R/€ = 14.88 Change: 0.00
R/$ = 12.10 Change: 0.00
Au 1335.58 $/oz Change: -5.52
Pt 927.50 $/oz Change: -4.49
 
 
R/€ = 14.88 Change: 0.00
R/$ = 12.10 Change: 0.00
Au 1335.58 $/oz Change: -5.52
Pt 927.50 $/oz Change: -4.49
 
 
BACK

Gensource offtake MoUs signal supply malaise in N American potash market

14th April 2018 BY: Henry Lazenby
Creamer Media Deputy Editor: North America
Photo by: Bloomberg

VANCOUVER (miningweekly.com) – The fact that junior Canadian start-up Gensource Potash has been able to secure two memoranda of understanding (MoUs) from separate US offtake partners that support the establishment of a new and independent supply of potash, speaks to a certain malaise in the continent’s crop nutrient market.

“This is a concrete piece of evidence that proves production is far too concentrated in the hands of only a few players. The existing producers have their customer base in fear of stepping outside of the existing supply chain,” Gensource president and CEO Mike Ferguson tells Mining Weekly Online in an interview.

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In the last few weeks, Gensource announced two separate MoUs with unnamed US entities to supply each with 250 000 t/y of potash.

He explained that the two groups the company is dealing with are very large and highly capitalised parties. 

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“Both are very nervous about their current supplies of potash. Potash production is so concentrated, if it becomes known that these companies are looking to support new independent projects, they [the offtakers] are concerned that their access to existing potash supplies could become constrained. It took some negotiation with the TSX and Investment Industry Regulation Organisation of Canada to allow the announcements with the anonymous partners to go through, but the partners’ fears are real,” he noted.

Ferguson blamed the evolution of the potash industry over the last century as being partly to blame for the current situation.

While it is true that there is a market glut,  there are two things to keep in mind, Ferguson says. Firstly, production capacity in the world is not really what the numbers tell you and the production capacity of most mines around the world are theoretical at best and can’t be fully obtained. In a bull market, global mine capacity is at best between 85% and 90% at any given time.

"The other thing, is how the industry is structured. It started life as a cartel – and some believe it still is – but it’s probably closer to an oligopoly. Nonetheless, it is still highly controlled."

OPAQUE MARKET
Ferguson explains that, in general, potash producers sell their product in large volumes to either governments or marketing and supply conglomerates, who sell to other governments, thereby excluding access to potash for many rural farmers in Asia and Latin America, where one often has to be well connected to get access to the crop nutrient additives. In North America, the situation is different, and there is an established open market.

“The MoUs to create new and independent supplies of potash, speaks to the fact that even in North America, with an open market, the large buyers are feeling that they do not have a consistent and sure supply of product, and that they are at the whim of the large suppliers. This has only become more acute with the establishment of Nutrien," Ferguson avers.

The C$37.72-billion agribusiness company Nutrien was formed in January following the merger of Agrium and Potash Corporation of Saskatchewan.

“Many are saying that the supplier has now become the competition, especially with Agrium having pushed so heavily down the retail business previously, and now Nutrien to follow suit, to control the retail market, with their own mined product. As they do that, the fear is that there will be less and less desire from them to supply their competitors with product. Yes, the gross production is larger than global gross consumption, but there are still pockets and markets around the world that are very poorly served and farmers can’t get the product they need,” Ferguson states.

He assesses the general investment atmosphere for new potash projects as “somewhat negative”, as the market deals with substantial overcapacity. And owing to many potash projects currently proposed, not many are feasible. He has found that once one gets into a deeper discussion with investors about how of the company intends to execute its plans, then the interest level "goes way up".

“We’ve seen tremendous interest from all fronts.”

In 2016, estimated US domestic sales of marketable potash, free-on-board (FOB) mine, was worth $430-million, which was 37% less than that in 2015, according to US Geological Survey data. Most of the US production was from southeastern New Mexico, where two companies operated three underground mines and one deep-well solution mine. The US imported 4.8-million metric tons of potash in 2016, compared with domestic output of 520 000 t.

Both of Gensource's future customers will take the product FOB at the mine site, in Saskatchewan. They both have large infrastructure assets comprising rail cars, rail contracts in place and storage facilities all over western Canada and western US. “They are in a better position to efficiently move the product from our mine to their markets than we are.”

The company is hoping to have final offtake agreements in place by the end of the month, which it will use to secure financing for the first Vanguard project. Securing the financing for the first project will, in essence, reflect a construction decision.

Ferguson says financing is looking towards a potential financing solution of 70:30 debt-to-equity, but formal discussions are yet to take place. “We are also speaking with private equity and debt providers. Securing the counter partners, which we have now done with these key US agribusinesses, was key for us to approach the financing question. With a second offtake MoU agreement in place, we have the beginnings of two projects at Vanguard.”

PROJECT PROPOSITION
Gensource will deploy a selective in situ mining technique, which has been well proven and poses little execution risk to the project. Intrepid Potash had used the technology for nearly two decades in Utah, and Gensource now plans to apply it to the much better potash geology of Saskatchewan.

“These methods allow us to scale the project down to a modular size, which helps making it economic at current lower potash prices. The legacy methods with shafts and underground operations are unable to compete with the economic returns we propose,” he says.

The potash price has risen to the $260/t to $300/t range, but he does not see potential for a lot of price appreciation over the next 12 months or so, since K+S Canada is still ramping up output from its new Bethune mine, and Swiss-based EuroChem is starting up two new mines in Russia, while significant production in Canada still remains under care and maintenance.

Each of the MoUs provide the partners to claim the full production of 250 000 t/y for a project, or unit, of the Vanguard project.

Gensource proposes solution mining using a proprietary selective mining technique, allowing the selective dissolution with enhanced crystallisation recovery of potash from its Vanguard project. The company believes the environmental impact will be minimal compared with typical potash mines, owing to the lack of brine ponds and no salt tailings on surface.

A 2017 feasibility study on the Vanguard One project had calculated an initial capital requirement of C$279-million, including contingency costs.

At a base case potash price of $300/t and a 45-year economic project life, the study had calculated an after-tax net present value, at an 8% discount, of C$235.82-million, with an internal rate of return of 16.31%.

The Vanguard area has compliant proven and probable reserves of 9.79-million tonnes of final muriate of potash product; 157-million tonnes of final potash product in the indicated and measured resource category; and more than 313-million tonnes of potash product in the inferred category.

As of Friday, Gensource’s TSX-V-listed equity has gained 62.5% since the start of the year, adding another 4% on Friday to close at C$0.13 apiece. 

EDITED BY: Creamer Media Reporter
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