Potash Turmoil Threatens England’s First Mine in Forty Years

Opponents of England’s first planned potash mine in 40 years can thank Russian billionaire Suleiman Kerimov for helping their cause.

A decision by OAO Uralkali to withdraw from a powerful marketing venture has upended the world’s $20 billion potash industry and is set to slash prices. The news reverberated in the seaside town of Whitby this week, where a former Citigroup Inc. banker wants to spend $1.9 billion tunneling beneath a national park and the North Sea to unearth the commodity.

The community of 13,000, some of whom will profit should the mine pass beneath their land, largely backs the plan, according to developer Sirius Minerals Plc. (SXX) The company argues it may create more than 1,000 jobs in an area where traditional industries from fishing to farming are in decline, while critics from environmental groups to Israel Chemicals Ltd. (ICL) say it’s not wanted.

“It’s going to be difficult to attract the scale of investment that’s needed to build these projects,” Paul Burnside, a principal consultant on potash for research group CRU in London, said by phone. “You’ve got to either raise that money or look sufficiently attractive to a buyer to sell the project. Falling prices are clearly going to make that more difficult.”

Photographer: Ariel Jerozolimski/Bloomberg

Potash is a key crop nutrient used to strengthen plant roots and protect them against drought. Close

Potash is a key crop nutrient used to strengthen plant roots and protect them against drought.

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Photographer: Ariel Jerozolimski/Bloomberg

Potash is a key crop nutrient used to strengthen plant roots and protect them against drought.

For Sirius Chief Executive Officer Chris Fraser the fallout from Uralkali’s move is just the latest obstacle in his three-year effort to build the U.K.’s first potash mine in more than four decades. The Australian’s current focus is winning support for the mine from a key local planning authority.

Sydney Move

“The value proposition for us is very much longer term,” Fraser, 39, said in a phone interview from Yorkshire, where he moved with his wife and two children from Sydney last year.

Sirius’s York Potash will help inject an estimated 1.4 billion pounds ($2.1 billion) annually into the U.K.’s economy should the mine start producing in 2017. The implications of Uralkali’s move may even help his project, Fraser said.

“High-cost producers will come under stress and therefore we will have possibly over the medium term a more consolidated, more rational, stronger industry.”

The potash marketing venture that Uralkali, co-owned by Kerimov, is abandoning is one of two that until now have controlled most of the world’s supply by negotiating fixed-term supply contracts for their members.

Price War

That means producers don’t compete with each other individually in export markets, helping them to match output with demand. The move could be a “game changer” and start a price war that could last as long as 18 months, Citigroup said July 30.

Potash is a key crop nutrient used to strengthen plant roots and protect them against drought. In the U.S., potash accounts for 21 percent of fertilizer used by farmers.

The price may fall below $300 a metric ton, the lowest level in at least three years, and hold above $200, which is the output cost at marginal mines, Uralkali Chief Executive Officer Vladislav Baumgertner said this week.

Indian Potash Ltd., the country’s biggest importer, said yesterday it would seek to renegotiate prices for the crop nutrient. The company had contracted to buy 1 million tons at about $400 to $410 a ton until March 31.

Key to Sirius’s strategy is that it has already signed sales agreements with customers for future exports of its product. The mine will extract polyhalite, Greek for “many salts,” which contains sulfate of potassium, calcium and magnesium. Sirius says its 2.66 billion ton resource at 85.7 percent polyhalite is the biggest of its kind in the world.

Underground Pipeline

The company estimates it can produce polyhalite for an average cost of $36.90 a ton. Uralkali has costs of $62 a ton, which compares with more than $100 for North American miners and almost $240 for producers in Europe, according to a July presentation by Uralkali. Liberum Capital Ltd. analyst Ash Lazenby estimates the company can achieve a sales price of $150 a ton, the discount stemming from its lower potassium content. Uralkali’s most recent sales deal with China was at $400 a ton.

Sirius’s plan involves extracting polyhalite more than a mile underground, then crushing, milling and feeding it into a pipeline -- all beneath the surface to protect the Yorkshire moor parkland. The submerged 44.5 kilometer (28 mile) pipe will transport slurry to a port on Teesside, about 220 miles north of London, where five million tons of product a year will be dried, granulated and shipped.

Market Unravels

“Landscapes designated as National Parks should be what they were set up to be,” said Tom Chadwick, chairman of North Yorkshire Moors Association. “Areas of tranquility, areas of beautiful landscapes which are for people’s enjoyment. This is the biggest threat to the national parks for 40 years, since the last potash mines were put forward.”

Sirius has said it’s confident of satisfying environmental requirements and has also rebuffed suggestions from Israel Chemicals that there isn’t demand for its product.

This week’s unraveling of the potash market has coincided with heightened debate in the coastal community before a decision by local planners on whether to approve the development. Recent submissions to the authority have highlighted environmental and economic hurdles. Sirius last month asked for a third delay on the ruling as it sought to respond to objections by an environmental consultant.

“There’s well over 1,000 different types of fungi that have been recorded in the Whitby area, and that’s just the tip of the iceberg,” said David Minter, 62, chairman of the Whitby Naturalists’ Club, which has about 200 members. “We have very little idea what impact digging a 30 mile pipeline is going to have on fungi in the soil and other micro-organisms and invertebrates. There are a lot of unknowns.”

Share Slump

Some local residents are more concerned about the Sirius share price, which has dropped 35 percent this year. It fell 2.8 percent to 17.5 pence today, giving it a market value of 236 million pounds ($361 million).

“Quite a lot of people have bought shares,” said John Cook, 64, who is chairman of the Yorkshire Coast Minerals Association, which represents 190 landowners in the area set to benefit from the mine. “It is virtually the talk of the town in this area because it will have an impact on a lot of people.”

Sirius acquired the project in 2011 from Fraser in a deal that saw his York Potash Ltd. issue 25 million pounds of Sirius stock.

Locals near the mine own 18 percent of the stock, while 1 percent is controlled by people living within the national park, according to Sirius.

Fortescue Metals

“One of my goals when I put York Potash into Sirius was to enable ownership to take place and have transparency,” Fraser said. “There’s nowhere I can go now without people talking about the shares.”

Fraser has history in getting huge mining projects up and running. At Citigroup, he helped Fortescue Metals Group Ltd. (FMG) fund a $2.8 billion iron-ore mine in Western Australia that has transformed that company from a simple explorer to the world’s fourth-biggest iron-ore exporter worth $10 billion.

Fraser owns 8.5 percent of Sirius. Former senior Fortescue executives are also major investors and on the company’s board. Chris Catlow, deputy chairman, holds 7.4 percent and Russell Scrimshaw, chairman, controls 2.7 percent.

While London-based Sirius currently employs just some 65 people, it has estimated the mine could contribute 0.1 percent to U.K. gross domestic product.

Jobs, Money

“I don’t think nationally we can afford to ignore these reserves, because the world does need potash to grow food for the world population,” Peter Beeforth, 60, a Whitby resident and landowner, said by phone. “It’s supported very widely, there’s very few dissenters.”

Payments to the 485 mineral rights owners in the park are estimated to total about 13 million pounds annually, according to Sirius. The company also projects it will spend 46 million pounds a year on supplies for the operation, supporting as many as 239 jobs.

That all translates to moderately increased prosperity for the locals, said Cook from the Yorkshire Coast Minerals Association.

“You aren’t going to see many Aston Martins in this part of the world, but you will see a few battered 4x4s replaced with new ones.”

To contact the reporters on this story: Jesse Riseborough in London at jriseborough@bloomberg.net; Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

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