Western Potash takes novel approach

When Western Potash (WPX-T) starts commercial production at its Milestone potash mine in Saskatchewan in 2016, it will draw much of its water from treated sewage effluent from the city of Regina, about 30 km away.

As much as 60,000 cubic metres of the stuff will be diverted daily from the Regina waste-water treatment plant to the mine. Once up and running, Western Potash estimates the mine will draw between 40% and 70% of Regina’s total waste water.

If paid out annually, the agreement could be worth $200 million to the City of Regina over its 45-year term. The city will be responsible for operating the pumphouse and pipeline and for securing environmental approvals for the project. Western Potash will need to pick up the tab for building the pumphouse and pipeline.

Regina’s Acting Deputy Mayor Louis Browne describes the agreement as an example of “creative thinking and partnerships” that compensates the city for treating waste and facilitates economic growth in one of the province’s key economic sectors, while alleviating problems such as algae buildup downstream.  

According to a prefeasibility study released in October, the Milestone project contains sufficient size and grade of potash to support solution mining for more than 40 years at a production rate of 2.8 million tonnes per year. The prefeasibility outlined a payback period of five years, a net present value of $4.14 billion, an internal rate of return of 22.7% and a total initial capital expenditure of $2.76 billion.

Specifically, Milestone holds 66.6 million tonnes of measured resource, 186.9 million tonnes of indicated resource and 708.2 million tonnes of inferred.

Western Potash adopted a shareholder rights plan at the end of May to help fend off unsolicited takeover bids for the company.
The Milestone project is 80 km southeast of Mosaic’s (MOS-N) Bell Plaine mining lease.

Western Potash ended its trading session down 3.4%, or 4¢ at $1.14 per share, on more than 1 million shares traded.

But the decline likely had less to do with sewage than it had to do with a research report  by Rabobank warning that global potash-production capacity could outstrip demand by 59% to 100% by the end of the decade. The report, released on June 26 and authored by the European bank’s global food and agribusiness research and advisory group, predicts the industry would suffer from “substantial overcapacity.”

One of the key influencing variables, it says, is the degree to which countries like China, India and Brazil — which the bank estimates made up 40% of total potash imports last year — are prepared “to endure uneconomic projects for the sake of securing supplies either domestically, or by investing in development overseas.”

“In the end, it is mainly geopolitical and long-term strategic security parameters that justify such investments,” Rabobank analyst Dirk Jan Kennes outlines in a Rabobank press release. “From a pure economics angle, many of these investments might render losses if prices come under pressure due to oversupply.”

A second factor it claims is the ability of smaller companies to get financing. “The response of established players to new entrants could also affect the arrival of new entrants,” the report says. “More than 60 new projects have been announced, but the existing producers have low production costs and the ability to increase their own output, which could reduce prices to a level that makes new production uneconomic.”  

Separately, Potash Corp. of ­Saskatchewan (POT-T, POT-N) reported the same day in its second-quarter market analysis report that “while some observers believe new potash supply could outpace global need in the coming years, what is often overlooked is the challenge for operating mines around the world to achieve full, operational capability.”

It pointed out that for most of last year, geological, logistical and operational issues “constrained the industry’s ability to meet underlying demand, highlighting the need for new capacity.”

And with the long lead time needed to develop new supply, the company said it is convinced that the industry “could  be challenged to meet the world’s rising potash demand in the years ahead.”