INSIGHT: Salts of the Earth

15 November 2017 15:27 Source:ICIS News


By Andy Hemphill

LONDON (ICIS)--Deep in the Australian outback, amid barren, featureless desert countryside reminiscent of Mad Max, lies a series of lakes which - investors hope - will offer profit, where now there is nought but sand.

This is Western Australia - a hot, distant land with little to offer on the surface, but which, for Australian Potash and its competitors, is both a literal and metaphorical goldmine of mineral resources.

In the midst of this desolate landscape, five of the biggest companies: Australian Potash, Kalium Lakes, Salt Lake Potash, Agrimin, and Reward Minerals, are racing to exploit the region’s true prize, which lies beneath, embedded in the ancient soil of the playa: nutrient-rich sulphate of potash (SOP).

White gold
‘Potash’ is the umbrella term for a number of potassium-rich fertilizers used the world over to support plant nutrition, improve yields, and fend off disease.

A multi-billion-dollar industry, the global potash market is largely producer-controlled, and centred in just a few key producing nations, including Russia, Canada, Belarus, and Germany.

Of the two major grades, which can vary in potency and colour, one is produced and consumed in vast amounts: muriate of potash (MOP), while the other, SOP, is far less common, yet offers far greater nutritional properties - and correspondingly, a greater price tag.

However, according to the International Fertilizer Association’s Fertilizer Outlook 2017-2021 study, new MOP projects in Russia, China, Turkmenistan, and Belarus will soon add in the region of 17m tonnes’ capacity to an already oversupplied market, potentially squeezing margins, despite the increasing global population.

As a result, many investors are looking to MOP’s more expensive cousin for a good return on investment.

Australian Potash claims to be ahead of the game in two areas that Matt Shackleton, the company’s executive chairman, rules as vital to winning the emergent SOP scuffle in Western Australia’s sandblasted depths.

“Logistics and marketing,” says Shackleton. “These are the key to a successful operation. Banks won’t back you if you don’t have a good plan, and they’re asking themselves: ‘who is going to be moving the product cheapest?’”

Brine battleground
Australian Potash’s prospective SOP operation is centred on Lake Wells - one of the many dry lakebeds in the country’s barren depths, and the unique geology at the site is one of Australian Potash’s key selling points, according to Shackleton.

A palaeochannel - an ancient, inactive, sediment-laden river - beneath the surface of the prospect can be reached with boreholes alone. This means there’s no need to dig deep and costly trenching systems - like those his competitors will require to achieve the same volumes of finished product, he claims.

“The essential production process is very similar for all five companies,” says Shackleton. “The difference is in the logistics, and initial investment. With our borefield, it’s one installation, and then we’re done. Trenching systems need to move every six to eight years. Our boreholes will reach 175m belowground at their deepest point to get to the brine.”

The site is predicted to offer a mineral resource of around 14.7m tonnes of SOP, over a life of approximately 20 years.

Operating expenditure is expected to be around Australian dollar (A$) 368/tonne ($281/tonne) of SOP from years 1-5, falling to A$343/tonne for the remaining years of production.

Like its competitors, Australian Potash will transport finished SOP via rail to coastal ports. However, the company plans to upgrade the roads between Lake Wells and the nearest railhead, to minimise the cost of road freight.

Lake Wells lies some 280km northeast of Western Australia’s Leonora rail freight terminal, and 500km from Kalgoorlie, in the Eastern Goldfields.

“It’s a 280km [174 mile] haul to the railhead at Leonora,” Shackleton adds. “Salt Lake Potash has to drive 380km, and Kalium 900km. Reward has to go further, at around 1,050km. It’s all about keeping costs low.”

However, Shackleton admits the differing nature of Australian Potash’s extraction process will not provide ‘better’ material: “The end-product is very similar - it’s moving the product that is expensive,” he says.

“There’s no market in Australia for SOP. The country only needs around 75,000 tonnes per year, and we’ll need to produce at least 100,000 tonnes to make the operation profitable.”

So, where can this newly-processed plant fertilizer find a buyer?

“China,” affirms Shackleton. “We’re heading to China.”

Growing demand
SOP contains two of the six macro-nutrients essential to plant growth: potassium and sulphur.

Estimated global potash consumption in 2015 was around 67m tonnes, comprising approximately 60m tonnes of MOP, plus more than 5m tonnes of SOP.

SOP can be produced from ‘primary’ and ‘secondary’ sources, with primary production mainly conducted at salt lake brine deposits in China, India, the US, Chile, and now, Australia.

However, the balance of SOP production comes from secondary production, including underground mines in Germany and volumes produced via the Mannheim Process, which involves the addition of sulphuric acid to MOP in a Mannheim furnace, to produce SOP and a hydrochloric acid by-product.

This process is environmentally unfriendly, which is why the Chinese government has ordered domestic SOP producers to close the smoke-belching edifices as soon as possible. However, the country’s vast SOP demand still needs to be met - and Australia’s SOP producers are angling for volumes with gusto.

“The Chinese smoke like you wouldn’t believe,” quips Shackleton. “Tobacco farms needs SOP - you can’t grow it with MOP. And that’s just one outlet for the product.”

Chlorine-free fertilizers such as SOP are ideal for premium crops such as nuts, fruit, and high-quality vegetables - and China is one of the world’s largest growers of these crops, thanks to its immense agricultural industry and ready manpower.

Like the competition, Shackleton’s company is working with domestic distributors to sign and seal offtake agreements for its SOP, having so far signed up Sino-Agri - China’s biggest agricultural firm - and rival importer Hubei-Agri to purchase Lake Wells’ waters.

“Sino-Agri and Hubei-Agri are looking to shore up their supply, and as imported product can be sold at a premium, buying from us makes sense. This is a market set to grow at a rapid rate, especially as China’s middle class continues to grow in size and means,” says Shackleton.

“The middle class demands a better class of vegetable - and to get the best veg, you need SOP.”

On the potential of any deal with Sinochem, China’s immense multi-national chemical and fertilizer major - which Shackleton refers to as “The Behemoth” - the Australian relates only a cautious optimism: “[Sinochem is] aware of us, but we’re yet to meet”.

As for the opportunity to seek out other customers in southeast Asia, the same cautious optimism is order of the day. Shackleton adds: “We may target Malaysia, but China is 90% of our target.”

And on the topic of existing SOP producers, such as Germany’s K+S, discretion is the better part of valour, insists Shackleton: “We’ve given our plan some thought, and we’re not really going to make waves in the market. We’ll be producing and selling around nine million tonnes of SOP over the first five to six years, to six or seven customers - which is quite a small volume for a global industry, relatively speaking.”

Wringing MOP
Although technically competitors, SOP and MOP serve very different crop types across the planet, so Australia’s newly-founded SOP industry is unlikely to suffer any competition from the cheaper product.

In fact, Shackleton is bullish on SOP’s prospects, amid continuing MOP oversupply, and a wave of new capacity.

“MOP prices won’t be going anywhere but down,” he says. “The big producers will be unable to control prices to the degree they would like, and MOP can be substituted for alternative products. SOP, meanwhile, is a non-substitutional product in a lot of situations.”

However, the Australian is quick to admit that SOP prices are hardly set in stone: “We have to be realistic about the prices we can get for SOP, but in my view, all five companies have been unrealistic in our scoping studies. We have to be prepared to flex our financial models downward, and think 10-20 years out,” he says.

That’s not to say Australian Potash hasn’t planned for this situation. Shackleton confidently claims the company has two additional income streams it could potentially leverage for a rainy day.

Firstly, there’s the “significant opportunity” to extract gold from the Lake Wells site, which lies near the Yamarna goldfields, and boasts similar geological conditions - the company describes any potential extraction as “prospective, but substantially underexplored”.

And then there’s the sulphate left over in Lake Wells’ brine - a significant amount that, when combined with MOP “bought cheaply”, produces additional SOP through a process as simple as dumping MOP and sulphate in a vat, and leaving the chemical reaction to do the rest.

“The excess sulphate allows us an additional revenue stream,” adds Shackleton. “This isn’t a new technology, but it’s one that would work well for our needs.”

Time will tell if Australian Potash’s plans keep the prospective producer at the front of the SOP pack, but there’s no doubt competition will be fierce in years ahead.

($1 = A$1.31)

Picture source: Rex Features

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By Andy Hemphill