Western Potash takes novel approach

When Western Potash Corp. (WPX-T) starts commercial production at its Milestone potash mine in 2016 it will draw much of its water from treated sewage effluent from the city of Regina, about 30 km away.

As much as 60,000 cubic metres of the stuff will be diverted daily from the Regina wastewater treatment plant to the mine. Once up and running, the company estimates the mine will draw between 40% and 70% of Regina’s total wastewater.

If paid out annually, the agreement is worth about $200 million to the City of Regina over its 45-year term. The city will be responsible for operating the pump house and pipeline and for obtaining all necessary environmental approvals for the project. Western Potash will be responsible for paying for the construction of the pump house and pipeline.

Acting Deputy Mayor Louis Browne described the agreement in prepared remarks as an example of “creative thinking and partnerships” that in this particular case not only compensate the city for treating a waste product, but facilitate economic growth in one of the key economic sectors of the province, while at the same time alleviating problems such as the build-up of algae downstream.  

According to a prefeasibility study released at the end of October 2011, the Milestone project contains sufficient size and grade of potash to support solution mining for more than 40 years at a production rate of 2.8 million tonnes per year. The prefeasibility outlined a payback period of five years, a net present value of $4.14 billion, an internal rate of return of 22.7%, and a total initial capex of $2.76 billion.

Specifically, Milestone holds 66.6 million tonnes of measured resource, 186.9 million tonnes of indicated resource; and 708.2 million tonnes of inferred.

Western Potash adopted a shareholder rights plan at the end of May to help fend off any unsolicited takeover bids for the company.

The Milestone project is 80 km southeast of Mosaic’s(MOS-N) Bell Plaine mining lease.

Western Potash ended its trading session in Toronto down 3.4% or 4¢ at $1.14 per share on more than 1 million shares traded.

But the decline likely had less to do with sewage than it had to do with a research report published yesterday by Rabobank warning that global supplies of potash could outstrip demand by between 59% and 100% by the end of the decade. The new report released June 26 and authored by the European bank’s global food and agribusiness research and advisory group predicted the industry will suffer from “substantial overcapacity.”

One of the key influencing variables, it said, is the degree to which countries like China, India and Brazil—which the bank estimates made up 40% of total potash imports last year—are prepared “to endure uneconomic projects for the sake of securing supplies either domestically or by investing in overseas developments.”

“In the end, it is mainly geopolitical and long-term strategic security parameters that justify such investments,” Rabobank analyst Dirk Jan Kennes outlined in a Rabobank press release. “From a pure economics angle, many of these investments might render losses if prices come under pressure due to oversupply.”

A second factor it claimed is the ability of smaller companies to get financing. “The response of established players to new entrants could also affect the arrival of new entrants,” the report said. “More than 60 new projects have been announced, but the existing producers have low production costs and the ability to increase their own output, which could reduce prices to a level that makes new production uneconomic.”  

Separately, Potash Corporation of Saskatchewan (POT-T, POT-N) reported the same day in its Second Quarter Market Analysis Report that “while some observers believe new potash supply could outpace global need in the coming years, what is often overlooked is the challenge for operating mines around the world to achieve full operational capability.”

It pointed out that for most of last year, geological, logistical and operational issues “constrained the industry’s ability to meet underlying demand, highlighting the need for new capacity.”

And with the long lead time needed to develop new supply, the Saskatoon-based company said, it remains convinced that the industry “could be challenged to meet the world’s rising potash demand in the years ahead.”