When earth welcomed its seven billionth human in October, the event came as no news to the potash industry. Population growth is one of the fundamental drivers of potash demand. Refined into potassium chloride and other potassium compounds, this mineral provides one of the three critical ingredients of crop-boosting chemical fertilizers.
Canada is the world's largest potash producer at around a third of global mining output (according to a 2010 USGS estimate, 9.5 out of 33 million tonnes K20); its resources are concentrated in Saskatchewan and Manitoba. So concentrated, in fact, that explorers do not typically look far afield: PotashCorp's lone New Brunswick project was discovered on a hunt for diamonds.
Three companies control Canada's producing mines: PotashCorp, The Mosaic Company and Agrium, and together sell their output through the Canpotex marketing agency. With supply tight, each has been working on expansion plans. PotashCorp read the signs in 2003 and planned a $7.5 billion series of expansions that will nearly double operational capability between 2005 and 2015, reaching 17.1 million tonnes. Mosaic intends to add an average of 300,000 to 500,000 tonnes a year between 2010 and 2020. Agrium's one producing site, the Vanscoy Mine in Saskatchewan, will be up by 750,000, reaching 2.8 million tonnes in 2015.
The majors have chosen to expand existing operations because it is shockingly expensive to build a new potash operation. PotashCorp estimates that it would take $4.1 billion and seven years to bring a two-million-tonne greenfield potash mine and mill into production. "We're doing brownfield expansions because, on a cost per tonne basis, it's about 40 per cent of what bringing on additional tonnes by greenfield would cost," says Bill Johnson, senior director, public affairs at PotashCorp. "We don't think prices as they currently stand would justify us doing a greenfield expansion."
A growing appetite for risk
For potash hopefuls, the current prices look good enough to take on the risk. BHP Billiton, Rio Tinto and German major K+S have all moved in on properties in Saskatchewan. BHP has thus far spent US$1.2 billion developing its feasibility-stage Jansen project. If approved, the mine is expected to begin operations in 2015 and eventually generate eight million tonnes per year. In late November, K+S approved $3.25 billion in capital expenditures to develop the Legacy project it acquired through its 2010 purchase of Potash One. The solution mine is also expected to start in 2015 and will have a projected output of 2.86 million tonnes per year.
While consolidation, historically, has been the name of the game, several explorers are looking to continue into production themselves. Western Potash Corp. has released a prefeasibility study for its Milestone project, a 2.8-million-tonne operation that would cost only $2.7 billion to build -- including port facilities -- with payback in five years. Two juniors, Karnalyte Resources and Encanto Potash, also aim to become producers.
"There's been no junior going into production in decades," says Gary Deathe, business development consultant for Encanto. Deathe's explanation goes back to the concentrated nature of potash resources. Large tracts are limited, he says, and often controlled by major producers or speculators.
The founders of Encanto turned to First Nations as partners. "Some of these First Nations have big properties, 30,000 to 100,000 acres, and they control their potash rights, says Deathe. “The founders of Encanto said, 'Listen, we think we can help you establish a potash resource and get some significant long-term revenues, educational and employment opportunities.’"
Encanto is now developing its flagship property with the Muskowekwan First Nation. Deathe says the Nation's primary benefits are predicated on the benefits of continued production, making it far less likely to sell to a major, who may not develop it in a timely manner.
If the demand for potash will be as strong and sustained as current producers expect, perhaps newcomers to the industry will become similarly resourceful in developing potash deposits. Saskatchewan alone holds more than one billion tonnes.