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.

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