As a general rule, the most successful man in life
is the man who has the best information
As demand for food
rises, so does the requirement for crop nutrients.
Potash has unique characteristics:
- High-quality,
economically viable deposits are rare
- Major
offshore markets have little or no indigenous production capability
- Barriers
to entering the business are significant
- Potash has
been historically under applied relative to nitrogen and phosphate
- Limited
new operational capability is expected
Higher crop yields are needed in order to feed
today’s global population of seven billion so strong fertilizer prices
are sustainable. Over the next fifty years, as we add another 4.5 billion
people to the world’s population, global demand for food will increase
almost 70% if population growth predictions are correct.
The sheer amount of people being
born every year, the loss of arable land and the change of diet among a newly
prosperous, urban population in developing countries are the most
important factors stoking the rise in global food demand.
A rising income means more money in the household
budget. The new middle class consumers forgo plant based calories in favor of
adding more protein from meat and dairy products to their diets. It takes up
to eight kilograms of grain to produce one pound of beef - less for pork,
chicken, milk or eggs - between 2kg and 6kg. As meat consumption soars, more
grain is needed to feed more livestock.
In 1995, the Chinese ate an average of 25kg of meat
per person, by 2007, the Chinese were consuming 53kg
of meat per person.
Enlarging and diversifying the meat supply is a
first step for every developing country.
The Protein Ladder:
5.Grain fed beef
4.Grass fed beef
3.Milk, other dairy products
2.Pork
1.Chicken and eggs
Rice, beans and bread
In 1980, the world ate 133 million tonnes of meat and drank 342 million tonnes
of milk. By 2002, consumption had increased to 239 million tonnes of meat and 487 million tonnes
of milk. The United Nations Food and Agriculture Organization (FAO) estimates
that by 2030 global annual consumption of meat will stand at 373 million tonnes and 736 million tonnes
of milk.
The more people there are on this planet and the
more Asians, and others, decide they want a western style diet the more
grains/oilseeds are needed to feed them. And many of those very same grains
are needed to raise the animal protein, the beef, pork and chicken they want.
Potash Corporation of Saskatchewan Inc. (NYSE:POT),
the world’s largest fertilizer producer by market value, doubled its
third quarter earnings, reporting 94 cents per share or $826 million compared
to 38 cents per share or $343 million a year ago. During the first
nine-months of 2011, the company’s earnings have doubled from $1.39 per
share during the same period last year to $2.73 per share today. Net income
of US$826 million was the second highest Q3 profit in the company’s
history - gross margin reached US$1.1-billion. Potash production was 1.9
million tonnes, a third quarter record for Potash
Corp.
The company said demand was strong from both North
American and international customers.
“Crop prices remained at historically high
levels [in the third quarter] and farmers continued to strive for increased
production to capitalize on the economic opportunity in agriculture. As a
result, demand for our potash, phosphate and nitrogen products remained
strong.” Bill Doyle chief executive of Potash
Corp.
While total shipments from the global potash
industry will rise to between 58 and 60 million tons in 2012, up from Potash
Corp.’s forecast of 57 million for 2011, Mr. Doyle predicted a very
tight potash market in 2012, saying the industry continues to face capacity
constraints and will struggle to keep up with demand.
The cost of fertilizer as a percentage of corn
revenue is 13%, 18% is the norm.
Global grain stocks remain at extremely low levels.
Potash Corp. said at the beginning of the year that it would take two years
of record harvests to get inventories back to comfortable levels, 2011 has
been referred to as a lost year.
According to figures compiled by Bloomberg potash
prices averaged 27 percent higher in the third quarter compared with a year
earlier.
“Global potash prices have surged in 2011,
driven by a tight global supply/demand balance, and with producers heavily
committed through year-end, we view current price levels as being
sustainable.” Don Carson, analyst, Susquehanna
Financial Group
WESTERN POTASH CORP. DELIVERS ROBUST PREFEASIBILITY
STUDY AT MILESTONE
Western Potash Corp. TSX – WPX has received an independent positive prefeasibility study from AMEC
Americas Ltd. on its 100-per-cent-owned Milestone property in Southern
Saskatchewan. AMEC is a leading international engineering and project
management company that currently manages multiple potash expansion projects
in Saskatchewan with a capital value of several billion dollars.
AMEC was chosen to carry out the Study because of
their technical expertise as engineers and EPCM contractors, as well as their
experience in potash mine construction, potash processing and their expertise
in producing potash feasibility studies.
This Study confirms that the Milestone Project shows
significant positive economics and that the asset is of sufficient size and
grade to support primary and secondary solution mining for more than forty
years at a production rate of 2.8Mt/yr. The Milestone Project hosts a potash
resource which consists of 64 million tonnes of
Measured Resource (contained KCl), 180 million tonnes of Indicated Resource, and 701 million tonnes of Inferred Resource. The Study was based on, and
supported by, the NI43-101 Technical Report "Updated Technical Report
Concerning Mineral Resource Estimates Subsurface Mineral Lease KLSA 008
Saskatchewan", dated June 8, 2011 and filed on SEDAR on June 10, 2011.
An assessment of project economics was also included
in the Study. Assuming a discount rate of 10%, the resulting project Net
Present Value is $4.14B CAD, while the Internal Rate of Return is 22.7 %. The
economics were modeled using pricing based on a CRU market report. This
report provided average yearly potash price estimates for the period from
2015 through 2025. The average for those years, equating to $US 511/t, was
used for the 2025 to 2055 period. The economic model assumes a flat US$
exchange rate, CAPEX based on 100% equity, and tax and royalties calculated
using a flat rate of $28.90/t CAD. A complete list of the assumptions used in
this model can be found in Table 1. Since the analysis is based on a cash
flow estimate, it could be expected that actual financial results may vary
from these predictions.
Table 1: Model Assumptions
Target Annual Production rate: 2.8 Mt/yr
Life of Mine: 40 years
Years of Construction: 3
Construction Start-up: 2013
Mining Start-up :2016
Years to Full Secondary Production: 6
Long Term Potash Price (FOB Gate): $511/tonne USD
Assumed Exchange Rate: US$/CAD$ 1.00
Taxes and Royalties: $28.90/tonne
CAD
Sustaining CAPEX Rate %: 2.0%
Base Case: 100% Equity
OPEX: $62.35 tonne CAD
Initial CAPEX:$2.458 Billion CAD
Port CAPEX: $300 Million CAD
Total Initial CAPEX: $2.758 Billion CAD
NPV (10): $4.14 Billion CAD
IRR: 22.7%
Payback Period: 5 Years
The Study includes all facilities required to
operate a potash solution mine, including a cavern and well field layout, a
two-train multiple effect evaporization-crystallization
plant, a dry processing plant, product storage, load out and all other
necessary site infrastructure. This design was detailed to a sufficient level
to allow the capital cost estimate to be upgraded to AACE "Class 4"
standard. The annual production rate can be expanded to a higher annual
production rate, achievable through a higher level of capital expenditure.
This Study was intended to provide a high degree of
project definition, building on the Scoping Study completed in 2010. The
Prefeasibility Study commenced with the completion of tradeoff studies where
important design options were investigated. Ultimately a single plant design
was identified, which was carried through the Study.
Agapito
Associates, Inc. was contracted by the Company to complete the Solution
Mining Design for the Study, which included a solution mining plan and
schedule, well field design, cavern layout and recovery modeling, and
subsidence analysis. AAI's experience includes work for Intrepid Potash Inc.
in the US, Rio Tinto and Vale at the PRC project in Argentina, and work for
several prospective potash projects located in Saskatchewan.
Capital and operating cost estimates were generated
with a target accuracy of Aplus
or minus 20%, typical for this level of Study. The initial CAPEX estimate for
the plant is $2.758B CAD, including allowances for port infrastructure, water
supply pipeline, and off site railway. An allowance of $300M CAD has been
included for port infrastructure which was excluded from the Company's
Scoping Study completed in 2010. Removing this allowance for port from the
current Study results in an approximate 2% reduction in initial CAPEX when
compared to the Company's Scoping Study.
Construction is assumed to take place over a three
year period, with production beginning in project year three. Full primary
and secondary production will be achieved over a six year ramp up period.
The Project unit operating costs were estimated to
be $62.35/tonne CAD at full production capacity.
These operating costs include estimates for labour,
maintenance, power, natural gas, water, consumables, diesel, and uncapitalized well field operations. Operating costs do
not include taxes, royalties, or the costs associated with transportation to
port and ship loading. Sustaining capital has been projected to remain flat
at 0.5% of replacement cost for the first 10 years of operations. Sustaining
capital ramps up from 0.5% to 2.0% of replacement cost between years 14 and 23
of the Project.
The Study resulted in significant advancement of the
level of definition of the project. The Milestone Project remains
economically very strong with no known limitations that may prevent a
successful and profitable project outcome. The Study recommends immediate
commencement of a Feasibility Study which will adhere to the AACE "Class
3" classification for projects.
"The PFS confirms the compelling opportunity
that the Milestone project represents for the Company and the Province of
Saskatchewan to develop a world class potash mining operation. In addition to
the 40 year scope of mining contemplated in the PFS, the known resource is
sufficient to support ongoing mining for an additional 40 years and beyond.
We are pleased with the on time and on budget delivery as well as the
thorough analysis of the available options considered for project
optimization. The coordinated efforts of the internal and external teams are
to be complimented for their work in delivering a comprehensive report, a critical
step as the Company continues the process of de-risking the Milestone
asset." Patricio Varas,
Western Potash CEO and President
NORTHERN FINANCIAL ANNOUNCES ITS WHOLLY-OWNED
SUBSIDIARY, NORTHERN SECURITIES INC., INITIATES
COVERAGE ON WESTERN POTASH CORP.
Northern Financial Corp.'s wholly owned subsidiary,
Northern Securities Inc., has initiated research coverage on Western Potash
Corp. with a buy rating and a 12-month target price of $2.40.
Conclusion
Potash, and Western Potash Corp. TSX.V – WPX
in particular, should be on every investors radar screen. Is it on yours?
If not, maybe it should be.
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