The New Criterion germinating potash mines is not a case of ‘just add water’

Tim Boreham

Independent Investment Research

The problems faced by the Australian heavyweight backers of a proposed multi-billion potash mine in Yorkshire show that the ‘feed the world’ theme alone is not enough to get such projects up and running.

Potash is a crucial ingredient of fertilizer, which is why the Gina Rinehart backed, London-listed Sirius Minerals thought it was on a winner after it won approval for its plans to mine the stuff deep below the Yorkshire Moors.

The project is now struggling for funding after failing to raise $US500 million($730m) in a bond issue, which in turn would have crystallised a $US2.5 billion financing facility.

The country’s Brexit-related political upheaval doesn’t help; nor does the complex nature of the project that included a 37 kilometre underground conveyor belt.

In Spain, meanwhile, Highfield Resources (HFR, 67c) hasn’t exactly found the road to approval a streamlined affair, but recently the company won environmental consent for its €540 million ($870m) Muga potash project in the country’s bull fighting north.

This consent initially was expected in late 2015, with a view to starting mining in 2018. When developed, Highfield’s Muga project in the country’s north will be Europe’s biggest source of the coveted fertiliser ingredient.

While the company still requires mining and construction approval, the environmental paperwork was the key obstacle given the green concerns about the project (fly-by-night miners have given the industry a bad reputation there).

CEO Peter Albert says the process was made more complex because the mine not only needed the consent of Madrid’s central government, but it straddles two districts (Navarra and Aragon) with 60 different authorities involved.

But Albert maintains the process was always administrative rather than political. “They [the authorities] came up with a solid document that clearly articulates the conditions and the monitoring plans we need to have in place,” he says.

Armed with the paperwork, Highfield is turning its attention to funding the mine, as well as securing offtake deals for the expected out of around one million tonnes of potash annually. In its first offtake deal, the Swiss based agri-firm Ameropa AG has agreed to take 250,000 tonnes a year.

Highfield produces murate of potash (potassium chloride), which is the most economical of the potassium fertilisers and therefore the most commonly used.

On the funding side, Highfield previously arranged a €185 million ($300m) debt facility with a syndicate of banks. But the company expects that with tumbling interest rates, improved potash pricing and he bank’s de-risked status, this can be renegotiated favourably.

With a net present value of €1.97 billion, Muga is expected to generate €310 million of ebitda annually at full production. Broker Cannacord expects a funding need of $700m, with a 20 per cent equity component

Albert says Muga’s proximity to the European market is a case of being in the right location: farmers rely on output from Russia and Canada and because of this Muga will enjoy a material freight advantage.

As with any commodity the price will fluctuate on short term supply factors, but the longer term demand supply dynamics are clear given the rising population and shrinking arable land.

Potash is a crucial ingredient for maintaining the water retention of plants and improving yields. It’s not interchangeable with phosphate fertilizers, although the two ingredients can perform similar functions.

Currently the world consumes about 67mt a year and Albert expects that when Muga is producing in earnest in 2023 demand will have risen to 75mt.

The potash story is not lost on BHP, which owns the Jansen project in the Canadian province of Saskatchewan. The world’s biggest miner is spending $US2.7 billion ($3.8bn) on two shafts, merely as a prelude to making a decision on whether or not go ahead with the $20bn venture.

In the meantime, two potash mines in England and Germany have closed.

The progress at Muga makes for an endurance award for Highfield’s patient long-time shareholders, notably mining legend Owen Hegarty who chipped in $10m of foundation capital in 2012.

Hegarty’s EMR Capital accounts for 28 per cent of the company, while Australian Super has increased its holding beyond the 5 per cent threshold.

Albert pledges in blood – his own and not a bull’s – that the remaining requisite approvals will be won and the mine will go ahead.

But while Highfield’s Pamploma-based management prides itself on community involvement, this did not extend to participating in July’s annual Running of the Bulls.

“I would not do that in a pink fit,’’ says Albert, who watched the gore-fest safely from the sidelines.

Fertoz (FTZ) 12c

On the phosphate side, the $17 million market cap minnow Fertoz has taken a different tack to the conventional providers by focusing on the organic farming market, which demands strict traceability around the origins of the product.

Conventional fertilisers also don’t pass the purity test as they contain heavy metals and other contaminants. Fertoz ensures it passes the key organic certification, while adding some useful elements such as gypsum along the way.

Handily, Fertoz has got its paws on North America’s biggest mined phosphate stockpiles, based on a 100,000 tonne mountain of the stuff in Montana acquired by way of a marketing agreement with a third party in late 2018.

“We have essentially located all the high quality phosphate in the western US and Canada and attempted to tie that up,” says executive chairman Pat Avery.

Fertoz also has rock phosphate permits in Canada, notably the Wapiti prospect in British Colombia which contains 1.54 million tonne resource.

Through a web of 60 distributors, Fertoz sells to around 5000 organic farmers, mainly in the US.

The company estimates a base of 18,000 producers in the US and 5000 in Canada, many of whom are not aware a certified product even exists. “With more than 80 per cent of organic farmers using little to no inputs, the scope for growth through education is significant,” it says.

Fertoz clocked up $878,255 of revenue in the half year to June 30 2019 compared with $1.45m 1.05m previously, the result of unfavourable weather in the US that included both severe floods and spot droughts.

Despite lower turnover Fertoz narrowed its loss to $682,000 from a $1.05m deficit previously.

While Fertoz’s sales to date have been slower than expected, the company has the benefit of being first mover in a sub-market that other players have ignored as a fringe sector.

The malaise is also reflected in the share price, which has fallen 40 per cent over the last six months.

Aguia Resources (AGR) 20c

Meanwhile, Aguia Resources has won environmental approval for its “well advanced” Tres Estradas phosphate project in the state of Rio Grande do Sul in southern Brazil.

A key advantage is that the deposit is in an intensive agricultural region that’s fully reliant on phosphate imports. Costed at $US84 million to develop, Tres Estradas contains a 100,000 tonne-plus resource.

Aguia’s progress was hampered by a board coup that saw four directors resign on the eve of a scheduled vote at a June EGM, with only managing director Justin Reid remaining.

But with new management now in place, Aguia shares have been on a nice run since.

The Aguia story has been enhanced by some promising copper strikes on its turf, with management seeking to “monetise” this side of the business.

Tim Boreham edits The New Criterion

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

3 stocks mentioned

Tim Boreham
Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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