Mosaic suspends Colonsay potash mine

Mosaic (NYSE: MOS) is temporarily shutting one of its three Saskatchewan potash operations, amid declining global demand and prices for potash.

The major fertilizer producer will close the Colonsay potash mine for the rest of 2016 in response to “challenging” market conditions.

As a result, it will lay off 330 employees until January 2017. This follows the company’s permanent dismissal of 46 Colonsay employees last October.

“Mosaic intends to keep a small workforce of 31 in scope employees on-site to perform safety checks,” Sarah Fedorchuk, the company’s senior director of public affairs, said in an emailed response. “We have also retained our 112 [non-unionized] out-of-scope employees for this period.”

The temporary shutdown will help Mosaic meet customers’ needs and lower production costs, Joc O’Rourke, the company’s president and CEO, said in a release.

The company plans to increase production at its lower-cost Esterhazy and Belle Plaine potash mines in Saskatchewan and sell from inventory to meet its customers’ short-term potash needs.

The Colonsay mine has a proven annual production capacity of 2.6 million tonnes.

Given Mosaic’s ability to replace Colonsay’s production, Fedorchuk notes there will be no changes to Mosaic’s 2016 potash sales guidance of 7.5 million to 8 million tonnes.

In a note, BMO analyst Joel Jackson says that “many investors are misconstruing this as a production cut for the purpose of being disciplined, as opposed to what it likely really is: a necessary move due to poor potash fundamentals impacting Mosaic, which actually has higher-cost production than most peers, other than K+S and ICL’s European mines.”

Mosaic will focus on lower-cost production to meet its guidance, which is similar to what Potash Corp. of Saskatchewan (TSX: POT; NYSE: POT) has been doing, Jackson says.

In January, PotashCorp suspended its new Picadilly potash operation in New Brunswick, dismissing 430 employees. A month later, it curbed production at its Saskatchewan potash operations. Both moves lowered its annual production capacity by 2.4 million tonnes.

After its first-quarter earnings miss, PotashCorp trimmed its 2016 potash sales guidance to 8.3 million to 8.8 million tonnes, down from 8.3 million to 9.1 million tonnes.

In May, Intrepid Potash (NYSE: IPI) said it would close the high-cost West Facility in Carlsbad, New Mexico. The operation, which generated 42% of Intrepid’s potash in 2015, was becoming less and less profitable due to oversupply and foreign competition in the U.S. potash market, the company said. This decision affected 300 employees.

“The anticipated negative progression for high-cost mines continues to happen in potash amid a depressed potash market, with the Chinese contract approaching the point where it may not actually get signed this year,” Jackson says, or signed only for fourth-quarter shipments.

Given the constrained global demand, PotashCorp’s average realized potash price for the first quarter dropped 37% to US$178 per tonne. Mosaic’s average realized potash price fell 18% to US$365 per tonne.