Could the UK’s most ambitious mining project really be over before production has even begun?
Sirius Minerals has spent the past three years drumming up interest in its £4bn Woodsmith project under the North York Moors National Park. The firm is building two mile-deep shafts to access what it claims is the world’s largest and highest-grade deposit of polyhalite, a naturally occurring mineral containing potassium, magnesium, calcium and sulphur that can be processed into fertiliser.
Sirius is also constructing a 23-mile-long tunnel to house a conveyor belt to transport chipped pieces of rock to a port on Teesside, where it will be crushed and processed into fine granules for farmers to spread on crops. At first, all seemed well. Sirius’ share price hit a 44p high in 2016 after 85,000 retail investors ploughed their savings into the project in the hope it would create 1,000 permanent jobs.
Sirius announced it had entered into talks with the Infrastructure and Projects Authority, part of HM Treasury, about providing funding. Polyhalite production from Woodsmith was pencilled in for 2021.
Then, in September, what had appeared to be a visionary, viable project began to look increasingly like hubris after Sirius pulled the plug on a planned £400m bond sale, blaming market conditions aggravated by uncertainty over Brexit. The funds were required to unlock a $2.5bn revolving credit facility from JP Morgan that would have provided the bulk of the project’s financing for the mine.
At the time of writing, Sirius is considering raising more funding through the debt markets or bringing in a joint venture partner. The Yorkshire potash miner has dropped out of the FTSE 250 index and shares in the firm have fallen by 87% in the past 12 months.
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What is polyhalite and how is it superior to other fertilisers?
The company’s well-publicised travails have focused attention on the viability of polyhalite mining and the credibility of claims that the mineral is significantly superior to existing potash fertilisers.
“It is important to note that some of the claims that polyhalite is superior to existing fertilisers are very questionable,” states Humphrey Knight, potash analyst at business intelligence company CRU.
“Polyhalite has been known about for decades but until recently it has often been dismissed for use as a fertiliser due to its low potassium content, and also because it is harder and denser, making it more difficult to mine than other key potassium-bearing minerals,” he adds.
Potash is a catch-all term for a range of potassium-bearing minerals that are employed as fertilisers, the most common being potassium chloride (MOP), which contains the most potassium (K2O) of any potash fertiliser (60–62%) and at present accounts for around 90% of their use worldwide.
However, the high chloride content of MOP can be a problem for certain crop types or growing conditions, and consumers that require low-chloride potassium therefore tend to use potassium sulphate (SOP), which accounts for around 6-7% of the potash market. The differences in market sizes alone indicates that low-chloride potash is not currently a large part of the fertiliser sector.
Then, there is another subset of potash fertilisers known as potassium magnesium fertilisers (or SOPM fertilisers), of which polyhalite is one. Total demand for such products is currently limited.
“SOPM products account for around 2–3% of the total potash fertiliser market and polyhalite alone for less than 1% of the total potash market,” says Knight. “Polyhalite contains only 14% K2O, making it an inefficient way of delivering potassium. There is the benefit of magnesium, and sulphur as well, but with other, more efficient sources available, global demand for magnesium as a fertiliser is very small, while sulphur is already available in a very wide range of fertilisers, many of which are cheap.
“In short, polyhalite may be useful when potassium, magnesium and sulphur are required, but the number of consumers that need all these three nutrients, and in large volumes, is very small indeed.
“Polyhalite may also have some benefit in nutrient delivery due to its lower solubility but that can also present problems with making nutrients available to plants and in areas with lower rainfall.”
Market forces: inside Sirius Minerals’ polyhalite project
To date, the world’s only producer of polyhalite is Israel’s ICL, whose UK subsidiary Cleveland Potash uses the mineral as a source of low-chloride potassium for its internal NPK and PK product range, as well as selling the mineral directly under the brand name PolySulphate for use as a field fertiliser.
“It is important to note that the sales from ICL UK’s Boulby mine represent the entirety of the global polyhalite market,” says Knight. “However, Sirius Minerals’ planned production of over 10 million tonnes per year is more than 30 times (or 3,000%) the global market size for polyhalite in 2018.”
On a positive note, the global polyhalite market appears to have been growing since sales began in 2012; however, as Knight points out, these still remain well below one million tonnes per year.
“Considering Sirius Minerals wants to sell potentially as much as 13–14 times (maybe even 20 times) as much as that, it would almost certainly take the company a very long time to develop that kind of market size, while maintaining profitability throughout,” he says. “Sirius’ ramp-up schedule is very aggressive and the company wants to be at nearly full production within only a few years of start-up.
“That could prove highly disruptive to existing fertiliser markets in terms of pricing and, in CRU’s view, the company would face intense competition from incumbent producers.”
Although not yet in production, Sirius has offtake contracts with customers in Africa, Brazil, Europe, India and the US, which it says have the potential to generate billions. Knight is sceptical, however.
“It is true the company has extensive offtake agreements but it’s really not clear how these would realistically be implemented on the scale that many of them stipulate and at the price level Sirius claims to have agreed at,” he says.
Onwards and downwards? What next for Woodsmith?
So, what now for Sirius Minerals and Woodsmith, set to be the world’s largest polyhalite mine?
The firm has since gone back to the government for support to allow it to issue $1bn of guaranteed bonds, but was turned down. A spokesman for Prime Minister Boris Johnson said any request for financing had to weigh “the potential of a project against the need to protect taxpayers’ money”.
Sirius insists the project still has potential, claiming that while set-up costs may be significant, the mine, once constructed, would be cheap to run. As of September, Sirius has £180m in “unrestricted cash”, of which £117m is “uncommitted capital”. In other words, not enough to develop the play.
However, the company will not be insolvent over the six months it is taking to complete a strategic review of Woodsmith, and has said publically that it is considering either raising additional funding through the debt markets or by bringing in a strategic investor.
A spokesman for the company said in October: “Our focus is on completing our strategic review, and unlocking the value of our project for our shareholders, our community, and the UK as a whole.”