Potash remains a hot commodity on the Canadian prairies

VANCOUVER — With world populations marching ever upward, and an updated forecast from the U.S. Department of Agriculture estimating the largest U.S. corn crop in 75 years through 2012, it comes as no surprise that potash exploration and project development are moving ahead at a brisk pace to start the year despite price fluctuations over the past six months.

U.S.-based fertilizer-giant Mosaic Co. (MOS-N) announced on April 25 that it saw a “sharp increase” in the world demand for nutrients, and subsequently announced fourth quarter volumes for both potash and phosphates at the upper end of its guidance — the current guidance ranges are 1.7 to 2.2 million tonnes potash, and 2.3 to 2.7 million tonnes phosphate. Mosaic shares jumped 5.4% or $2.72 following the news, triggering renewed optimism regarding nutrient-based market potential this year,

“Global demand for crop nutrients has increased sharply, driven by an early and strong spring season in North America, combined with increasing shipments to South America,” said Jim Prokopanko, Mosaic’s president and chief executive officer. “We expect demand to continue to grow, and crop nutrients to remain affordable. We anticipate another year of high farm income in North America — the second highest on record — and strong farm economics around the world. Our long-term outlook for the business is positive.”

That should come as welcome news to a group of exploration and development outfits operating in the potash-rich Canadian prairies, with Saskatchewan alone holding over 50% of the world’s potash reserves.

On a large-scale development schedule is German-based K+S Potash Canada’s greenfield Legacy project in southern Saskatchewan. K+S’s supervisory board approved a US$3.25 billion capital expenditure (capex) on the project last November, and the company is holding a “ground-breaking ceremony” on June 19, though construction has already begun on water and electrical infrastructure.

K+S estimates its construction workforce will peak at around 1,100 employees, with 320 permanent jobs at the operation during production. With a build-out period of around three years, Legacy is slated for initial production in 2015, and K+S anticipates total capacity at 2.86 million tonnes of potassium chloride (KCl) per year by 2023, with potential project expansion increasing output to 4 million tonnes per year.

Australian-mining giant BHP Billiton (BHP-N, BLT-L, BHP-A) is on the precipice of making a decision regarding its Jansen potash project outside of LeRoy, Sask. The company is expected to present a US$12 billion conventional-underground mining study to its board later this year. BHP is reportedly building a 2,600 employee camp 100-km-north of Regina in anticipation of Jansen’s build-out period.

According to an early-stage research report released by Bank of Montreal’s Capital Markets, the project has an estimated 12.5% internal rate of return (IRR) and a US$2.1 billion net present value (NPV) at a 10% discount rate. Jansen is projected to be the largest potash mine in the world at peak capacity, with production totalling 8 million tonnes of potash per year over a 50 year mine life.

Karnalyte Resources’ (KRN-T) 100%-owned Wynyard carnallite project is also at a preliminary developmental stage with advanced-exploration and environmental permitting underway. Located outside of Wynyard, Sask. the project has reserves totalling 786 million tonnes grading 22.4% KCl for 155 million tonnes contained KCl.

According to a current economic assessment, full operations at Wynyard carry a US$2 billion capex with a US$1.7 billion NPV and 21.4% IRR at a 10% discount rate. The project is expected to have a five-to-six year ramp-up period with production eventually totalling 2.1 million tonnes in potash-granular pellets (a product Karnalyte has branded “KCl97”), with reserves and resources reportedly supporting a 70 year mine life. Karnalyte is in the process of a detailed engineering study, leading to initial project construction.

A first-phase commissioning and production stage is expected to start-up in early 2013, with initial output pegged at 625,000 tonnes of KC197 per year. Phase one will carry a US$593 million capex, and Karnalyte is in the process of exploring debt facilities and financing options necessary to proceed with its project.

Western Potash (WPX-T) has made headlines in recent weeks after it announced intentions to bring on a major partner to handle development at its Milestone potash project 30-km-southeast of Regina. Talks with Chinese fertilizer-giant Sinofert Holdings, which is 22%-owned by Canadian-based Potash Corp. (POT-T), broke off in early April after the parties failed to reach an option agreement.

Western Potash is searching for a partner with the financial strength to support Milestone’s US$2.5 billion capex, and continues to target prospective merger or acquisition principals in India and China. According to an economic assessment Milestone carries a US$4.14 billion NPV and 22.7% IRR at a 10% discount rate. Western Potash is targeting a 2016 start-up with a six-year ramp-up period and steady-state production at 2.8 million tonnes of potash annually with average-cash costs of US$62.35 per tonne.

Milestone has a measured resource totalling 787 million tonnes grading 25.6% KCl for 203 million tonnes of contained KCl, which translates to a mine life exceeding 40 years.

Exploration-outfit Encanto Potash (EPO-V) recently received good news on its flagship Muskowekwan potash project, in southeastern Saskatchewan, when the Muskowekwan First Nations demonstrated “overwhelming support” for the project during a vote in late February.

According to a preliminary economic assessment the Muskowekwan project carries a 32-year mine life with a US$2.4 billion capex, a US$2.9 billion NPV, and a 23.6% IRR at a 10% discount rate.

Encanto commenced a feasibility study on the project in early January, and released an updated resource in March that includes measured resources totalling 273 million tonnes grading 29.6% KCl for 26.9 million tonnes recoverable KCl, as well as indicated resources of 1.04 billion tonnes grading 29.7% KCl for 104 million tonnes of recoverable KCl.

Muskowekwan is part of a 234-sq.km land package on the Muskowekwan First Nation home reserve. Encanto maintains 100%-interest in the project under joint-venture conditions with the Muskowekwan that include a 3% gross-overriding royalty, as well as a 5% gross-overriding royalty held in trust by the government.

Pacific Potash (SKZ-V) released results from initial wells drilled and cored on its 100%-owned Provost Potash property — 250-km-southeast of Edmonton on the Alberta-Saskatchewan border — in mid-February. According to director and chief executive officer Steve Khan, the results mark the first-ever presence of potash within Alberta. Results from wells 37 and 38 include: 3 metres carrying 18.76% KCl starting from 1,330 metres including 1.6 metres of 29.7% KCl; and 0.3 metre grading 34% KCl from 1,350 metres.

Pacific Potash had US$2.5 million in working capital to end March, and intends on using results from its initial drilling to map out a second drill program later this year. The Provost Potash property is part of a 178 sq.km group of mineral claims Pacific Potash controls on the prairie-evaporate formation that stretches from eastern Manitoba to eastern Alberta.

Pacific Potash is also initiating a drill program roughly 10-km-north of the Provost Potash property at its 50-50 Provost property — the company controls 50% of the project under a joint-venture with Grizzly Discoveries (GZD-V).

Grizzly is another exploration-stage outfit in southern Alberta. The company discovered potash in mid-February in a well on its 100%-owned, 4,000-sq.km South Block property outside of Medicine Hat, Ab. Grizzly observed visible potash minerals in core drilling between 1,650 and 1,670 metres below surface, results include: 22 metres grading 4.15% KCl starting from 1,650 metres depth, including a 2.7 metre intersect carrying 13.88% KCl; and 3.3 metres grading 3.88% KCl from 1661 metres.

Grizzly holds roughly 9,300 sq.km along the Alberta-Saskatchewan border with showings up to 20% potassium oxide from historic core and gamma logs. The company is planning confirmation drilling on three separate sites with 5-to-20-km interspacing, and aiming for a resource estimate by the end of the year.