Legacy’s costs climb, K+S delays commissioning

VANCOUVER — News of a 26% capital-cost increase and six-month delay in start-up at the Legacy potash mine in Saskatchewan drove owner K+S AG’s share price to a five-month low, but the German fertilizer giant remains confident that the project offers attractive economics and good potential to grow into a major potash operation.

K+S broke ground at Legacy in late 2011, a year after gaining ownership of the property through a $428-million takeover of Potash One. Now, a year and a half into construction, the company says estimated capital costs to build the mine have climbed from $3.3 billion to $4.1 billion.

K+S also warned that commissioning is planned for mid-2016, six months later than first forecast. But the company still expects to achieve a capacity of 2 million tonnes per year by 2017. Potential expansions could increase annual output to as much as 4 million tonnes by 2030.

Those tonnes are key to the company’s production profile. K+S is Europe’s largest potash maker, but the Canadian mine is at the heart of its global expansion plans, primarily because ore grades are declining in Germany’s long-operating mines. K+S produces 7.5 million tonnes of potash and magnesium crude salts a year.

Because Legacy is so important to the company’s fertilizer unit, K+S is willing to spend a bit more money and take a few extra months to get the mine built. Costs increased in part because K+S investing in its own installations at the port of Vancouver instead of renting. Plant modifications and rising material and labour costs also added to capital needs.

Cash to support the increased capital budget will come partly from new debt and partly from existing cash reserves and future cash flows.

In announcing the revised Legacy plan, K+S CEO Norbert Steiner said the Canadian operation will be “an important part of the future of K+S,” as it will be the main source for distributing to the emerging regions of Asia, South America and North America. Steiner noted that despite the changes to costs and timing, Legacy remains “economically attractive and still fulfills the requirements . . . to earn a 15% premium on the cost of capital before taxes.”

Legacy will be a solution mine, which means potassium chloride will be leached from its host rock in situ. The process involves two drill holes. The first hole is used to send hot water down to the potash-bearing rock layers. As the minerals dissolve, an underground cavern is created that is partially filled with potash-laced brine. A second borehole, drilled 70 to 100 metres away from the first, taps into the underground cavern and pumps the brine to the surface.

Legacy will be the first new potash mine in Saskatchewan in almost 40 years. The province’s first potash mine — an underground mining operation — started producing in 1962. Two years later the first solution mine started operating. By 1971 Saskatchewan was home to 10 potash mines, and today the province remains the second-largest potash-producing region in the world.

The Legacy news pushed K+S’s share price down 4.1% to an intraday low of €32.08, its lowest point since November. The stock, which is listed on the German DAX exchange under the symbol SDF, is down 8% this year.

Regardless, K+S’s potash business unit has outperformed its rivals — Potash Corp. of Saskatchewan (POT-T, POT-N) and Russia’s OAO Uralkali have both cut production amidst faltering demand. In addition, Vale (VALE-N) announced last month that its Rio Colorado project in Argentina is no longer economically viable, while BHP Billiton (BHP-N) is holding off on developing its potash project in western Canada.

Potash prices, which hit a record high of US$872 per tonne in 2009, have fallen off in recent years and currently sit near US$400 per tonne.