Mining vs AI: What’s wrong with this picture?
As the saying from mid-19th century California goes, during a gold rush the easiest way to get rich is selling shovels and picks.
The United Nations estimates that the world’s population will reach 7.7 billion by 2020 and 9.3 billion in 2050. Another UN estimate says that only 30 percent of the arable land used in the 1950s will be available in 2050.
“Just when we need more soil to feed the 10 billion people of the future, we’ll actually have less — only a quarter of an acre of cropland per person in 2050, versus the half-acre we use today on the most efficient farms,” says David Montgomery, author of the 2007 book Dirt: The Erosion of Civilizations.
Fertilizers are going to become increasingly important to improve crop yields.
2010 is going to be the remembered as the year of the fertilizer deal. BHP Billiton acquired Athabasca Potash for C$341 million. Vale paid US$3.8 billion for the South American fertilizer assets of U.S. commodity supply chain company Bunge, and at the same time acquired a 16 per cent stake in Fertilizantes Fosfatados of Brazil. The recent, and failed, $38 billion all-cash bid for PotashCorp (POT-TSX) by BHP Billiton (BHP-NYSE) has stirred up the fertilizer sector and reminded the investment community of potash’s attractive economic fundamentals.
BHP Billiton’s failed bid for PotashCorp was showcased in the Canadian press and investors have been focused on the senior potash sector. This is going to change due to recent news that, in my opinion, will refocus investors’ attention further down the potash food chain.
Potash One suitor offers $4.50 a share
K+S Aktiengesellschaft and Potash One Inc. have entered into a support agreement pursuant to which K+S will make an offer to acquire all of the issued and outstanding common shares of Potash One at a price of $4.50 per share in cash for total consideration of approximately $434-million (311 million euros).
BHP has made it very clear it likes potash — not just Potash Corp. In 2009 the company bought Athabasca Potash for $341 million, based on a resource of 465 million tonnes. In 2010 it announced it was going to spend upwards of $12 billion dollars to develop the Jansen mine in Saskatchewan. The question I’m presently considering is where BHP, and others, will seek their next deal now that the Potash Corp. bid has failed and K+S has made an offer for Potash One.
There are two junior potash developers in Saskatchewan, and one in Brazil, on my radar screen.
Amazon Mining Corp.
Amazon Mining Corp. (TSX.V – AMZ) was founded by Brazilians in 2005. The company is focused on the development of its Cerrado Verde project. Cerrado Verde is the source of a potash-rich rock from which Amazon plans to produce a slow-release, non-chloride, multi-nutrient fertilizer product called ThermoPotash. Brazilian soils are generally poor in potash and Brazil only produces 10 percent of its current potash needs.
Their leading exports — sugar cane, soy beans, orange juice, coffee, tobacco, beef, poultry and corn — all require potash-rich environments. Brazil is one of the few countries left with potential to increase arable land and that has an abundance of fresh water (Brazil, Canada, China, Colombia, Indonesia and Russia have half the world’s supply of freshwater. Asia has the lowest water supply per capita). Increasing the size of the country’s agricultural land base will drive further potash demand.
Interesting developments in Amazon’s remarkable story include:
A preliminary economic assessment released Oct. 28, 2010 estimates annual production of 1.1 million tonnes of ThermoPotash, based on inferred resources of 105 million tonnes. Operating costs are estimated at US$41.80 per tonne.
Encanto Potash (TSX.V – EPO)
Saskatchewan is the largest potash producer in the world, typically accounting for 30 percent of total production. The value of Saskatchewan potash sales was $3.1 billion in 2009.
Encanto Potash is steadily working towards its maiden 43-101 resource calculation. EPO’s flagship property, the Muskowekwan, is on trend with all the major players in the potash basin.
EPO has published its initial interpretations of a 63-square-mile 3D survey. The data supports findings from its original 2D survey indicating that the potash bed is continuous and structurally intact. Boyd PetroSearch reports less than 10 percent of the survey shows anomalies in seismic response, indicating that the potash could be continuous over 30,000 acres.
According to a research report dated August 30, 2010 from Industrial Alliance, EPO’s first drill hole shows depth, grade and thickness on par with both Potash Corp’s Rocanville and Allan producing mines and Athabasca Potash’s (now BHP Billiton) Burr Property in the feasibility stage, recently bought out by BHP for $341 million.
Says CEO Jim Walchuck: “Consistent grades and thicknesses have been demonstrated by these five wells to extend laterally at least six miles. Combined with the responses seen on our 63-square-mile 3D seismic survey we are optimistic that this will result in a significant resource in our upcoming NI 43-101 report.
“We expect the NI 43-101 report to be completed by late January/early February 2011. It is encouraging that our assay grades and thicknesses are similar or better than the published grades from other Canadian producing mines.”
Western Potash Corp. (TSX.V – WPX)
Western Potash Corp.has a NI 43-101 compliant mineral resource estimate for its Milestone property in southern Saskatchewan.
The estimate consists of 41 million tonnes of measured resources, 133 million tonnes of indicated resources, and 560 million tonnes of inferred resources.
Mineral resources at Patience Lake, Belle Plaine, and Esterhazy Members are estimated to be as follows:
The recently-published Preliminary Economic Assessment (PEA) confirms that the Milestone resource shows significant positive economics and that the asset is of sufficient size and grade to support solution mining for more than 40 years at a production rate of 2.5Mt/yr. The study recommends immediate commencement of a pre-feasibility study based on the attractive economic assessment in the PEA.
Solution mining takes advantage of the fact that mineral solubility in water improves with increasing temperature. Since temperature increases with depth, deeper potash deposits become candidates for solution mining. In line or primary solution mining, water is sent down a pipe to the deposit and circulated to dissolve halite (sodium chloride) and sylvite (potassium chloride); the solution is then pumped to the surface. In secondary mining, a halite-rich brine is injected into the deposit, selectively dissolving the sylvite and leaving the mineralized halite behind.
With solution mining, development costs are significantly lower, timelines are shorter, production is easily scalable, and mining risk is significantly less compared to conventional underground mining.
WPX management is studying the possibility of consolidating the pre- and final feasibility processes, and publishing only a final feasibility study suitable for reaching a production decision and for attracting project debt finance.
Says Patricio Varas, Western Potash Corp. CEO and President:
“We are pleased that the scoping study confirms that the Milestone Potash project is an economically robust, stand alone project capable of delivering significant value for our shareholders. Not only does the study show that the project is technically feasible and economically positive, it also shows that our favorable formation temperatures contribute to reduce our production costs by approximately 10 percent.
“We believe these features identify Milestone as one of the largest and best Tier 1 potash, greenfield, solution deposits still available in the world today, that are ready for development… The receipt of this positive scoping study is a significant milestone on the path towards building Saskatchewan’s most efficient potash solution mine.”
Conclusion
Today fertilizers are responsible for between 40 and 60 percent of the world’s food supply. The United Nations Food and Agriculture Organization estimates that total world demand for agricultural products will be 60 percent higher in 2030 than it is today.
Fertilizers are going to become increasingly important for improving crop yields.
“Companies involved solely in exploration of potash are likely take-out candidates, either by diversified mining companies seeking a way into the potash industry or by countries looking to lock in supply,” says Jacob Bout, fertilizers analyst for CIBC World Markets.
There is certainly longevity to the potash story and as more and more investors become aware of it the most leveraged companies could very well deliver spectacular gains for their shareholders.
* Richard Mills is host of www.aheadoftheherd.com and an investor in the junior resource sector. He does not own shares of any company mentioned in this article.
Links and References
Dirt: The Erosion of Civilizations
Global Potash Supply – A Focus on Saskatchewan Exploration.
