Legacy looks to make history

K+S plans to go ahead with building its Legacy project in Saskatchewan’s highly prospective potash basin, with initial production expected in 2015.   

The German fertilizer company announced on Nov. 29 that its board approved the construction of the $3.25-billion project.

“Legacy has now become the first greenfield potash mine in Saskatchewan to receive a green light for construction since disco was popular,” commented Jaret Anderson, a Mackie Research Capital analyst, in a note.

K+S also revised the feasibility study Legacy’s previous owner Potash One completed last October.  K+S had nabbed the junior and its project for $434 earlier this year based on the feasibility, showing a solution mine at Legacy could produce 2.86 million tonnes of potassium chloride (KCl) a year for at least 47 years.

The updated feasibility shows the production capacity remains at 2.86 tonnes a year. But the optimized start-up costs grew from $2.9 billion to $3.25 billion. K+S also hiked up its operational expenditure estimate by 51% to $95 per tonne, says Anderson. This is before transportation, mining taxed and royalties.

But the company valued at €7.3-billion shouldn’t have trouble covering Legacy’s higher costs.

“Financing is expected from liquidity remaining on the balance sheet and future cash flows,” said Dahlman Rose’s analyst Charles Neivert in a Nov. 29 note. “The company is assuming the refinancing of a bond due in 2014.”

The company has already started building initial infrastructure for water supply, electricity and road development on the site, located 50 km north of the city of Moose Jaw.

Initial production from Legacy should come online in 2015, before reaching 2 million tonnes a year in 2017. Full production of 2.86 million tonnes is anticipated in 2023. The company says it could potentially expand that capacity to 4 million tonnes in 2034. The cost of that expansion is not included in the $3.25-billion price tag.  

Legacy has proven reserves of 160 million tonnes grading 29% KCl and 18% potassium oxide (K2O). It has another 982 million tonnes at 27% KCl and 17% K2O in inferred and indicated on the property.  

K+S’ plan to start construction is a “big positive” for the future of Western Potash‘s (WPX-T) Milestone project also near Regina, Sask., says Anderson, explaining Legacy may be the best comparison for Milestone due to their similar mining methods, scale and location.

Anderson has a speculative buy and a $3 price target on Western Potash. He says though K+S’ increased costs indicate that the initial costs at Milestone could also grow; it also may suggest that the junior could possibly increase its initial processing rate. Based on an October 2011 prefeasibility study, Milestone is envisioned to annually produce 2.8 tonnes of potash for at least  40 years. Capital expenditures are pegged at $2.76 billion.

While the news may bode well for Western Potash, Neivert says he views K+S’ announcement as “mildy bearish” for the potash companies that Dahlman Rose covers, including: Potash Corp. of Saskatchewan (POT-T, POT-N), Mosaic (MOS-N), Agrium (AGU-T, AGU-N) and Intrepid Mines (IPI-N).