July 31, 2013 / 9:18 PM / 4 years ago

Junior potash miners now a tougher sell to investors

5 Min Read

WINNIPEG, Manitoba, July 31 (Reuters) - Changes to how big producers sell potash will likely force a shakeout among junior miners of the key crop nutrient, and even the strongest of them may face delayed investment plans or more expensive fund-raising.

Russian fertilizer giant Uralkali OAO pulled out of its trading partnership with Belarus potash producer Belaruskali on Tuesday and said it will seek to maximize its sales volumes, which it said would result in a 25 percent drop in potash prices to around $300 per tonne.

The partnership, the Belarusian Potash Company, was one of two big trading consortiums that managed potash supply to support prices, and the talk of lower commodity prices hit the shares of some small exploration and development companies harder than it did those of the bigger producers.

"There's still margin to be made, it's just ... only those juniors that can come up with a business model that shows low (expenditures) will be successful," said Evan Shoforost, Saskatchewan mining leader at Ernst & Young, which advises junior miners on issues such as financing and taxation.

He said the change in global market conditions will "filter out" some mine projects. "Some aren't going to survive, I think that's clear."

With Uralkali raising production, and its competitors possibly doing the same, there will likely be less need for the additional potash supplies the juniors seek to bring to market.

Among the juniors, Allana Resources Chief Executive Farhad Abasov said the relatively low cost structure of his company's flagship project in Ethiopia will keep it economical even if potash prices dive, although he acknowledged investors had called, or sold, as they heard the Uralkali news.

Allana stock fell 20 percent on Tuesday, and eased slightly on Wednesday.

"Their main concern is that it's going to be a highly competitive market. How low can the price go?" Abasov said in a telephone interview with Reuters.

Allana, which had a market capitalization of C$126 million ($122 million) at the close of business on Wednesday, expects to raise close to two-thirds of the $642 million cost of its mine by issuing debt, and the remaining one-third from upcoming private equity placements.

"We're hoping that the market will come to its senses in the next few weeks, couple of months, so we can do that equity at a better price," Abasov said.

Allana hopes to start production by early 2016.

Other executives doubt that potash prices will fall as much as Uralkali expects, given that big producers will shutter production before selling at a loss.

But Karnalyte Resources Inc Chief Executive Robin Phinney said a severe potash price drop "would be devastating for any of the guys trying to develop a potash mine".

Karnalyte, which analysts see as one of the junior potash miners with the biggest chance of success, has lost nearly half of its value since Tuesday, and closed at C$2.98 on the Toronto Stock Exchange on Wednesday.

Phinney said Karnalyte will survive because it already has one off-take agreement to sell potash supplies and because its project, in Wynyard, Saskatchewan, will produce magnesium compounds as a secondary line.

The magnesium compounds have a variety of uses including as fire-extinguishing chemicals, while potash is an essential crop nutrient that helps crops grow and resist disease.

Karnalyte hopes to attract a 50 percent partner, but Phinney said the steep drop in the price of the company's shares removes a public equity offering as an option for now.

Vancouver, British Columbia-based Passport Potash Inc , which is developing a project in Arizona, said fears of a sharp price drop are unjustified.

Passport sees more of a regional, than global impact on potash trading from BPC's demise, with Uralkali exercising its advantage shipping into Asia, and Western Hemisphere miners tapping the U.S. and Brazilian markets.

The potash juniors hope to avoid the plight of small gold-mining companies, whose stock has been dragged lower by gold's 20 percent plunge so far this year.

The S&P/TSX Global Gold Index, made up of a mix of senior, mid-tier and junior companies, is down more than 40 percent this year.

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