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Western Australia potash rent subsidies to benefit more advanced projects

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Western Australia potash rent subsidies to benefit more advanced projects

The new rental rate for potash tenements announced by the government of Western Australia will benefit the more advanced projects in the state with funding the various studies to enter production. Meanwhile, the advantages offered to the wider industry may be less easily felt, market watchers say.

The policy change, proposed to bolster the fledgling potash industry in Western Australia, will bring about more than 75.2% of rental relief per year for the potash projects in the state after it takes effect in 2019, based on data compiled by S&P Global Market Intelligence.

Under the new lease rate, the existing annual rental rate of A$18.70 per hectare will change to A$2.32 per hectare in the first five years and A$4.64 from the sixth year onward, according to a Dec. 13 statement by the state.

Humphrey Knight, a potash analyst with consultancy CRU, told S&P Global Market Intelligence that the rental rate change will undoubtedly provide a helping hand to those existing developers and may allow an economically viable potash project to enter production earlier than originally expected. However, Knight said the country's large inland transportation distances and remote locations relative to current key sulfate of potash import markets are still hindering the development of the potash industry.

"We are still many years away from the first commercially produced tonnes of potassium sulfate in Australia and there are challenges ahead that this lease rate change won't affect. ... But this lower lease rate could potentially attract some further interest," Knight added.

According to S&P Global Market Intelligence analysis, the rental subsidies will benefit 15 projects in Western Australia. It is expected to save companies more than A$36.6 million per year for the leases during the first five years and A$31.4 million from the sixth year onward.

Kalium Lakes Ltd.'s late-stage Beyondie project, which aims to enter production in 2020 and is the most advanced of the projects, is expected to save about A$3.9 million with an area of 2,400 square kilometers at first, and A$3.4 million subsequently. Agrimin Ltd., whose late-stage Lake Mackay project covers 4,370 square kilometers, may save about A$7.2 million in the first five years and A$6.1 million from year six. On the other end, smaller projects like Salt Lake Potash Ltd.'s early-stage Lake Ballard may benefit from an annual saving of A$1 million in the first five years and A$880,156 from the sixth year.

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Due to the large scale of the Lake Mackay project, Agrimin had been engaging with the government regarding rental rates. It said in a statement that the new rental rate will result in a "significant" annual saving and that it intends to submit its mining lease application for the project once the reduced rental rate comes into effect in 2019.

CRU's Knight said the proposed change will benefit the more advanced projects with funding the various studies they must undertake to enter production.

Brett Hazelden, managing director and CEO of Kalium Lakes, told S&P Global Market Intelligence that the timing of the reduction is particularly handy because the company is at the project financing stage as it prepares for the construction and production phases of the Beyondie project. However, he does not expect the project to enter production earlier than expected as the reduction will not reduce the time needed for construction.

The company in June signed an offtake term sheet with K+S AG, in which its Beyondie project will supply 75,000 tonnes of sulfate of potash per year to the German fertilizer producer during an initial 10-year term.

"The government and the WA Mines Department have always provided a great deal of assistance to Kalium Lakes. ... The fact that Kalium Lakes working with K+S has provided greater certainty that project finance is achievable," Hazelden also said.

Knight said the government appears to have realized that these projects are different to conventional mining projects like gold, copper and nickel, and that they generally require much larger lease areas. "Interest in Australian SOP projects has undoubtedly been growing and some are advancing rapidly. ... [i]f an experienced industry participant like K+S believes one of these projects may be economically viable, then the Australian government is clearly listening to that message and attempting to provide assistance."

The state government also said the rent relief is expected generate more sustained job opportunities as potash projects generally have a relatively longer mine life.

Kalium's Hazelden said he believes the government is looking to diversify its mining revenues across multiple commodities by introducing a new rental rate, which in turn offers more jobs across more mines and protects the state from the impact of downturns in specific commodities over time.