Bare fruit and vegetable shelves in supermarkets this month have brought the global food supply chain into sharp focus, as droughts in North Africa and tougher growing conditions in Europe cut what is available to UK consumers.
At the same time, Anglo American (AAL) will reportedly announce its updated plan for the former Sirius Minerals mine in North Yorkshire this week. Fertiliser mine developers pitch investors with the idea that their products will boost crops and see continued demand growth purely through the world's population rising.
The fertiliser market is still being reconfigured a year on from Russia’s invasion of Ukraine. There are two reasons for this: Russia and Belarus are significant exporters of fertilisers, while soaring gas prices were passed through into urea and ammonium nitrate prices, which are key fertiliser inputs.
The price for potash, a potassium-rich salt that is the most commonly-mined fertiliser, soared in 2022 from around $250 (£207) a tonne at the start of the year, to nearly $1,200 a tonne by the end of the year. This is distinct from ammonium nitrate fertiliser, which is produced by combining nitrogen from the air and natural gas. Anglo will mine a product called polyhalite, which is crushed and applied directly to crops, at Woodsmith near Whitby.
The potash price has since come back to earth due to seasonal movements and importers using inventories rather than paying record prices. But industry leaders such as Nutrien (CA:NTR) have already seen earnings hit record levels in the past year. The Canadian giant reported adjusted cash profits that were treble pre-pandemic levels, at $12bn, and also a 70 per cent year-on-year increase. ICL (IS:ICL), which runs the UK’s only major mine in Yorkshire, Boulby, doubled Ebitda for 2022 to $448mn off the back of its polyhalite production.
And Anglo is not the only major miner with a project in the works. BHP (BHP) has the Jansen development project in Canada, which is closer to construction and production.
It was championed by former chief executive Sir Andrew Mackenzie, and new boss Mike Henry has kept on with the Saskatchewan-based project. It was initially scheduled to reach production in 2015, and then again in 2023, but BHP has pushed this out to 2026.
Henry said this week that spending for the mine would be $120mn ahead of its previous forecast this year, at $860mn, because of the “accelerated production schedule” for stage 1. A feasibility study for stage 2, which would expand production, is expected in the financial year ending 30 June 2024.
The excitement from the majors is easy to explain: people need to eat, and the world just keeps making more people. This isn’t a new push, either, but as the big miners have talked about simplification and slimmed-down priorities, fertiliser projects have remained in portfolios. BHP started work on Jansen 12 years ago, and the head frame has been a feature of the local landscape for a decade.
Hungry for action
“The irony is Anglo was originally involved with [ICL mine] Boulby in the late 1960s,” says Graham Clarke, chief executive of fertiliser mine developer Emmerson (EML). “They sold it because it didn’t fit the core business, but now fertiliser and agriculture are becoming a lot more people’s core business because of the importance [to the world] and fundamentals that support it.”
Emmerson is an Aim-traded company in the late stages of planning a potash mine in Morocco. Clarke is running the company after spending nine years working on Woodsmith with Sirius Minerals and 20 years at the Boulby mine before that. He says the market “changed forever” after Russia invaded Ukraine, given the trade sanctions it triggered.
Clarke notes that potash had been a very controlled market where a handful of major players had dominated supply for decades, but now there was a clear push for extra supply given the disruption.
BHP’s chief economist, Huw McKay, made this point in the company’s commodities outlook, also published this week. “The immediate impact on potash was larger than most – and the reverberations of the history-shaping events we are living through will certainly continue for years, and plausibly, perhaps decades,” he said.
The grand assumption in the industry is that demand will keep growing along with the global population. For Emmerson, this is a handy trend given the company is based in Africa. Even bringing fertiliser use on the continent up to the level seen in India would increase demand massively.
UK investors also have Congo-focused Kore Potash (KP2) and Canada-based Gensource Potash (GSP) as options.
Potential shareholders should have a high risk tolerance – “On 19 October 2022, the company announced receipt of correspondence from the minister of mines of the Republic of Congo expressing discontent with the progress towards construction of the Kola project. The letter was received following the arrest and subsequent release, without charge, of two senior employees of the company by the Congolese police.”
Kore said it sorted things with the minister in December, and is working on financing the Kola mine.
Emmerson has experienced its own hold-ups, although has had less public bust-ups with its host country.
The sticking point right now is the Moroccan government signing off on an environmental impact assessment, which was expected last year but has not happened yet. There is also an equity element of the project financing, so investors’ holdings will be diluted before construction begins.
Gensource is developing a mine in the heart of potash country, Saskatchewan. It had signed a deal with major agriculture company Helm to hand it a third of its mine in the financing arrangement but dissolved this last month because it “had the effect of creating an unequal ownership structure for incoming investors”.
The scale of these mines is leagues away from the BHP and Anglo plans, but also significantly cheaper and faster to get into production.
BHP will export potash from a Vancouver port, two provinces and 1,000 miles away from the mine, while Emmerson’s plan for its Khemisset mine is to mine and sell smaller volumes from its $400mn operation (pending a capex forecast update in the coming weeks). Government agency UK Export Finance is involved in drumming up $230mn of this cash from export credit agencies, while the rest will come from commercial paper and fresh equity.
This is a slightly fuzzy market for investors used to the hard numbers of iron ore, copper and oil, where growth demand is largely quantifiable (except in wars and pandemics, clearly).
The risk is in a swift return to global markets of Russian and Belarusian supply, but the broader trend is also compelling – since the 1960s, the global population has grown 2.5-fold, crop production is up 3.5-fold and potash demand 4.5-fold. These numbers are from BHP, however, so might need to be taken with a pinch of potash.
