Saskatchewan potash developers pull in their horns

Rising costs and inconsistent downstream demand have taken a toll on potash and fertilizer producers during the first half of 2012, with volatile global markets now impacting the strategies of several mega miners in Saskatchewan’s sprawling potash sector. While the forecast looked sunny for Canada’s fertilizer industry earlier in the year, there is now some uncertainty in the face of major project delays.

The bad news began rolling in on Aug. 16, when Brazil’s Vale (VALE-N) announced it would be delaying its US$3-billion Kronau potash project 30 km southeast of Regina. Vale indicated it would continue to work on water sourcing for the project and move ahead with an environmental impact assessment, but provided no clear time frame on project construction.

“We find ourselves in some challenging economic times today, and we have reviewed the projects that we have on our plate and we have made a decision to postpone [Kronau] for the time being,” Vale spokesman Cory McPhee told CBC News reporters on Aug. 16.

Vale’s mine was expected to employ a workforce of 1,000 at peak capacity, and produce 2.9 million tonnes of potash annually. The project was set for a build-out period over the next three years after Vale purchased the project from Rio Tinto (RIO-N, RIO-L, RIO-A) for US$850 million in 2009.

Just one week later,  BHP Billiton (BHP-N, BHP-A) announced it would be delaying a decision on its US$12-billion Jansen development, a mega potash project near LeRoy, Sask. Jansen is still being reviewed by BHP’s board, though the company has already started a large build-out on-site.

BHP has committed US$1.2 billion to the project, and is building a 2,600-person construction camp at what is projected to be the world’s largest potash mine, with annual production peaking at 8 million tonnes of potash over a mine life that could exceed 50 years.

BHP’s decision followed a six-month financial period where the company experienced a 58% profit drop to US$5.5 billion on weak base-metal and coal prices. BHP was says  it remains committed to the Jansen project, and would continue with engineering work looking at start-up operations, at a 4 million tonnes per annum throughput capacity.

Saskatchewan Premier Brad Wall met with reporters on Aug. 23 in response to the BHP project delay, and stated he remained optimistic about the Jansen project. Wall also jump-started speculation by mentioning the possibility of a new potash royalty structure that he said would be tied more closely to production than cost structures.

“Given what’s happening in other parts of the world as a result of this announcement, we see this project going ahead in Saskatchewan, and that’s good news,” Wall told reporters in Regina. “A project where they’re continuing to sink shafts does not sound like a delay.”

Tepid potash markets have also hit Canadian potash miner Potash Corp. of Saskatchwan (POT-T, POT-N). Its second quarter saw  profits fall to US$526 million, or 60¢ per share — down from US$846 million, or 96¢ per share in the second-quarter of 2011. The company was saddled with a US$345-million impairment charge from an investment in China’s Sinofert Holdings, which management expects will affect Potash Corp.’s profit margins for the rest of the year.

As a result of the impairment charge, the company dropped its earnings guidance to between $2.80 and $3.20 per share. According to a Thomson Reuters survey, analysts had pegged Potash Corp.’s earnings at $3.47 during 2012.

The company is suspending operations at its Lanigan potash mine in Saskatchewan from Sept. 15 to Oct. 13 in response to a surplus in potash supply. Potash Corp. reported North American inventories at 30% above its five-year average in July.

Lanigan is a conventional underground mine operating at 1,000 metres depth, with a capacity of 3.8 million tonnes potassium chloride annually.

The mine employs a 600-person workforce. Potash Corp. has made no comment regarding layoffs or extended work stoppages.

Offering a more optimistic outlook is German fertilizer company K+S Group, which said on Aug. 24 that it would be moving ahead with a large-scale development northeast of Moose Jaw, Sask.

The company’s board approved a US$3.25-billion development at its greenfield Legacy potash project in November, and held a ground-breaking ceremony in mid-June. Water sourcing and power infrastructure measures are underway, with production expected to start-up in 2015. Legacy will produce at an average capacity of 2.86 million tonnes of potassium chloride per year through 2023.

The project is expected to provide work for 1,000 people during construction, before supplying 320 sustainable jobs at peak production.

“It’s looking great. [We hired] our one-hundredth employee this week, and those numbers are going to continue to grow bigger and bigger,” K+S Canada spokeswoman Christine Stass told the Moose Jaw Times Herald on Aug. 24. “They’re doing a fair amount of groundwork just to prepare for the future structures that will be on the site. They’ll be continuing to drill those production wells that will eventually be used for potash extraction. And we’re continuing to build our water facilities and pipelines.”