The potash market has always been an interesting one – just look at the excitement generated by Sirius Minerals. The potash distribution and supply chain is experiencing some short term disruption, especially in Asia, where we are seeing marine traffic authorities, ports and private industries battling to deal with government regulations.
When we look at the Asian potash supply situation it is tough to gauge what demand is going to look like, even six months out. In Europe potash production has been less impacted, as it has been deemed an essential industry by many countries.
In the US however, we could see some disruption; demand from some locations is expected to quickly exhaust carryover volumes and we could see tight market conditions, especially in inland areas.
More potash projects are coming online to meet demand, and the more interesting ones are those able to supply the higher quality ‘sulphate of potash’ (SOP), which trades at around US$500-650/ton. This is typically used for premium quality crops like fruit and tomatoes. SOP pricing has remained relatrively stable with the global market growing at a 10 year CAGR of 5.7%. As a commodity it enjoys a very low level of price volatility.
Salt Lake Potash is working on a large new site in Western Australia
Australian potash specialist Salt Lake Potash [LSE:SO4] is planning to bring a new source of SOP online which it wants to sell as a premium grade to quality SOP. This includes high potassium low chloride standard powder and fertigation high grade potassium. It has signed binding term sheets with five leading distributors and over 90% of planned production has been committed for five and 10 year terms.
Among the distributors are Unifert, with has signed up for 60,000 tpa and Helm, which is in for 50,000 tpa.
The Salt Lake Potash Lake Way development in Australia is looking at EBITDA of A$111 million per annum with a 28% IRR post tax. It has already commissioned its stage 1 evaporation ponds and expects to be delivering harvested salts to plant in 2021. Process plant construction is expected to be complete by the end of the year.
Delivery agreements and expansion plans
We like the fact that Salt Lake Potash already has its delivery agreements in place for what looks to be a fairly premium product in the potash space. This is topped off by the fact that there are ambitious plans for expansion to eight other lake sites that exist in Western Australia in the region of Leonora and Menzies. Several lakes have access to good energy, transport and infrastructure, which will keep capex down should they prove fruitful. Indeed Salt Lake Potash is already involved in exploration at Lake Ballard and Lake Marmion.
Latest exploration news, as of the end of last month, has confirmed plant feed grades and premium quality SOP for end user customers from the original Lake Way area (Kainite harvest ponds). The bulk sample confirms the Lake Way operation is precipitating plant feed harvest salts suitable for conversion to premium quality SOP.
Share price and what to look out for
Following a predictable drop in the Salt Lake Potash share price from 39p to close to 15p during the COVID-19 crisis, we have seen gradual uptake in the stock, leading to a rise from 17p on 23 April to 32p on 29 May. There has been a slight decline with no further news flow since then.Shares closed just above 30p on 9 June.
The company has a 52 week high of 49p and that is prior to actual production. Prospective investors should be focused on further results on the quality of the SOP readings from the Lake Way site for the time being and any further announcement on the timetabling of production currently scheduled for Q1.