Chemicals, along with an off-take agreement for 350,000 tonnes a year.

A second 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, said Ron Love, Karnalyte's chief financial officer, 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 fertilizer 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 Co., which represent the big producers in Canada and Russia/Belarus, respectively, and who use their clout to drive hard bargains.

Karnalyte's project, called Wynyard Carnallite, also looks appealing for its relatively low cost, at C$600 million, due to its small scale and use of less-conventional solution mining.

Off-take agreements

Encanto Potash Corp. is working toward signing an off-take agreement with a consortium led by India's Rashtriya Chemicals and Fertilizers Ltd for its flagship Muskowekwan project in Saskatchewan, said Ross Moulton, vice-president of exploration.

The agreement is expected to commit two million tonnes a year of the project's 2.8 million-tonne 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 at Encanto's booth at the mining convention.

Encanto is seeking government approval for Muskowekwan on environmental grounds and completion of a bankable feasibility study by the end of the year.

Western Potash Corp. has struggled to attract capital because of the steep C$3.3-billion 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 C$5 million and in January it hired UBS Securities to help search for financing.

The price tag simply reflects the large size of the resource, said Western's CEO Varas.

Western is in talks about investments with numerous parties, from hedge funds, to fertilizer companies in China and India, Varas said. Unlike its junior rivals, he said Western has turned down offers of off-take agreements from fertilizer makers as it looks for a comprehensive plan to build Milestone, he said.

China's state-owned Sichuan Chemical Industry Holding (Group) Co. signed an off-take agreement last autumn with Prospect Global Resources, which is planning a potash mine in Arizona.

To be sure, big fertilizer producers aren't completely ignoring juniors. Last spring, Norwegian nitrogen maker Yara International bought a one-fifth stake in IC Potash Corp, 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 PLC 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 Corp and MBAC Fertilizer Corp are also eyeing potential Brazilian potash projects.

-- Rod Nickel is a Reuters correspondent based in Winnipeg.

Related stories:
PotashCorp wants to buy ICL despite obstacles,
Feb. 26, 2013
Potash developer plans N.B. fertilizer processing plant, Feb. 28, 2013


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