Forecast a bit cloudier for major potash developers

VANCOUVER — Rising costs and inconsistent downstream demand have taken a toll on potash and fertilizer producers during the first half of 2012, with volatile global markets now impacting the strategies of several mega miners in Saskatchewan’s rich potash belt. Where the forecast looked extremely sunny for Canada’s fertilizer industry earlier in the year, there now exists some uncertainty in the face of major project delays.

The bad news started to roll in on August 16, when Brazilian mining power Vale (VALE-N) announced it would be delaying its US$3 billion Kronau potash project 30 km southeast of Regina. Vale indicated it would continue to work on water sourcing for the project and move ahead with an environmental impact assessment, but provided no clear timeframe on project construction.

“We find ourselves in some challenging economic times today and we have reviewed the projects that we have on our plate, one of those being the Kronau project, and we have made a decision to postpone it for the time being,” Vale spokesman Cory McPhee told CBC News reporters on August 16. “We are looking at all the projects we have on our plate and prioritizing.”

Vale’s mine was expected to employ a workforce of roughly 1,000 at peak capacity, and produce 2.9 million tonnes of potash annually. The project was set for a build-out period over the next three years after Vale purchased the project from Australian giant Rio Tinto (RIO-N, RIO-L) for US$850 million in 2009.

Just one week later, on August 23, Australian mining-giant BHP Billiton (BHP-N, BHP-A) announced it would be delaying a decision on its US$12 billion Jansen development, a mega potash project near LeRoy, Sask. Jansen is currently in the review stage with BHP’s board of directors, though the company has already started a massive build-out on site.

BHP has committed roughly US$1.2 billion to the project and is in the process of constructing a 2,600-person construction camp at what is projected to be the world’s largest potash mine, with annual production peaking at 8 million tonnes of potash over a mine life that could exceed 50 years.

BHP’s decision followed a six-month financial period where the company experienced a 58% profit drop to US$5.5 billion on weak base-metal and coal prices. BHP was quick to point out that it remains committed to the Jansen project and would continue with engineering work looking at start-up operations with a four million tonnes per annum throughput capacity.

Sask. Premier Brad Wall met with reporters on August 23 in response to the BHP project delay and stated he remained optimistic on the Jansen project. Wall also jump-started speculation by mentioning the possibility of a new potash royalty structure that he said would be tied more closely to production than cost structures.

“Given what’s happening in other parts of the world as a result of this announcement, we see this project going ahead in Saskatchewan, and that’s good news,” Wall told reporters in Regina. “A project where they’re continuing to sink shafts does not sound like a delay.”

Markets have hit Canadian potash miner Potash Corp. (POT-T, POT-N) following a second quarter where profits fell to US$526 million or 60¢ per share — down from US$846 million or 96¢ per share in second quarter 2011. The company was hit by a US$345 million impairment charge from an investment in China’s Sinofert Holdings, which management expects will affect Potash Corp.’s profit margins over the remainder of the year.

As a result of the impairment charge the company dropped its earnings guidance to between $2.80 and $3.20 per share. According to a Thomson Reuters survey analysts had pegged Potash Corp.’s earnings at roughly $3.47 during 2012.

The company will be forced to shut-down operations at its Lanigan potash mine in Sask. from September 15 to October 13 due to a current surplus in supply. Potash Corp. reported North American inventories at 30% above its five-year average in July. Lanigan is a conventional underground mine operating at 1,000 metres depth with a capacity of 3.8 million tonnes potassium chloride annually.

The mine employs a workforce of roughly 600. Potash Corp. has made no comment regarding lay-offs or extended work stoppages.

Offering a more optimistic outlook is German fertilizer company K+S Group, which said on August 24 that it would be moving ahead with a large-scale development northeast of Moose Jaw, Sask. The company’s board approved a US$3.25 billion development at its greenfield Legacy potash project in November, and held a ground-breaking ceremony in mid-June. Water sourcing and power infrastructure measures are underway, with production expected to start-up in 2015. Legacy will produce at an average capacity of 2.86 million tonnes of potassium chloride per year through 2023.

The project is expected to provide work for roughly 1,000 people during construction before supplying 320 sustainable jobs at peak production.

“It’s looking great. [We hired] our one-hundredth employee this week and those numbers are going to continue to grow bigger and bigger,” K+S Canada spokeswoman Christine Stass told the Moose Jaw Times-Herald on August 24. “They’re doing a fair amount of groundwork just to prepare for the future structures that will be on the site. They’ll be continuing to drill those production wells that will eventually be used for potash extraction. And we’re continuing to build our water facilities and pipelines.”