Australia's potash players optimistic on market despite 1st movers' setbacks

Australian producers of sulfate of potash, or SOP, are applying lessons learned from setbacks experienced by the industry's first movers to capitalize on a "cracking macro story" of increasing demand and soaring prices.

The share prices of five out of Australia's seven SOP companies ended up in negative territory in the two-year period prior to Feb. 8, according to S&P Global Market Intelligence data. The setbacks have damaged investor confidence, as one company went bust and another had to undertake an emergency fundraising to cover a capital overrun.

Sulfate of potash, also known as potassium sulfate, is an inorganic compound that is commonly used in fertilizers to provide potassium and sulfur.

Development challenges

Kalium Lakes Ltd. became Australia's first SOP producer in October 2021, but not before a A$61 million raise in May 2020 to cover cost blowouts at its West Australian Beyondie project when it was 40% complete and A$100 million had already been incurred.

The company attributed the cost overrun to process plant design changes, saying in May 2020 that it had underestimated the involvement in using a German-based design in the Western Australian desert, as well as unforeseen insurance costs after two cyclone events. It also flagged operational issues including lower-than-expected brine extraction rates, as well as increased gas pipeline costs.

Kalium Lakes' share price fell 70.3% in the two years prior to Feb. 8, but the company managed to raise A$50 million and restructured its debt to fund expansion plans in October 2021, the same month another local player, Salt Lake Potash Ltd., declared itself insolvent.

Salt Lake said July 1, 2021, that it expected the first SOP product from its Lake Way project within weeks. However, less than a month later, the company said it was revising its ramp-up strategy, partly due to reclassified lower-grade inventories being deemed unsuitable for plant feed during the ramp-up period.

These events "made the market nervous," Trigg Mining Ltd. Managing Director Keren Paterson said in an interview. "However, that doesn't take away that there is an industry that needs to be developed in Australia which imports all its potash needs, and with COVID-19 we're seeing just how disrupted logistics can be, and supply."

Trigg Mining's stock managed to rise 82.43% over the two-year period prior to Feb. 8 but fell 33.3% in the 12 months before that date. In an interview, Paterson described the company as a "second mover — absorbing those learnings and ensuring we build them into our project, and get it right."

Australian Potash Ltd.'s shares fell 32.22% over the two years to Feb. 8, despite securing a A$140 million loan for its Lake Wells SOP project in Western Australia in March 2021. Similarly, Western Australia's other SOP hopefuls Agrimin Ltd. and Reward Minerals Ltd. dropped 21.71% and 26.71%, respectively.

The share price hits were "a function of the market broadly concerned about companies not producing earnings or positive cash flow at this point in their life," Joh Snyman, a senior analyst with equity research firm Corporate Connect, said in an interview.

While developers of battery metal projects have enjoyed huge market capitalization growth on the back of soaring commodity prices, investors are looking harder for tangible gains with SOP companies, as the industry and the technology involved are new, Snyman said.

"I would hope that, as Kalium Lakes progresses and gets into cash flow, some of that will rub off on other players in the market and help their share prices," Snyman said.

Australia's potash exploration spending took a major hit in 2021, falling by more than half to US$15.3 million from US$39.9 million in 2020, according to Market Intelligence data.

"Sedimentary deposits differ from hard rock deposits in exploration. Once you have defined your sedimentary basin, there's generally little exploration left to do and basins follow more predictable deposit forms," Market Intelligence principal research analyst Kevin Murphy said in an email interview.

Cracking market

Though the SOP process has proven "a lot more difficult" than the market expected, it has a "cracking macro story" given strong fertilizer prices, Canaccord Genuity equity analyst James Bullen said in an interview.

SOP prices rose 66% in the 12 months preceding Jan. 17, according to a recent presentation from Trigg Mining, which has launched a pre-feasibility study for its Lake Throssell project, with an investment decision due in 2025 ahead of first production by 2027.

This confidence, along with broader equity market strength, attributed to BCI Minerals Ltd.'s share price soaring 158.52% in the two years to Feb. 8. The company completed a A$1.2 billion funding package for its Mardie salt-potash project in November 2021 and acquired 15% of Agrimin as part of the deal.

The price of muriate of potash, or MOP, a cheaper and more abundant source of potash, has risen 194% over the same period, according to Trigg Mining. Lithium is the only mining commodity to have risen more.

"Half of MOP is chloride, which is detrimental to soil health and crops, yet it's a 70 [million tonnes-per-year] market globally, while SOP is 7 Mt/y, but we can substitute the MOP with SOP and have a much better environmental outcome in the soil because SOP is providing only the nutrients plants need, and no detrimental elements," Paterson said.