K+S to make history with Legacy potash

K+S plans to go ahead with building its Legacy  potash project in Saskatchewan’s highly prospective potash basin, with initial production expected in 2015.

The German fertilizer company announced on Nov. 29 that its board approved the $3.25-billion project.

“Legacy has now become the first greenfield potash mine in Saskatchewan to receive a green light for construction since disco was popular,” Jaret Anderson, a Mackie Research Capital analyst, commented in a note.

K+S also revised the feasibility study that Legacy’s previous owner Potash One completed last October. K+S nabbed the junior and its project for $434 million earlier this year based on the feasibility, showing a solution mine at Legacy could produce 2.86 million tonnes of potassium chloride (KCl) a year for at least 47 years. 

The updated feasibility shows the production capacity remains at 2.86 tonnes a year, but the optimized start-up costs grew from $2.9 billion to $3.25 billion. K+S also hiked up its operational expenditure estimate by 51% to $95 per tonne, Anderson says, prior to transportation, mining taxes and royalties. 

But the company – valued at €7.3 billion – shouldn’t have trouble covering Legacy’s higher costs.

“Financing is expected from liquidity remaining on the balance sheet and future cash flows,” Charles Neivert, a Dahlman Rose analyst, said in a Nov. 29 note. “The company is assuming the refinancing of a bond due in 2014.”

K+S has already started building initial infrastructure for water supply, electricity and road development on the site, located 50 km north of the city of Moose Jaw. 

Initial production from Legacy should come online in 2015, before reaching 2 million tonnes annually in 2017. Full production of 2.86 million tonnes is anticipated by 2023, and the company looks to expand capacity to 4 million tonnes in 2034. The expansion’s cost is not included in the $3.25-
billion price tag. 

Legacy has proven reserves of 160 million tonnes grading 29% KCl and 18% potassium oxide (K2O). It has another 982 million tonnes at 27% KCl and 17% K2O in inferred and indicated on the property. 

K+S’s building plan is a “big positive” for Western Potash‘s (WPX-T) future. Anderson says the Milestone project’s proximity to Regina may be a benefit, owing to similar mining methods, scale and location.

Anderson has a “speculative buy” rating and a $3 price target on Western Potash. He says K+S’s increased costs indicate initial costs at Milestone could also grow. But the silver lining is that Milestone can also increase its initial processing rate. Based on an October prefeasibility study, Milestone is envisioned to produce 2.8 tonnes of potash annually for at least 40 years. Capital expenditures are pegged at $2.76 billion. 

While the news bodes well for Western Potash, Neivert says he views K+S’ announcement as “mildy bearish” for the potash companies that Dahlman Rose covers, including: Potash Corp. of Saskatchewan (POT-T, POT-N), Mosaic (MOS-N) and Agrium (AGU-T, AGU-N).