Africa's potash pioneers hope to thrive even if price drops
Africa's nascent potash industry, often enjoying low costs and shallow deposits while standing to benefit from fast growth in local demand, expects to withstand an expected drop in the crop nutrient's prices better than emerging rivals.
The collapse last week of one of two global potash cartels is expected to take about 25 percent off prices, prompting questions over the future of projects such as BHP Billiton's $14 billion Jansen and the K+S Legacy mine - both in Canada.
Shares of small explorers and miners have been battered and financing, already tough, has become tougher.
But companies exploring Africa's emerging potash regions - the Republic of Congo to the west and Ethopia and Eritrea to the east - say a price drop could benefit those with lower costs and high ore grades, if it means output cuts in established mining regions.
Lower prices could also increase demand for potash in emerging markets and notably in Africa, where food consumption patterns are changing as population growth and increased urbanisation alter diets and boost demand for grain.
"(The expected price fall) affects general market sentiment, which could be tricky for the next few months," said Ed Marlow, Chief Executive of African Potash, which is working on the early stage Lake Dinga project in the Republic of Congo.
"But we are talking about world potash prices coming down as low as under $300 - if you are producing under $100 a tonne, there are still very good margins. There is not a lot that makes that sort of margin."
Ethiopia faces greater difficulty than Congo, due to a longer distance from planned mines to port.
But the shallow deposits in the parched Danakil Depression mean the region that has seen some of Africa's worst famines still hopes to cash in on the nutrient that will help the continent boost production and avoid such crises in future.
"We are going to have potash as a commodity in addition to gold, tantalum and gemstones," Ethiopia's Mines Minister Sinkenesh Ejigu said.
Just 12 countries produce virtually all the world's potash, with Canada, Russia and Belarus accounting for the lion's share.
While a boom around 2007 encouraged numbers of new mine projects, many were predicated on prices that now look distant.
The timing is more fortunate for Africa, which will not start producing significant amounts of potash before 2016 or 2017. By then it can hope prices will again be stable or rising as more of the world's population seeks more and better food.
The African industry's success will still rely on low costs.
"The major silver lining for us is that finally people will wake up and start looking at project economics," said Farhad Abasov, CEO of Allana Potash, working in Ethiopia on the $642 million Dallol project that aims to produce 1 million tonnes a year.
Allana estimates costs of around the industry average.
Africa's new mines will initially be set up to export. But the lure of the continent's increasing domestic demand - up from just 1 percent of global potash consumption today - will be vital to bring in investment.
This prospect has already attracted the attention of investors such as Nigerian billionaire Aliko Dangote, Brazilian entrepreneur and former CEO of Vale Roger Agnelli and even industry heavyweights like fertiliser group Yara, which has a stake in an Ethiopian project.
Allana forecasts African potash usage could rise to between 3 million and 7 million tonnes by 2020 from demand of less than 1 million now.
"What has changed now... is the rapid growth of demand for potash in Africa. Some of our initial production will definitely be destined for Asia, into India, but 20-40 percent of our production will actually stay in Africa," Abasov said.
He said Ethiopia had announced a tender for 4 NPK (nitrogen, phosphorus, potassium) fertiliser plants that would require 200,000 tonnes of potash a year.
Congo, meanwhile, stands to cash in on its logistical advantage - deposits 20 km to 100 km from the port of Pointe Noire, compared with distances of 1,700 km and more for certain mines in Canada.
Congo's planned mines appear to have ore grades of 20 to 25 percent, according to a 2012 World Bank report, making them comparable with Canada's Saskatchewan province. Crucially, they can be exploited at a depth of 300 metres, whereas deposits in Canada are explored at more than 1,000 metres.
The most advanced Congolese project is the 1.2 million tonne a year Mengo project, run by a company controlled by Chinese group Evergreen, and due to be completed at the end of 2015.
Elemental Minerals is due to produce at Congo's Sintoukola at costs of $79.70 a tonne, according to a 2012 report - in an industry where costs are typically closer to $100 to $150 and against a spot price of closer to $400. Marlow at African Potash hopes his costs, and margins, will be similar.
The problem for most, though, remains finding cash now.
"If there really are low cost options in Africa, perhaps they are possible, but you still have to get the financing and the capex costs are high," said analyst Sophie Jourdier at Liberum.
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