Timing is Everything for Potash Juniors

Australia-based potash junior Elemental Minerals (ASX:ELM,TSX:ELM) believes its high-grade sylvinite and carnallite formations on the west coast of the Republic of Congo are an exception. Elemental’s CEO, Iain Macpherson, claimed that “there is room for new [potash] production coming into the market,” and “we believe Elemental is one of the best greenfields out there.”

Traditionally focused on oil, new markets like the Republic of Congo have seen a rise in potash exploration and development projects in recent years. These markets are especially sought after thanks to their relative proximity to emerging economies that are driving potash and fertilizer demand.

The recent release of Elemental’s Phase 2 drill results at the northeast end of its developing property at Sintoukola, which has assured the targeted addition of between 320 million and 1.08 billion tonnes of sylvinite mineralisation grading between 19 percent K₂O (30.15 percent KCl) and 21 percent K₂O (33.33 percent KCl), is proof of just how much potash supply exists in traditionally undeveloped regions.

Juniors seeking finance

Potash projects, especially greenfields, face real challenges in accessing financing. Due to the large capital expenditures for underground or solution mining and various processing techniques, potash production is typically dominated by a few large, vertically-integrated companies.

Macpherson alluded to the financing challenge, suggesting that the key risk for Elemental was “the ability to finance the project in the time that it needs to be done.” This was more important than the risks related to the project itself or the overstated political risks of operating within the Republic of Congo.

In the wake of Mosaic and PotashCorp’s production cuts and mine closures, making that sale on public markets may be a tough road for eventual fertilizer producers. The sudden run up in supply that forced Mosaic and PotashCorp to close mines took some by surprise, including Canpotex CEO Steven Dechka.

“We had a fall in the fourth quarter as the European crisis started to hit again, people started getting nervous,” Dechka told Reuters last week. As a result, it was “a slower-than-expected…first quarter.”

A number of potash producer executives have encouraged investors to look beyond short-term fluctuations to long-term shifts in the market. But protracted standoffs between suppliers and farmers in the past have caused problems for producers’ fortunes, and the risk of a similar stand-off could still exist this year.

Identifying markets

Potash markets are a sensitive area and vary depending on the country in question. Chinese and Indian markets are highly politicized in part due to the predominance of farmers across these countries, but are in search of secure supplies.

Brazil is deeply dependent on foreign sources to supply its markets, relying on imports for over 90 percent of its annual consumption of about 7.5 MT. Traditionally buying potash on the spot markets, Macpherson noted that Brazil “has a very serious need for supply” and “we believe there are synergies that we are in a position to feed in to.”

But a number of other suppliers are also eyeing this perceived opportunity. Bloomberg recently announced that Brazilian Vale SA (NYSE:VALE), the world’s second largest mining company, agreed to lease a potash mine owned by Petroleo Brasileiro SA (PETR4) for 30 years in order to set up a fertilizer project worth US $4 billion.

Mining juniors Verde Potash (TSXV:NPK) and Rio Verde Minerals (TSX:RVD) both have their sights on supplying the Brazilian market from within, with Verde beginning production in 2014 and Rio’s start date yet to be determined.

Leading forward, determining which mines are likely to come online in time to grow with the market will depend on both mineral resources and time. Many juniors may be short on both.

Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.