The possibility of a quick route for the fifth pillar?

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Earlier this month potash was announced as the potential 5th pillar for BHP’s commodity portfolio.  Then several days later the Globe and Mail printed an article that discussed the possibility of BHP Billiton attempting a second takeover attempt of PotashCorp.  On the surface it is easy to dismiss this possibility as a slow news day, but thinking further on this possibility, would it make sense?

BHP has been developing the Jansen project to produce between 8MM and 10MM tonnes of potash.  According to PotashCorp, by 2015 they will have a capacity of 17MM tonnes.  This obviously is considerably more capacity, in a shorter period of time, but at a higher price.  Remember however that PotashCorp is more than just potash, and BHP has already announced their intentions of shedding non-core commodities.

What could this mean for the market?  Contact Schlumpberger Inc to discuss this or other potash market possibilities.

Pricing for Potash Improving

There are indications that potash pricing is improving in some of the major markets.

Cantor Fitzgerald has indicated that prices have begun to firm up in Brazil, Southeast Asia, and even the United States. SE Asia has seen prices climb from $280 per tonne at the end of 2013, to reach $350 in April. Brazil has also shown improvement expecting to reach $360/tonne from $310. Not to be left out, the pricing in the United States has also improved by $20 to $370.

This pricing improvement is also coupled with improved volumes, reported to be ahead of last February by 24%.

If you would like to discuss the potash markets or a specific project please feel free to contact us.

What Factors Drive Returns for Potash Projects?

Recently I saw a comment that spoke about NPV of a potash mine.  This caused me to wonder about what drives the investment for a mining project, specifically a potash project.

Pondering this, a simplified cash flow model for a hypothetical investment was created.  Simplified, but conservative estimates were used for this model, which included: A 25 year mine project with an estimated capacity of 2MM tons per year.  Costs of production that were averaged from 2012 published data from Agrium, ICL DSW, K+S, Mosaic, and PotashCorp.  A five year investment period was assumed, as well as a five year ramp up to the 2MM ton per year production rate.  The potash sales price was then varied, as well as the initial capital investment, and the Internal Rate of Return was calculated for these variables.

The following was the result:

Potash Project IRR

What does this show us?  Even with the current floor set on potash at the low sales price of $300 per ton, a project yields a positive IRR (or positive NPV at approximately a 5 percent cost of capital) for a $2,000 CapEx per ton project.  While this was a simplified model and certainly a 5 percent return is not what one is after when investing billions of dollars, but obviously as the price of potash increases, and/or the cost of a project decreases that return improves.  As this model shows the question becomes what do we think that the price of potash will be, how can we reduce construction costs, and what is an acceptable return?

If you would like to discuss a potash project, or other mining project, please contact us at 419.224.0748.

Does BHP Billiton know something that the rest of us don’t?

The world of potash was rocked last July when the Russian cartel that sells roughly a third of the world’s potash decided to split and abandon the price over volume strategy that potash producers had held sacrosanct for years.  This resulted in a marked destruction in demand while buyers decided to wait and see what would happen with this essential nutrient.  Investors also suffered as market caps were quickly eroded by over 30 percent for the potash producers.

Fast forward to 01 April.  BHP Billiton made an announcement that they were going to concentrate on core commodities.  This certainly is not a new strategy, but what is interesting is what the world’s largest miner indicated that they were going to focus on.  The following is from the Wall Street Journal on 01 April 2014.

Wall Street Journal Source

“Chief Executive Andrew Mackenzie has long flagged his desire to streamline BHP’s business. …Mr. Mackenzie wants BHP’s attention trained on its iron ore, copper, coking coal and oil assets, with the potential for potash to become its fifth core commodity.”

So potentially BHP has decided to forgo metals mining, and concentrate on producing potash.  I believe that it would be prudent to assume that the world’s largest miner has a considerable amount of talent evaluating potential projects and the return that these projects can create.  Therefor it stands to reason that they believe that investing $12 billion (or $15 depending upon which estimate you want to use) in potash is good for their bottom line.

This certainly seems as if it is a bullish indicator for the potash markets.  Especially when you couple this with rising food prices.

If you would like to discuss the potash market or a potash project, please feel free to contact us at 419.224.0748.