Potash, uranium, key themes at RBC conference;RBC conference

Commodity prices will remain strong for several years to come due to robust demand outside the United States and persistent supply constraints, according to presentations at the recent RBC Global Mining and Materials Conference in Toronto.

But the biggest buzz at the recent two-day event seemed to be about potash — a commodity thriving amidst fears of a global grain deficit and food crisis (the current grain supply would feed the world for just 53 days), surging fertilizer prices, and an expanding appetite for biofuels.

Population growth and rising incomes in emerging economies such as India and China, where millions of people aspire to switch to meatier diets, are also fuelling the commodity’s popularity.

Potash prices have yet to peak and demand for fertilizer from Brazil, China and India will double over the next 15-20 years, Bill Doyle, chief executive of Potash Corp. of Saskatchewan (POT-T, POT-N) told conference participants.

Canada’s biggest mining company, which has large operations in Canada and strategic investments in Jordan, Israel, Chile and China, anticipates that over the next five years, escalating potash demand will translate into the company’s greatest growth in its history. It plans to boost production — or operational capacity — by as much as 50% by 2012.

But barriers to entry are high, Doyle said. He estimated that building a 2-million-tonne greenfield mine in Saskatchewan would cost at least $2.8 billion. And that amount doesn’t include infrastructure outside the gates like roads, rail lines, utilities and port facilities. When infrastructure costs are factored in, the cost of building a greenfield mine rises to about $4-5 billion, he said. It also takes between five and seven years to build a potash mine.

In terms of rising grain prices, Doyle noted that only about 5% of grain production goes to biofuel use and that commodity index funds are not responsible for higher grain prices because the funds do not hoard grain. Just 19% of food production costs are on-farm costs such as fertilizer and seed, he said, while 81% are off-farm costs for things such as packaging, transportation and marketing.

Already, the potash industry is operating at full capacity (capacity utilization of 93%) with no inventory buildup, according to Bob Jornayvaz, chief executive of Intrepid Potash (IPI-N). What is constraining the industry is not capital, he explained in his presentation, but rather the shortage of deposits, available equipment and technology.

Jornayvaz said that most of the world’s potash deposits have already been discovered. He also pointed out that during the last quarter of a century at least five facilities have been lost to water incursion. (According to Doyle of Potash Corp. of Saskatchewan, good deposits are rare and only 12 countries produce potash.)

Bruce Waterman, senior vice-president of finance and chief financial officer of Calgary-based fertilizer and crop nutrient maker Agrium (AGU-T, AGU-N), forecast that the fertilizer cycle looks robust for the next 3-5 years. He also asserted that the fertilizer sector may be undervalued, as the market may not fully factor in the sector’s current pricing power.

The world’s largest miner, BHP Billiton (BHP-N, BLT-L) is also moving decisively on the mineral, with its recent takeover of Anglo Potash complete. Graham Kerr, president, diamonds and specialty products for BHP, said that potash has a favourable outlook, based on continued fertilizer demand growth as a result of increasing population, limited arable land, and improving diets in developing countries, driven by growing incomes. Meanwhile, supply is constrained by the capital intensity of the industry, long lead times, and resource scarcity.

Because market conditions for potash are also good, Kerr believes BHP’s potash program has an exciting future. The company has five or six geographic areas of interest in Canada, of which three are high priority. It is aggressively exploring in Saskatchewan and Manitoba.

Moving from potash to uranium, demand fundamentals are strong due to rising electricity requirements and because users want security of supply, according to Kim Goheen, senior vice-president and chief financial officer at Cameco (CCO-T, CCJ-N), noting that at the current spot price of uranium oxide (US$59 per lb.), the price has increased more than fivefold over its 2003 average.

Goheen conceded that uranium prices will remain volatile this year and over the next few years, but maintained that prices will eventually stabilize within a range that supports exploration and new mine development.

“Irrespective of today’s volatility, the long-term fundamentals are overwhelmingly positive,” he said.

Goheen also pointed out that globally, there are 440 nuclear reactors in 30 countries that would require about 182 million lbs. of uranium oxide this year.

He calculated a net increase of 83 reactors by 2017 — which translates into demand for 226 million lbs. uranium oxide annually.

This year, Cameco expects mine production to reach about 125 million lbs. uranium oxide, “still well below consumption,” and that amount includes planned production from 12 new mines.

“The continuing drawdown of secondary sources (finite civilian and military inventories and recycled products) is expected to result in a cumulative supply deficit ofabout 450 million pounds through to 2017, which must be filled by new production,” Goheen said.

In terms of the cost of going nuclear, Goheen noted that analysts have started to incorporate costs for reducing carbon dioxide emissions into figuring out the price of building new power plants. This trend, he says, will make new nuclear plants even more competitive.

Cameco, the world’s largest uranium producer (19% of world production last year) plans to invest $50-55 million on exploration this year. It has recently announced the acquisition of a 70% interest in the Kintyre uranium project in Australia for about US$346 million.

The RBC conference was closed to media; summaries of the presentations were prepared by RBC analysts.