RE: Canpotex - development financing Would be interested to hear views on whether AAA could be a target for Canpotex/BHP etc once the development financing is in place?
Having lenders such as the IFC and other Development Agencies is a great protection from Nationalism and Government edicts that prohibit fair competition. Why would Canpotex or BHP etc want to risk their own capital developing a mine when they could buyout AAA and repay the development financing over a period of time and have the further protection that development financing affords?
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I can't say much as to whether Saskatchewan players would be interested in AAA right now (maybe POT now that their ICL move fell through. I think BHP has higher production expectations if they abandon Jansen and try to push into potash again), but I can say that the dynamic of potash industry is changing. Saskatchewan is still the largest producing region with the largest reserves in the world. It is, also, for its size and class, the safest jurisdiction (not only politically, but geostrategically) for potash production, bar none. It was these traits that attracted many big players into the region in the past 5 years. And if someone wants to make a multi-decade, multi-billion dollar investment, that is certainly an important consideration.
However, as we are seeing, many of these projects are being shelved because economics, in the end, trumps security. The Saskatchewan producers, both current and emerging, are facing major cost headwinds not shared to the same scale by other potash producing regions:
1. Natural gas. I've posted at length about this in the past so I won't repeat the details, suffice it to say John Costigan of WPX told me ~40% of their OPEX is natural gas. Natural gas prices have tanked and forecasts for prices in 3-4+ years time are double on the low end and quadrduple on the high end. Do the math.
2. Saskatchewan's labour shortage. This will probably not go away. First, because for whatever reason not many people desire to live in Saskatchewan. Second, the federal government just reviewed the foreign temporary worker program in light of the Royal Bank outsourcing scandal and made it significantly harder to bring in foreign workers. It's led Canada in unemployment in recent memory and has an admitted, chronic labour shortage. There will be major cost pressures here against what are already high labour costs for skilled workers.
3. Logistics is traditionally an inflationary pressure. Add in unionized labour all over this industry it's a safe bet these costs will inflate above the mean. Within about 2 years or so, the published transport OPEX Of at least two Saskatchewan juniors (who publish these figures) has risen from $50/ton FOB Vancouver to $60/ton FOB vancouver. 20%.
When you compare this to a region like Russia which already has lower operating expenses vs Saskatchewan, has massive reserves, large production capacity and none of these cost pressures to anything close to the same scale... it's easy to see why incumbents in Saskatchewan aren't planning major brownfield expansion. Ukrali does have major expansion planned, but since they're in a cartel, they're waiting to see what happens with all of these juniors and the overall market before committing. Russia has its own problems of course, including the government having a habit of playing politics with resources (see Russia vs Ukraine and Russia vs Western Europe relating to natural gas) and the general concern investors have over the risk of being "Putin"ed.
But it's also why POT recently made a push for ICL. It wasn't just for market share (that is clearly a consideration which helps their short-term bargaining position), but it was also for cost. Cost on two key fronts - one, the cost of extracting pounds from the ground. Without that natural gas exposure and very short transport distances to port, ICL enjoys advantages on all three aforementioned cost headwinds over any Saskatchewan producer. Secondly, cost vis a vis location. I've detailed the ocean-going freight savings issue before, so I won't go into too much detail. Suffice it to say that for any European or Asian buyer, the ocean-going logistics costs buying from ICL vary from a meaningful cost savings to a massive cost saving over buying FOB Vancouver. And that matters. Any buyer looks at the total cost to bring product to their local market. That includes FOB port price, ocean-going logistics costs, duty/customs clearing costs, etc.
As far as potash goes, I see a shift in the dynamics of the industry changing away from Saskatchewan as the prime location for new potash projects to other more cost effective regions. It won't happen overnight, but we're seeing that start to play out right now in the industry. Still, for anyone that is committed to procuring millions of tons of potash and completely bypassing the cartels, Saskatchewan is still the obvious choice. However, it is very unlikely anyone out there is willing to do this. Think about it this way - how much cartel premium on the potash price will a $3.5 billion CAPEX (+ lost investment income or opportunity cost) pay for? A 2 million tpy consumer could simply take that $3.5 billion (+ investment gains they could make on that money) and pay for 20+ years of a $100/ton cartel premiums on the price AND not be saddled with any of the risk associated with owning and funding a potash mine in an oversupplied potash market.
So why would any major consumer of potash do this? They're not. That's why CBC signed a hilarious 1 mtpy offtake agreement with WPX which can be unilaterally cancelled every 5 years. Or, put another way, CBC can unilaterally cancel that offtake every 5 years. WPX isn't going to be able to unilaterally cancel a 1 mtpy offtake with a 20% shareholder without serious consequences. I see it as very unlikely CBC will themselves fund WPX. It may be years before the potash market turns around to the point that someone else will. But the Chinese got to pick up 20% of the company for next to nothing. Smart investment. If they were committed to see Milestone get to production anytime soon they wouldn't have bent WPX over the table on equity and a totally one-sided offtake agreement that commmits nothing on the most important challenge for the company - financing.
And that leads us to the last tidit - Saskatchewan potash projects generally have such a high capex because they usually have to be scaled that high to be economic. Projects like that only get funded in commodity bull markets. If I had to place a bet: Jansen is shelved, not a single Saskatchewan junior makes it to production and interest in non-traditional potash producing regions will rise. If you're a commercial bank and huge players in Saskatchewan are all halting projects after investing hundreds of millions or billions already, why would you loan billions to a junior trying to build the exact same sized project? You're not - simple as that.
Only private equity would take that kind of risk and the only private equity that might be remotely interested in loaning billions to a potash junior is one that wants all of the production. I've touched on the math above, but it doesn't add up even for the biggest consumers globally, which is why, at best, we've seen "strategic investment". Throw a few tens of millions into a project as a hedge, but limit your exposure.
These projects are all so undervalued right now relative to NAV/NPV that if strategic investors (who are either consumers or producers) were truly committed, they would just take out the project the way Yara did vis a vis Ethiopotash. But they're not that committed - at least not now and are hedging their bets. I'd be surprised to see any of them front significant percentages of the needed CAPEX of these projects - they have more productive ways to deploy that kind of capital. If these investors were serious about bringing their own owned production online, they are not looking at a potash producing region where you must be producing 2-3+ million tons per year just to be economically feasible - because that means they run the risk of having to consume ALL of that, from a single source regardless of what the greater potash market is doing or regardless of any major problems at that single site (eg unexpected geology greatly increasing OPEX relative to peers, etc). It's not a coincidence all these off-takes were for 1mtpy - nobody wants 3 million tons per year themselves - standard procurement hedging strategy. It's all much the risk for very little gain.
Allana's strategic investors on the other hand, are either in this to make money (LMM) or have a mandate to see the project succeed (IFC). We are literally in the best geographic region for potash production globally at this point in time (whe one considers where potash is available) with the possible exception of certain (but not all) Brazilian deposits. Geopolitical risk (whatever you think it is) aside Allana's deposit is highly strategic. And within the basin itself, Allana's acquisition of Nova (a tremendously smart move by Farhad and crew) now controls what is possibly all of the significant water reserves needed for low cost solution mining/solar evaporation. In short, Allana in all likelyhood controls the most important resource (even more so than the potash itself) in what will likely become one of the most profitable potash producing regions in the world. The size of solution-mining/solar evaporation production capacity possible here isn't massive, so it won't be a game changer in the global market unless there is significant water elsewhere in the basin (I'm guessing not, which is probably why BHP bailed). But it will make Allana a prime target for eventual acquisition for any major producer to diversify their potash production (not to mention a realtively highly profitable operation).