July 09, 2013
Pundits Ponder Potash Potential
By Ryan Jackson in Vancouver(Canada)
Mining and agriculture may seem to be an unlikely mix but the boundaries between the asset classes bleed together when it comes to potash.
For most of human history fertilizer production was a cottage industry serving the needs of local farmers.
But when the introduction of phosphate to the British Association of Science in 1840 marked the beginning of a scientific understanding of the role of minerals in agriculture.
Fertilizer production has since grown into a colossal industry.
Today, the long term trends of increasing agricultural production, the decreasing availability of arable land per capita, improving diets, and development of marginal crop lands are all bullish for investment in agriculture in general, and potash in particular.
Just at the minute, the role of precious metals as a store of value in uncertain times is coming under heavy scrutiny. And, while gold and silver have, over the centuries, proved effective at persevering wealth against inflation and market calamities, it’s indisputable that the need for food is even more immutable than the human desire for gold.
Sprott’s Steve Yuzpe drove the point home at the World Resource Investment Conference in Vancouver this year. “During times of economic contraction and uncertainly, the demand for food has historically declined less than for other goods and services”, he said. “That gives us some built in downside protection when investing in agriculture.”
Over the long term, Steve is very bullish on investing in agriculture. He argues that the massive printing of currency by the United States, Europe, and Japan are “exporting food inflation”, as the nominal cost of all the inputs which go into producing and distributing food begin to rise.
Meanwhile, global weather patterns are putting massive strain on the agricultural industry. Grain production is extremely temperature sensitive and could be devastated by the effects of a temperature increase of even a few degrees.
Steve also points to water shortages around the world and to depleting aquifers in the US grain belt in particular, as cause for great concern.
The aquifers in question take on average 1,400 years to replenish, so Steve considers them a non-renewable resource which is rapidly running out. Citing research from the USDA on the primary aquifer of the High Plains, the Ogallala Aquifer, Steve stated: “All we can do now is try and engineer a soft landing. The Ogallala supply will run out and farming may not be possible in that region.”
That’s a pretty staggering prediction considering the Ogallala supplies water for agriculture, industry and domestic use across 174,000 square miles of the USA, mainly in Nebraska, Kansas, Oklahoma, and Texas, as well as parts of South Dakota, Wyoming, Colorado, and New Mexico.
The way potash fits into this scenario is pretty clear, although there have been sporadic fears of oversupply in recent years. Most recently, Green Markets, a fertilizer industry information provider, predicted that supply growth will outpace demand growth over the next five years.
However, that’s assuming that all the planned mines come into production. Which, as anyone who’s acquainted with the mining industry will know, they won’t.
And in terms of demand, it’s possible that that may have been understated. A recent report by the USDA shows sharp declines in year-over-year grain stocks, which could put upwards pressure on North American grain prices, in turn prompting farmers to bring additional land into intensive cultivation. Enter potash, in a big way.
In fact, the USDA reports that US farmers have gone above and beyond their predictions for planting acreage in 2013, overcoming a cold a wet spring to plant 97.4 million acres of corn. Wheat and soybean planting also was ahead of 2012 this year, which could be good news for fertilizer sales during the remainder of the season.
And, while North American potash demand has remained relatively steady with short term fluctuations in the recent past, consumption has doubled in Asia and Latin America over the past 20 years, closely matching food production trends.
This year, spot potash prices (FOB Vancouver) have been trading on the low end but rose slightly in May to US$417.50 per tonne from US$405 in April.
“While prices remain at a lower ebb, shipment volumes have picked up markedly”, writes Scotiabank’s Patricia Mohr, in the bank’s recent commodity price index, with Chinese imports up 19 per cent between January and April and Brazilian imports up 53 per cent year-over-year.
But where should the interested investor look, if potash seems appealing? The industry is currently dominated by a select few major companies operating in Canada, Russia, and Belarus.
Saskatchewan is home to the largest recoverable reserve of potash in the world, accounting for about 60 percent of global potash reserves. TSX-listed PotashCorp is a leader in the industry accounting for roughly 20 per cent of the global supply. It produced two million tonnes in the first quarter of 2013 alone.
But while the majors dominate as far as production is concerned, there are opportunities in the junior sphere as well. Among the companies with near term production opportunities is TSX-listed Karnalyte Resources.
Karnalyte has just completed a bankable feasibility study on a project which boasts proven and probable reserves of 789 million tonnes of mineralized material grading 19.6% KCl. Initial production is expected in early 2014 for a project with an estimated life of 68 years. Production will start at 625,000 tonnes per annum and ramp up to 2.125 million tonnes per annum.
Another interesting story in the junior markets is Venture listed Encanto Potash. Shares in Encanto, which we have covered extensively in the past on Minesite, have been on the rise of late, up 32 per cent so far this year.
Having discovered that few new land packages are available for new exploration companies in Saskatchewan, the Encanto team approached First Nations groups who hold large land holdings in the area which other companies have stayed clear of because of the complexity of developing them.
It’s an area where Encanto’s management have past experience and this has allowed the company to be highly successful in its exploration programs. So far, Encanto has defined recoverable KCI potash resources of 130.7 million tonnes in the measured and indicated categories as well as 234.7 million tonnes in the inferred category.
At an extraction rate of 2.5 million tonnes a year, the measured and indicated resources alone will support a solution mine life of 52 years, according to Encanto.
What’s more, having worked with the local First Nations groups as partners through the exploration process, the company will benefit from strong local support in the event of a development scenario.
Source >>
www.minesite.com
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