Start-up costs at UK potash mine slashed by $1bn

The extensive potash mine that Sirius Minerals is developing in the UK is to come $1bn cheaper after the group decided to sell ore in raw form, rather than processing it as traditional operators do.

Sirius Minerals cut to $1.7bn, from $2.7bn, the development cost of its York potash project in the north of England by saying it will sell the ore it produces as unrefined polyhalite, rather than as the sulphate of potash it had initially intended.

While potassium is more typically delivered as sulphate of potash, or muriate of potash, the polyhalite that the mine produces can be sold as a direct application fertilizer - containing additional nutrients calcium and magnesium, as well as sulphur –besides being a raw material for other nutrients.

"This simplified development approach delivers a significantly lower capital cost to achieve first production and materially reduces our initial financing requirements," Chris Fraser, the Sirius chief executive, said.

It would also enable launch of production a year earlier, in 2016.

Big potential?

The group, although saying it would consider further processing into sulphate of potash in the future, said that its initial strategy was to sell polyhalite in granular form "on a large scale".

The combined world market for fertilizers containing similar nutrients to polyhalite, which is itself "currently sold as a specialty fertilizer in small volumes in Europe", was 20m tonnes a year, and expected to grow to 27 tonnes a year by 2010.

Polyhalite was also suitable as an ingredient of multi-nutrient fertilizers, known as NPK, containing nitrogen and phosphorus as well as potassium, Sirius said.

The group is also considering its own NPK plant, which would take some 1m tonnes of polyhalite, allowing for production of up to 5m tonnes a year of the compound fertilizer.

However, the start-up bill has been lowered here too by relaying initially on truck delivery of the other NPK ingredients, rather than building dedicated shipping infrastructure, if at the price of raising annual operating costs by some $23 a tonne of fertilizer produced.

'Key positive'

The importance of cutting costs in fertilizer projects, especially on greenfield sites for which start-up bills are typically higher than for site expansions, has been given extra significance by the large amount of potash capacity is due to come onstream, questioning the viability of some projects.

Credit Suisse last month questioned whether forecasts of 3-5% growth in potash demand "are too optimistic" given a "disconcerting" lack of expansion in the market since 2007.

"To see negative growth in a period of strong, albeit volatile, grain prices suggest to us that… there is lack of understanding of the merits of using potash in some developing markets, where the growth is supposed to come from," the bank said.

Jefferies analyst Seth Rosenfeld said on Monday: "In light of the significant challenges Sirius may face financing a project of this scale, any efforts to reduce capital expenditure are a key positive."

Nonetheless, Sirius Minerals shares closed unchanged at 21.75p.

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