If You Believe In Food, A Special Investment Opportunity In Potash

The world’s human population is moving from 7+ billion towards 10 billion. Animals, too, are keeping pace and all need feeding. That means more fertilizer to help plants grow.

The major macro nutrients for crop nutrition are nitrogen, phosphorus and potassium, or N-P-K, the three numbers you see on your bag of fertilizer.

Potash is the naturally occurring mineral that provides potassium (K). It lies mostly in thick, deep-lying beds in Canada and Russia, as well as salt lake beds in China and elsewhere and supports a supply-demand balance of 65-70 million tonnes per year.

As a largely deep-mined product, it has always been expensive to access, like in excess of $250 per tonne, refined, but was assisted by a Canadian-Russian led cartel which long maintained the world price at higher than market prices. No more.

Thanks to push-back on the demand side and break-up in the cartel on the Russian side, it is now $300-350 wholesale. At these prices, transport costs become an important feature. So does the cost of production and the environmental constraints on mining permissions.

These latter two items apply to the extraction of most minerals. Yet in a rapidly evolving world market, where mining underpins over 40% of total activity, Potash has a niche place.

It should not be a random investment choice, but one which recognizes the evolving opportunities. Every balanced portfolio should have a potash ingredient.

Thus, Gensource Potash Corporation. This company has recognized a rapidly-changing growth market as it moves to bring its first production unit on-stream. Its innovative features include:

• The production technique used is solution mining, via horizontal boreholes. Not only is this infinitely cheaper than conventional shaft mining, but much more environmentally friendly. It enables the unwanted NaCl (table salt) to remain in situ while extracting – via pumping to surface – the valuable potassium chloride (KCL) for processing and sale. The environmental benefits (e.g. no surface salt tailings mountains and no brine ponds) are enormous and lead to speedy licensing approvals and strong local community support for the project.

• The first production unit, Vanguard One, is well advanced and offers these advantages: o It is located in the province of Saskatchewan, Canada, home to the world’s largest known potash deposits and a recognized safe political jurisdiction. o It is designed as a compact unit, with a targeted output of c.250,000 tpy product. o This is linked to a dedicated offtake-user within economic transport distance. Thus, no third parties or market manipulation. The product is pre-sold. o It is based on proven technology, having been used at a number of operating mines for many years.

• The company mission is to create a number of these independent and environmentally sustainable potash production facilities in Saskatchewan and elsewhere.

• Lead Time to Production. Worldwide, the time to production for a mining operation, from discovery to cashflow has increased via the bureaucratic processes (safety, environmental, zoning, etc) up to ten years or more, to the detriment of shareholder value. Not so with Gensource. Given its credentials, Vanguard One did not require an Economic Impact Assessment (EIA). Its surface footprint is one-tenth the size of a traditional mine. It is licensed and ready to build.

The economics are attractive. These indicate:

1. A building cost of C$300m (US$223m)
2. Building time of two years
3. A payback period of six years.
4. A mine life of approximately 40 years based on current reserves, but practically not limited.
5. An IRR of 16% post-tax.

Overview. The case for long-term increases in potash demand is a strong one. The major contenders for new supply tonnages such as BHP’s Jansen, Canada and the Sirius UK project are years from reality and financially suspect. So, the argument for short-medium term market price appreciation is strong.

Gensource has recently refinanced, giving it a straight path to production and an attractive share price entry point. Its approach to changing investment criteria is a heartening one.

David Hargreaves, CEng, FIMMM, FGS

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