There’s not a heap of urea so prices are soaring and Leigh Creek Energy is capitalizing
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Australia is scrambling to find alternative supplies of urea after a perfect storm of local and global conditions has more than doubled the price of the nitrogen-based compound this year.
Surging energy prices have stunted global production of urea which, coupled with export bans from traditional suppliers such as China and Russia, is impacting more than just the agriculture industry, which depends on urea-based fertilisers to grow the world’s increasingly expensive food.
Australia imports nearly all its urea, a good 70% of it from the Middle East and China but tensions around supply have been mounting after China announced an export ban in August.
Russia has also restricted nitrogen and phosphate fertilizer exports for a period of six months from December 1, further adding to supply concerns.
Severe shortages of the diesel additive product AdBlue, made from urea and used to reduce nitrous oxide in modern diesel and freight engines is beginning to wreak havoc on the transport industry and is only set to worsen in the coming quarter unless supply issues are addressed immediately.
Last month, major Australian urea producer Incitec Pivot (ASX:IPL) announced the closure of its Gibson Island operations by December 2022, the last production facility of its kind on Australian soil.
One of the only Aussie companies poised to capitalise on the current fertiliser crisis is Leigh Creek Energy (ASX:LCK).
The company’s Leigh Creek Urea Project (LCUP) alone could go a long way to satisfying the ravenous domestic urea market.
LCK plans to produce as much as 2Mtpa of zero carbon urea via downstream processing of syngas (see below), which it will extract using in-situ gasification at the now closed Leigh Creek coalfields of northern South Australia.
In an interview with Stockhead, LCK executive chairman Justyn Peters said after listing on the ASX five years ago, the idea to head down the fertiliser route came when urea prices were around the $400 – $500/tonne mark.
At the time, LCK had been conducting various feasibility studies looking into how syngas – a fuel gas mixture containing methane, hydrogen, and carbon monoxide could be best used.
While other options were considered, Peters said from a food security point of view, being able to manufacture urea in Australia is “incredibly important.”
The only ASX listed company doing it back in 2018 was major producer, Incitec.
One of the major advantages that sets Leigh Creek apart is the fact they have the capability to be a fully integrated process.
“We have our own gas, our own feedstock for ammonia and urea onsite, and we don’t have to transport it from a distant location through pipelines,” he said.
The Leigh Creek project is one of a few urea projects proposed around the country with Strike Energy (ASX:STK) and private company Perdaman Group each planning their own plants in Western Australia.
But what puts Leigh Creek ahead of the pack is the cost of feed gas to the LCUP, which will be less than A$1/gigajoule, which Peters says places it at a huge advantage to urea producers sourcing gas from the market in Australia.
The average nominal operating costs at the project are also forecast by LCK to be about A$109/t which means the company will be in the lowest quartile of the global urea production cost curve.
“So, whilst Strike Energy are a bigger company than us, we believe if they don’t have the gas themselves – and even if they do, their gas will be more expensive because it will be from the ground and will cost anywhere between $2 and $6/ gigajoule,” he said.
“Which means the feedstock for their plant will cost around two to six times more than us.”
Another big win is the fact most of Leigh Creeks’ clients are, quite literally, on their doorstep.
“Strike’s project is located in north Western Australia so they will have access to Asian markets and there will be tension for them to export, whereas we can meet the domestic market quite comfortably,” he said.
“We have a train line that runs down to Port Augusta, which can deliver urea to the farming community in South Australia, Victoria, and New South Wales so we have the infrastructure in place to get the product to our customers very easily.”
LCK shares have been on a solid trajectory upwards over the past year and it seems the market might be starting to wake up to the undervalued stock.
With a bankable feasibility study (BFS) set for completion by Q1, 2022, Peters said the company hopes to reach a final investment decision on the project between June – September 2022.
If all goes to plan, he said the project will be in production by 2025.
“The future is exciting,” he said.
“We are having a look at several other projects in the meantime as well– one in Australia and another one in South America.
“In five to 10 years’ time I would like to think we will have more than two plants operating in several countries.”
This article was developed in collaboration with Leigh Creek Energy, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.