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Mining
If any investors needs a reminder that narrative can be just that, take a look at the ASX potash sector.
Five or so years ago the gaggle of stocks planning to turn WA and the NT’s fertile salt lakes into nature’s fuel for Asia’s growing food bowl was on a high.
The theory went thusly: The global middle class was on an unstoppable growth trajectory and with that came higher demand for foods previously viewed as luxuries.
The Aussie cohort wanted to produce the niche sulphate of potash rather than the more common muriate of potash mined in places like Canada and Europe.
SoP is low in chloride and salt, and therefore suited to growing fruit and vegetables like berries and vines or in areas where soil and irrigation salt levels are too high.
Even better, Aussie companies would be using a cleaner, greener solar evaporation method to produce their salts, as opposed to the heat and energy intensive Mannheim process used to convert MoP to SoP.
This is how the industry was viewed just two years ago. Undervalued and ready to turn years of investments into fertiliser gold.
It hasn’t worked out. Shortly after opening in 2021 Salt Lake Potash collapsed and fell into the hands of administrators. A special purpose administrator later said investors who put $28m into a capital raising less than six months before it went bust may have been misled (allegations denied by Ian Middlemas on behalf of its previous directors).
In the end creditors accepted a DOCA that saw the company hived off to Sev.En Global Investments, a Czech family office known for its ESG agnostic investments in coal mines and thermal power assets in Australia and the USA.
Other potash stocks are still around but have lost favour from investors. Kalium Lakes (ASX:KLL) reported March quarter production of 1784t this year, a record thus far and plans to hit a 60,000tpa production rate from July.
But that’s half of the scale proposed to be achieved by October 2022 in a study released almost two years ago. Its shares are down over 90% in five years.
That has, without doubt, placed other potash stocks under the microscope.
Kerry Stokes backed BCI Minerals (ASX:BCI), formerly an iron ore stock and now trying to build a large salt and SOP project in the Pilbara, is up 55% over the past five years but trading at well under half its 2021 highs of 57c.
Mark Creasy-backed Australian Potash (ASX:APC) is down almost 82% over the past 12 months, Reward Minerals (ASX:RWD) is down 50% over the same period and $4m capped Trigg Minerals (ASX:TMG) has put technical and project approval work on hold to focus on R&D in a bid to conserve cash in a tough market.
But outside the Australian SOP space, ASX-listed players are having a lot more success.
Danakali (ASX:DNK) will pocket US$121m from the sale of its 50% holding in the Colluli mine in Eritrea in east Africa to China’s Sichuan Road and Bridge Group Co. Ltd.
In the muriate of potash space activities are still ticking along. BHP (ASX:BHP) has made the agricultural product a key pillar of its move into future facing commodities with the development of its US$5.7b Jansen mine in Saskatchewan, Canada.
The Russian invasion of Ukraine could see disruptions to 41% of global potash supply out of Russia and ally Belarus, something which has BHP considering an early approval to double the mine even before its 4.35Mtpa first stage begins in late 2026.
Of course, you’re not investing in BHP, the $220 billion iron ore, coal and copper giant for the potash.
More pure play exposure can be found in Spanish MoP hopeful Highfield Resources (ASX:HFR).
Owner of the now shovel ready Muga project in the Pamplona region where the bulls are known to run, the $220m company has some high profile backers despite a pullback in interest which has seen its shares slide 41% over the past year.
One of those believers is the man who made OZ Minerals, the copper upstart which BHP bought for $9.6 billion this year.
Owen Hegarty’s EMR Capital, also the main backer of copper stock 29Metals (ASX:29M) and a major investor in met coal, copper and gold, tipped $18m into a recent funding deal alongside $7m from fellow insto and longtime backer Tectonic.
EMR has now put $80m into Highfield, and Hegarty told Stockhead it sees potash as one of the leading Aussie mining PE firm’s key pillars.
“We’ve spent $80 million or something like that in such a significant investment for us, we own something a bit less than 30% of the stock, this is EMR talking now, and there was an opportunity to provide this runway via our third fund, fund three … we see it as a terrific investment,” he said.
EMR’s other investments are far more familiar to the Aussie market. Along with 29Metals it retains a copper investment in Zambia, owns the Ravenswood gold mine in Queensland once mined by Resolute (ASX:RSG) and has a stake in the formerly Rio Tinto owned Kestrel met coal mine with Adaro and Mitsui.
“Potash is our other commodity. Because of all the thematics that you’re familiar with, you know, greater populations, less arable land effectively per man, per can, per day type of thing,” Hegarty said.
“And you know people with fussier diets, eating more and living longer. They’re the sort of simple thematics.
“And we do see challenges to supply.
“You wouldn’t describe it as a shortage of supply globally, holistically around the world — a little bit like lithium in a way there’s, there’s a lot of it going around.
“But in the next 5-10 years or so, probably 15, given that you got demand continuing to tick away and in the case of lithium, of course, it’s actually rising quite fast, supply always takes a while to catch up.
“So we see that there are opportunities in the product space for the smaller guy.”
MoP pricing skyrocketed in the aftermath of the Russian invasion of Ukraine, lifting more than 5x above their pandemic lows to in excess of US$1200/t in April 2022.
They have since fallen to US$372.50/t, though that remains well above the ~US$200/t range they occupied before Covid.
Prices last year weren’t necessarily great for the market in general. Many farmers curtailed fertiliser applications in response as big Canadian producers ramped up supply to replace Russian and Belarussian tonnes.
Given the end users are often small businesses, demand is typically constrained by supply and pricing.
The International Fertilizer Association says potassium consumption hit a record 41.3Mt in 2020, but will only exceed that level by FY2026 under its most optimistic scenario.
Fertiliser demand in general could range from 194.6Mt to 211.1Mt from 2024-2026, between 9Mt below the 2020 record and 7.4Mt above it.
But the situation with Russia and Belarus has redrawn the supply lines in Europe, Hegarty says.
“We were always very confident about the marketing, no question about that, good strong pricing in that part of the world, good, strong market, whether it’s Europe, or export to Brazil,” he said.
“What happened there with the sanctions has really accentuated all of that and seen a lot more interest in us from various people, as you would expect.
“The whole of that supply hasn’t disappeared. It certainly disappeared for a while, you know what it’s like – some actually finds its way back into the markets, but it’s higher cost, it takes longer.
“And there’s a clear doubt about it. People will see will see it as a high risk strategy signing up long term contracts there.”
According to a DFS last year it will cost €436 million to develop Muga’s first stage and €226m for its second. The project will eventually produce 1Mtpa of MoP of 30 years, generating an estimated €410m of EBITDA per year with an NPV of €1.82 billion and 21% IRR.
A consortium of high profile European banks are on board to provide €320.6m in debt financing once all ‘i’s are dotted and ‘t’s are crossed, including BNP Paribas, ING, Natixis and Societe Generale.
At the company’s AGM last month, Highfield CEO Ignacio Salazar told investors disruptions were rewriting global MoP flows, placing a renewed focus on local sources of supply in Europe, where 47% of MoP imports in the past four years have come from Russia and Belarus.
It comes with other potash mines in decline, with the closure of the 500,000tpa Boulby in the UK, 600,000tpa Sigmundshall in Germany, water related restrictions on the Wintershall mine in Germany and closure of ICL’s Vilafruns in 2020, also taking 500,000t of capacity out of the local supply chain.
Full scale construction is expected to begin in H2 this year after the Townhall of Sanguesa approved a construction licence for Muga’s process plant in March.
While he remains positive on the long term outlook for Australian brine potash and believes there will eventually be successful players, Hegarty says as a soft rock miner, Highfield will be following conventional mining methods tried and tested in Europe.
“It’s got tonnes, it’s got grade, it’s got scale, it’s (got) proximity to the market,” he said.
“It’s low cost, long life, lots of upside, stable and secure area up there in Pamplona the community’s supportive.
“And when you got the big guys like BHP and Anglo (American which is developing the Woodsmith polyhalite mine) you know, they’re investing heavily, billions of dollars in Canada and in the UK … to have the two big guys investing heavily — that’s a clue.”
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