rio potash asset right next to bhp, page-9

Rio keen to make potash plunge

MATT CHAMBERS THE AUSTRALIAN MARCH 22, 2014 12:00AM


RIO Tinto could start building a Canadian potash project within three years, according to its joint venture partner, as the big miner chases a fertiliser push by BHP Billiton to position itself at the forefront of a global food boom.

There is also growing speculation Rio will make a bigger plunge into the sector through an acquisition or joint venture of neighbouring junior Western Potash, or even by joining BHP.

Last week, Rio revealed it had made a "tier-one" potash discovery at its KP405 lease near Regina, in Saskatchewan's Elk Point Basin. This is the basin where BHP is spending $US3.8 billion ($4.2bn) sinking big mine shafts and building associated infrastructure about 200km to the north to be ready for expected growth in global demand for the crop fertiliser.

Rio's Russian partner, Acron, has called the find "massive" and, based on a Rio report, capable of supporting a long-life, low-cost potash mine.

Still, KP405 is lower grade, has been proved up to a fraction of the certainty and is less than a third the size of the resource BHP is targeting. It is also nearly twice as deep, meaning mining methods will be different and probably more expensive.

While Rio has not hosed down industry buzz generated about the project last week by its "tier-one" declaration, it will not give its view on KP405's potential.

The excitement, and what is seen as an ambitious timetable, is being looked at with bemusement within BHP, where a decade of proving up its Jansen deposit into potentially the world's biggest potash producer still has it three or more years away from production.

While there is no shortage of potash at the moment, BHP's multi-billion-dollar move into the sector is based on expectations that demand will steadily outgrow supply by the next decade as more people around the globe become richer and demand better-quality food. The potassium in potash is one of three important plant nutrients, along with phosphorous and nitrogen. At a time when arable land is becoming constrained, its quality of increasing crop yields is expected to become highly valued.

Rio's virtual silence about its push into potash is in contrast to BHP's, which left no one in any doubt about its commitment when it made a $US40bn bid for Potash Corporation of Saskatchewan in 2010.

When this bid failed to clear the Canadian government, BHP ramped up work on its Jansen project, 140km east of Saskatoon.

So far BHP has already committed itself to spending $US3.8bn to access a 1km-deep deposit capable of supporting the world's biggest potash operation, before a definite board decision to mine has been made.

London-listed Acron, one of the biggest global fertiliser producers, with a market value of $US1.1bn, is not hiding its excitement about KP405.

David Waugh, the head of Acron's Canadian subsidiary, North Atlantic Potash, told The Weekend Australian that KP405 was a world-class project.

He said there was a lot of work ahead of the joint venture, with both pre-feasibility and feasibility studies needed, but a decision to mine could be two or three years away if things went well. Earlier this year, Mr Waugh was reported as saying that production could be five years away.

In December, Acron spoke glowingly of the results of a resource study done by Rio.

"This massive potash deposit is located in one of the most favourable potash regions in the world," the Moscow-based company said.

"Exploration shows that this deposit has the potential to support a world-class solution mine for many years and its technical characteristics point to very favourable operating costs."

Rio's push into potash has been so low-key the miner refuses to say under what terms it entered the joint venture with Acron in 2011. The entry came two years after Rio, under pressure to pay down $US40bn of debt acquired to take over Alcan, sold potash ground in Canada and Brazil to Vale for $US850 million. The big miner's only mention of the scale of its find at KP405 was in its annual report last week, where it called the deposit "tier one". This is the language Rio and BHP use when they think something is big and profitable enough to pursue.

Rio's find has sparked speculation it could bid for, or form a joint venture with, Canada's Western Potash, which has neighbouring ground. With a market value of just $C125m ($124m), it would be no trouble for Rio to swallow, giving it access to the company's Milestone project, which is next to KP405 and has a resource twice the size.

Milestone is a similar size to the mine proposed at KP405 and is expected to cost $C3bn, but it is more advanced and has better access to water, which could be shared.

But Western Potash's small market cap, despite it reporting in 2012 that Milestone had an after-tax net present value of $C2.44bn, indicates the lack of certainty that the project will progress.

Rio has also been touted by analysts as a potential partner for BHP, which is looking for investors to help it develop Jansen.

BHP has said it wants partners that can bring something to the project, in the same way its joint venture with Rio at the huge Escondida copper mine in Chile has.

The joint venture between Rio and Acron is on a 40-60 basis, with Rio directing exploration. Rio can reportedly earn up to 80 per cent by funding more exploration.

The known detail about KP405 comes from North Atlantic Potash, which has released a summary of an internal Rio report.

According to the summary, the deposit could produce three million tonnes of potash a year, which is about 6 per cent of global production and represents annual revenue of about $US900m based on potash prices sitting near six-year lows of $US300 a tonne.

BHP plans to produce up to 10 million tonnes per year at Jansen from its bigger, higher-grade resource.

Rio's inferred resource of 1.4 billion tonnes of ore at 31 per cent potassium chloride is dwarfed by BHP's of 6.6 billion tonnes of ore at about 41 per cent. BHP's has also been proved up to a much greater level of certainty.

In August, BHP approved a $US2.6bn spend at Jansen, on top of $US1.2bn already spent, to finish excavating two shafts 1km deep so it can access the potash when demand warrants it. The work should be finished in 2017.

BHP is doing the pre-mine work on Jansen as its analysis shows a new mine will be required to fill growing demand from 2020. Where Rio hopes to slot into the global picture is unclear.

BHP faces an extra spend of up to $US10bn to get to its 10 million tonnes a year based on current potash construction in Saskatchewan. Based on the same benchmark, Rio and Acron are looking at a $US4bn-plus spend for their project.

Rio's potash is about 1750m underground, too deep for the traditional mining methods BHP plans to use. Instead, Rio is studying solution mining, where salt water is injected into the mine to dissolve the potash before it is pumped to an evaporation pond.