As Brazil's Vale SA figures out what to do with its fertilizer business, the mining giant is thought to be testing the waters on a potential sale, according to people familiar with the matter.
In addition to potash mines in South America, the Brazilian mining company owns a big potash development project and slew of fertilizer concessions in Saskatchewan, the world's biggest producer of potash – a crop nutrient.
"There has been a lot of chatter that Vale is possibly considering selling their fertilizer business. If you are preparing your assets for sale, you want to increase the value of your portfolio," said Joel Jackson, an analyst with Bank of Montreal.
Vale, the world's biggest iron ore supplier and a major producer of other metals, is under pressure to sell assets amid a nearly $20-billion (U.S.) expansion of its iron ore complex in Brazil. People familiar with the matter said it has been trying to gauge how much its fertilizer business could fetch.
The unit accounts for about 6 per cent of Vale's revenue from operations. Asked whether Vale is considering selling its potash assets, a spokeswoman for the company said it previously announced it was looking for strategic partners for potash and phosphate projects.
The outlook for the crop nutrient is murky, with new potash production coming onto the market and the dominant North American and Russian fertilizer players no longer able to influence prices the way they used to. Vale and its rival BHP Billiton Ltd. appear unsure about how to proceed with their respective potash development projects in Saskatchewan; neither has given a clear signal if and when they will go ahead.
Vale is still studying whether it would be economical to build its mine, called Kronau, after the nearby town. BHP has been vague on when it might build its Jansen mine, even though it has committed $3.8-billion to sink shafts into the earth – in preparation for the mine.
If developed, both projects have the potential to upend the potash market, which has long been controlled by three North American producers and, until 2013, a Russian-Belarus potash cartel. BHP's Jansen would be the biggest potash mine in the world and Vale's Kronau would be a medium-sized producer. The mines would be an economic boon to Saskatchewan. Though their potash output could further depress prices, which took a hit in 2013 when Russia's Uralkali killed the Russian-Belarus cartel.
Vale and BHP would be competing with Potash Corp. of Saskatchewan Inc., the world's biggest fertilizer producer. The Saskatoon-based company operates five of the 10 mines in the province and is expanding one of its mines there.
A Vale spokeswoman said the board of directors has not made a decision on whether to proceed with the mine. But the flurry of activity around Kronau has led some to believe that Vale is getting ready to advance the project, even if it may eventually attract a buyer.
"Things are progressing very fast," said Erwin Beitel, Reeve of a regional municipality that includes Kronau, a community of about 500 people. Mr. Beitel said that Vale has already provided the community with supplies and said Vale has been more active this year than in the past. "When they came up, they asked us to put down what we needed. They went so far as to talk about day care facilities," Mr. Beitel said. "They must believe in the potash mine."
In April, Vale sent officials from its Brazil headquarters to Kronau. The global miner recently recalled its original project manager, Will Longworth, to Canada from Australia. And it has amassed nearly 15,000 acres of land in Saskatchewan.
Mr. Longworth was the original project leader on Kronau when Vale acquired it in 2009. After Vale postponed the project in 2012, Mr. Longworth was sent to Australia. He is now Kronau's senior project leader. A Vale spokeswoman said Mr. Longworth was not available to comment and did not say why he was brought back to Canada.
Vale, like the rest of the mining industry, is under pressure to divest non-core assets to deal with the slump in commodity prices. The Brazilian company's profit has been crimped with iron prices down 70 per cent owing to weaker Chinese demand and a glut of supply.
Vale has already floated the idea of spinning off part of its metals business into a separate company, though that is unlikely given low nickel prices.
Vale has another potash project called Carnalita, which is close to its Taquari-Vassouras potash mine in Brazil. Taquari-Vassouras is the only potash mine in Brazil and all of its production serves the Brazilian market, which is consuming more and more of the crop nutrient.
"There's a lot of potash coming on in Saskatchewan and they have a project in Brazil that is near their existing mine," said the Bank of Montreal analyst, Mr. Jackson. "I am sure they would prefer to do a project in Brazil rather than Saskatchewan," he said.
Vale's increased activity in Saskatchewan comes as the provincial government changed its mineral policies this March to ensure that companies don't sit on projects forever.
Under former rules, there was no requirement for companies to develop a resource. Today, companies that do not develop the resource will not be allowed to continue to lease the land after a certain time period.
"Our policies now encourage development of the resource" said Cory Hughes, Saskatchewan's executive director of mineral policy.