Junior potash companies, already suffering from tight financing conditions, will start to feel more pain following an industry shakeup that has increased competition among suppliers of the crop nutrient.
The dismantling of the world’s largest potash oligopoly last month has already hit stock prices for potash companies, and is expected to lead to a drop in potash prices, which would lower margins for producers and make new projects less viable.
BHP Billiton Ltd.’s decision this week to push ahead with its Jansen project in Saskatchewan, expected to be the world’s largest potash mine, also threatens to create a glut of the mineral. BHP’s announcement follows a move by Russia’s OAO Uralkali to drop out of Belarusian Potash Co. (BPC), a joint venture with rival Belaruskali of Belarus.
Only those potash projects with low-cost projects as well as money and time to spare are expected to survive the next few quarters, analysts say.
“Even before Uralkali’s announcement last month and BHP’s Jansen update this week, the junior potash projects were already in trouble. One or two were going to get built. Now that likelihood has reduced significantly,” said BMO Nesbitt Burns analyst Joel Jackson. “The global potash industry is oversupplied and will be for some time. Plus, the ability to general mine financing is relatively impossible.”
Junior mining companies were already contending with financing difficulties amid a rise in interest rates and uncertainty stemming from slower growth in China and other emerging markets. The outlook for many junior potash players worsened after the BPC announcement. Uralkali will instead go it alone in selling potash to markets, a move that will increase supply. Analysts and Uralkali itself say they expect prices to drop by about 25 per cent in the coming quarters, to about $300 (U.S.) per tonne, down from about $400 today.
The threat of falling prices has hammered potash stocks. Juniors have been especially hard hit, and their sinking valuations lessen their chances of getting projects off the ground.
Analysts say those companies with higher capital expenditures, particularly in potash-rich regions such as Saskatchewan, are seen as riskier compared to lower-cost ones in places such as Africa and Brazil.
Karnalyte Resources Inc., which is developing its Wynyard project in eastern Saskatchewan, has seen its stock price fall by 66 per cent since late July, including a 10-per-cent drop on Wednesday.
Earlier this month, Karnalyte said it didn’t think the Uralkali’s withdrawal from BPC would have an extreme impact on potash prices. In June, Karnalyte said BNP Paribas and Natixis would underwrite a $300-million debt facility for the Wynyard project, which would help cover about half the cost.
Another company developing potash properties in Saskatchewan, Vancouver-based Encanto Potash Corp., has seen its shares fall by 38 per cent since late July.
“It’s an issue of how big the capex is and how impactful to the return on investment this drop in price is for [junior potash companies], and where they are going to get their money from,” said Paradigm Capital Inc. analyst Spencer Churchill.
“Those that will survive are ones that have attractive projects from a strategic perspective as well as a low-cost and low-capex perspective in addition to having sources of funding. … There’s a lot of upside if you can be picky and choosey and understand the differences between these projects for those who have patience.”
Some of the slightly lower-risk companies are said to include Allana Potash Corp., which has a property in Ethiopia expected to begin construction next year, and IC Potash Corp., which has global fertilizer giant Yara as a 20-per-cent investor. IC is also involved in a specialty, non-chloride based potash fertilizer used mainly for cash crops and in horticultural applications.
IC Potash shares are down 40 per cent since late July, and Allana shares have fallen about 18 per cent.
Richard Kelertas, a former fertilizer analyst and now senior vice-president corporate development at Allana, says the current shakeup in the industry will “cull the herd,” but could mean a stronger market down the road.
“This is a quasi black swan event, it’s not a killer event,” Mr. Kelertas said of the industry changes. “I’m not saying it’s all rosy. … But we think it will turn out to be a white swan for us.”