Jan 062012

By Teri Walker–

A company exploring the development of a potash mining operation in the Holbrook Basin, east of Holbrook, has received a favorable preliminary economic analysis suggesting it could count on being competitive in the global potash mining industry.

Prospect Global Resources Inc., the parent company of American West Potash of Denver, filed its preliminary economic analysis with the U.S. Securities and Exchange Commission on Dec. 21.

“We are very pleased that we can be very competitive in the global market,” said American West CEO Pat Avery.

TetraTech, an engineering, renewable energy and construction services consulting firm, prepared the report, which estimates American West will outlay a $1.33 billion capital investment to develop a mine in the Holbrook Basin.

“This was lower than our estimate,” said Avery. “It is our observation that many management teams claim the very low end of a capital estimate hoping to draw attention and get people excited about the project. Down the road, they increase the capital cost to more accurate levels. This always hurts credibility.”

American West has mineral leases for nearly 94,000 acres of land in the basin, including a mix of private and state lands.

TetraTech estimates American West’s operating costs will be about $98 per metric tonne.

“For the last six months, we calculated approximately $120 to $125 per metric tonne ‘inside the fence,’” said Avery, referring to all mining, lifting, surface processing, on-site product storage and plant management.

Avery references public company reports when he explains it’s estimated that the best Canadian plants, which are leaders in the potash industry, are in the $85 to $95 per metric tonne operating cost range, with “good” plants sitting at about $95 to $110, and older, higher cost plants in Canada and the U.S. at the $110 to $150 range.

Added to the “inside the fence” costs are external expenses including freight, royalties, taxes and management overhead, with the final cost for finishing and delivering the potash about $200 per metric tonne.

Recent contracts for potash include prices ranging from $520 to $550 per tonne, according to Potash News, Investing, providing an ample profit margin for American West’s operation.

The mining company expects to withdraw about two million tons of potash from its land holdings annually, and will develop a mine plan to accommodate that level of extraction.

At that rate of extraction and based on current market values, TetraTech predicts American West could pay back the cost of mine development in just over two years.

“What I’m so pleased about is even if the costs go up $5 or $6 or so, we are still very competitive,” said Avery.

TetraTech’s estimates are presented with a margin of error of 20 to 35 percent.

“Even with upward cost pressures, we are highly competitive,” said Avery.

Mining in the Holbrook Basin will be the first potash production in the state. Currently, three companies are exploring in the basin, including American West Potash, Passport Potash and HNZ Potash.

The TetraTech preliminary assessment assumes the development of a conventional underground mining facility. The estimated capital costs include exploration; a feasibility study; engineering, procurement and construction management; mine access by a vertical shaft; the underground mine facility; a processing plant; product storage and load out facilities; a tailings storage facility; water supply; environmental studies and permitting costs; surface infrastructure; and the owner’s costs.

The $1.33 billion capital costs are estimated over the initial three-year pre-production period. Additional incremental operating or sustaining capital will be required over the 40-year mine life and is estimated at a total cost of approximately $643 million.

TetraTech explained that the intent of the economic analysis at this stage is to evaluate the preliminary economic potential of the company’s potash deposit by giving consideration to costs for infrastructure, mining, mineral processing, available potash markets and selling costs along with a scoping study mine plan for revenue generation.

Looking at the global market, TetraTech reports that potash production is based on extraction from about a dozen countries, with Canada, Belarus, Russia, China, Germany, Israel and Jordan accounting for almost 90 percent of the world’s potash production. Consumption, however, is virtually universal. More than 80 percent of the potash produced is exported to major fertilizer consumers such as China, the United States, Brazil and India.

TetraTech expects the demand for potash to remain strong.

“With the post-recession recovery in potash demand, the global potash market has turned tight and additional capacity is needed to satisfy the fast growing demand in major consuming countries like China, India and Brazil,” the firm’s analysis noted.

“Approximately 95 percent of the potash produced worldwide is used as agricultural fertilizer. There is no substitute as a fertilizer. It is critical to the world’s food supply with the main crops utilizing potash being grains, fruits and vegetables, oilseeds and sugar.

“As the world population grows by about 75 million per year–mainly in China, India and other developing nations–the demand for food increases, and as incomes grow the consumer’s average daily caloric intake increases as the diet changes from vegetables and grains to meat (livestock consumes 10 times the fertilizer used to produce its feed). This encourages the planting of increased acreage and the desire for higher yields per acre through increased fertilizer applications. For the 15 years before the economic turndown of 2008, global potash consumption increased by about three percent per year, which is expected to continue.

“Asia accounts for more than 40 percent of the world’s potash consumption followed by North America (mainly the United States) with 18 percent, and Latin America with 17 percent.”

Avery says American West expects to divide its potash about evenly between a domestic and international customer base. Domestically, he expects to market about 50 percent of his product to the Western U.S. and northern Mexico, with the other 50 percent going overseas, and the majority of that heading to India, China and Southeast Asia.

Avery said American West has already begun proceeding with the recommendations presented in TetraTech’s preliminary economic analysis: The company is continuing additional drilling, proceeding with a bank feasibility study, and initiating mine planning, engineering, environmental review and permitting.

Avery has said he anticipates beginning the permitting process in March 2012, with the potential for breaking ground on a mine in late 2013 and beginning operations in 2014.