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Market:	TSX
Sector:	General Mining
Epic:	TSX-ALM
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Web Site:	Anglo Potash
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Anglo Potash: An emerging potash manufacturer with assets around Potash Corporation in Saskatchewan in partnership with BHP Billiton

by Sam Kiri

Anglo Minerals is engaged in the development and exploration of Saskatchewan's first potash mine in almost 40 years. In fact, the world’s last operating mine was constructed in 1982.  Contrary to the rapid expansion phenomenon that characterises the resources industry of modern times, Anglo Minerals’ corporate strategy was to amass a significant land position with subsurface potash mineral permits and then to partner with a company that has extensive mining expertise to see a project of this size and complexity through to fruition.  By June 2006, Anglo Minerals had accumulated approximately 1.6 million acres (see yellow on map) in what is believed to be the world’s largest landholdings perspective for potash and partnered it with the world’s largest and most diversified mining company, BHP Billiton.  

According to the Saskatchewan Potash JV agreement, BHP Billiton will be the operator with 75% project ownership and is required to spend up to US$40 million by the end of 2011 to complete a bankable feasibility study on the project. Anglo Minerals will own the remaining 25%. The JV covers all current and future acquired permitable potash land in Saskatchewan. Anglo Minerals is "carried" by BHP Billiton for the first US$40 million spent by the JV on the project or until feasibility study is completed.
 
If one needs an assurance of project prospects the partnership with BHP Billiton itself speaks volumes. BHP Billiton’s commitment to the project indicates the optimism it shares with Anglo Mineral. Having developed mines on every continent BHP Billiton brings its vast mining expertise to the table. With the world’s largest mining company undertaking the development efforts including funding, the investment case of Anglo Minerals is indeed irrefutable.

The JV has a tremendous amount of information gathered so far on its potash ore body.  Over its entire land position there is a 256 drill hole data base that contains core samples and seismic information.  Prior to partnering with BHP Billiton, Anglo Minerals has also completed two NI 43-101 compliant technical reports. These two reports show measured and indicated extractable potash ore resources of 479 million tonnes and 981 million tonnes of inferred resources.  Readers would be delighted to know that the above resource estimates cover only 6-7% of Anglo Minerals land position!

	Measured & Indicated	Inferred	Total
Extractable Potash Ore*	479	981	1460
Nutrient Tonnes (K2O = 26.2%)	125	257	383
Product Tonnes (KCl = 61% K2O)	206	421	627
Anglo's Share	51	105	157
Product Price ($/Tonne)**	$285	$285	$285
Estimated Total In Situ Value***	$14,659	$30,021	$44,680

   Source: Fertecon
* Net of a 25% deduction for unidentified mining-level anomalies and the application of a 40% extraction ratio.
** Average FOB Vancouver standard potash price 2007-2020.
*** More work is needed to qualify this resource as mineable; therefore, the estimated total in situ value of the resource is purely speculative at this time.

The Potash Industry - Fundamentals are overwhelmingly positive
Demand for potash is driven by the agriculture super-cycle. Over 90% of global potash production is used as fertilizer to assist farmers to grow crops that feed and fuel the world. Potash fertilizer is essential for plant growth and there is no substitute.  Demand for fertilizer is positively correlated with growing populations and economies...more people eat more food. The rising proportion of affluent population in fast growing economies such as China and India is driving the demand not only for more food, but also for better quality, high protein food such as meat.  PotashCorp (PCS) estimates that a third of each new dollar earned by people in these countries is spent on food, particularly protein rich food such as meat.

General population growth and rising incomes have resulted in over 170 million tonnes of additional meat being consumed per annum globally in the last 40 years. Much of the growth has actually come from the developing world. For instance, growth in meat consumption in developed countries during this period has been 5-6% per annum compared to just 2% per annum in developed countries, a trend that is expected to continue.

To produce meat you have to feed animals grain – lots of it.  This is significant for the potash industry, because it takes several kilograms of grain to produce just one kilogram of meat.  As such, more grain will need to be grown on the world’s limited arable land acreage which is declining on a per capita basis as the global population increases and urbanization gathers pace.  Basically, every acre of arable land will need to become more productive. Farmers therefore are required to fertilize at scientifically recommended levels, a practice yet to be followed by the developing world.

Although not as profound as the change in dietary habits of the developing world to the agriculture super-cycle, the growing popularity of bio-fuels such as ethanol has also contributed to the increase in grain and oilseed demand. Corn is the main feedstock for ethanol production. In 2005, around 1.6 billion bushels, or 14 percent of the US corn crop was used in ethanol production.  By 2007, 30 percent, or 4.3 billion bushels is expected to be used for ethanol production. From a global perspective, world ethanol production has increased threefold over the past six years. As bio-fuels emerge as an alternative to expensive fossil fuels, fertilizer use to increase grain and oilseed yields is expected to drive potash prices to even higher levels.

Sustainability of industry positives is beyond doubt as global grain stocks have reached the lowest levels in modern history with a stock-to-use ratio of 15.3%.  This is driving grain prices up and is signalling farmers that more production is needed.  As the land suitable for agriculture declines and grain stocks get tighter due to increased demand, the need for higher crop yields gain eloquence further emphasizing the need for the increased use of fertilizer at recommended levels. 

Developing countries are fast recognising the need to consume more potash to ensure higher yields.  China, India and Brazil – three developing countries with heavy fertilizer consumption – have been under applying potash fertilizer for years, depleting nutrient content in their soils.  For instance, based on 2005 acreage, China, India and Brazil consumed 21 million tonnes of potash fertilizer, which was only 42% of the recommended level.  To put this 29 million tonne short-fall into perspective, it is equivalent to over 14, two million tonne a year greenfield potash mines. Similar examples are wide spread through out the developing world.

Strong industry fundamentals have certainly helped PCS. Sales of potash over the last 10 years have increased 45% from just 2.7 million tonnes in 1996. Barring a minor dip in 2005 and 2006 due to higher energy input costs, drought and lower commodity prices, margins have also been on the rise.  Gross margins per tonne of potash for instance have increased from a low of $34 in 1996 to almost $87 in 2005 (or 47% gross margin), representing a 152 percent gain.  Higher margins further confirm rising potash prices and a tightening potash market.  PCS indicates that they expect their potash margin growth to continue into the future up to $300 per tonne as they sell more potash at higher prices.

Higher potash prices are expected to continue as the yearly supply growth lags behind the demand growth. The current annual demand growth at 3-4% is equivalent to almost a new 2 million tonne mine.  The industry has high entry barriers such as limited availability of quality mineable ore bodies around the world and high capital requirement to develop new mines.  Potash is one of the world’s most scarce resources.  Currently, only 12 countries produce potash, but consumed in over 150. Saskatchewan accounts for almost half of world’s potash reserves, over a third of global potash production and is considered to have the best potash deposits.  The global potash industry has few producers with the top ten accounting for over 95 percent of the production.  In addition, several of the producers in Canada and the former Soviet Union market their production under two separate marketing companies.  In Canada, the Saskatchewan potash marketing company or Canpotex is owned by the province’s three potash producers: PCS, Mosaic and Agrium.  PCS, being the largest producer with approximately 22 percent of global capacity, is able to influence market price through its strategy of matching its supply to demand through temporarily curtailing its production during slow times.  This strategy has essentially de-commoditized potash.  Anglo Minerals together with BHP Billiton appears to be on its way to joining a prestigious club.

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