Occasionally, macro & company developments align in a potential investment. It’s one of those take note moments, akin to the alignment of TA with FA or the twin-turbo drivers of an earnings upgrade with an earnings multiple re-rate.
Right now, food insecurity is one of Earth’s most significant challenges, exacerbated by climate change and the COVID-19 pandemic. Fertiliser costs have been surging, with prices driven by surging energy costs, supply curtailments, and trade policies.
Most fertilizer prices increased sharply in 2021Q3 and continued rising in early November, reaching levels unseen since the 2008-09 global financial crisis.
Around the world, Governments are acting fast. China announced the suspension of fertilizer exports until June 2022 to ensure domestic availability amid food security concerns. China’s exports of DAP (diammonium phosphate) and urea account for approximately one-third and one-tenth of global trade, respectively.
In addition, Russia recently announced restrictions on nitrogen and phosphate fertilizer exports for six months, effective December 1, 2021. Moreover, across Dec 2021, the US, EU, UK and Canada announced new sanctions on Belarus, amid ongoing pressure campaign on President Alexander Lukashenko, restricting financial dealings with state-owned Belarusian potash fertiliser producer, OJSC Belaruskali, the world’s second largest potash supplier.
Following these disruptions, Muriate of potash (MOP) contract prices are forecast to surge in 2022 following significant increases in spot prices, in which there is already a growing divergence between spot and contract prices for MOP.
Potassium is one of the three key nutrients required for plant growth, along with nitrogen and phosphorous. As soil quality around the world declines and the global demand for produce increases, potash will play a vital role in the expansion of the world’s food supply.
Another key driver of the potash market is that it is a finite resource, with no known substitutes in agriculture. Most of the world’s supply comes from only a few countries with Canada being the world’s biggest supplier and exporter, producing over one third of the word’s global output. This is followed by Belarus, Russia, China, Israel, Germany and the rest of the world.
Further, due to climate change, arable land per person globally continues to dramatically decrease – from 4,500m2 in 1960 down to just 1,800m2 in 2050, which will significantly increase the need for potash and other fertiliser constituents.
Forecasted Arable Land Per Person Globally Across 1960, 2005 & 2050
Enter South Harz Potash (ASX:SHP) building Western Europe’s largest potash inventoryIt is against this backdrop, that South Harz Potash (ASX:SHP) enters the mix, with a market capitalisation of $80 million AUD at a share price of 17c. Listed on the ASX in 2017 (as Davenport Resources), South Harz Potash Ltd is set to become a world-class producer and a major supplier of potash in Europe by developing its large potash resource in the South Harz region of Central Germany.
The South Harz Potash District, located in the heart of Germany, was one of the world’s most important Muriate of Potash (MOP) producing regions, with a history of Potash mining going back over 120 years. SHP’s portfolio of German licences represents Western Europe’s most significant potash resource, comprised of high-grade Muriate of Potash (MOP) Inferred Mineral Resources (JORC 2012) and valuable potassium and magnesium sulphate minerals at relatively shallow depths.
The former German Democratic Republic produced approximately 3.3Mt of K2O annually from mines within and around the South Harz Potash District and communist East Germany (GDR) was one of the top three producing countries in the world. Historically, both Sylvinite and Carnallitite potash ores have been mined in the South Harz Potash District by conventional underground room and pillar mining.
However, the last active mines and potash processing plants were decommissioned in 1991 and 1993 during the reunification of Germany. At its peak, the region employed 45,000 mine workers back in the days of GDR. With reunification in the early 1990s, most of the mines were closed and 15-20,000 miners lost their jobs. The government went to sell off the mines, but the pricing was unrealistically high, so they sat on the shelf until SHP (formerly DAV) successfully bid €1.3m, completing the acquisition in early 2018.
Today, Potash is produced in the South Harz Potash District only from the BWE Kehmstedt and Kehmstedt-NW owned Kehmstedt operation via solution mining techniques, at a production rate estimated at just over 100,000 tonnes MOP per year.
Thus, the company has seized at the opportunity to capture an already established and inferred potash resource of more than 5 billion tonnes at a grade of 10.8% potassium oxide across 4 deposits that can be developed independently within its asset bases in Germany – a rarity generated due to the unique socio-political history of mining in the area.
The opportunity ahead for South Harz Potash is immense and unlike many other ASX early-stage development companies, the upcoming planned work programmes should allow a rapid and low-cost route to a JORC compliant potash resource.
Further thoughts on catalysts and a valuation can be found here.
