Phosphate plays weathering the financial storm - Part One

By Jennifer Perry

With prices jumping from $US45 tonne in 2005 to $US450 tonne in 2008, last year was a good one for phosphate. Spurred on by food demand growth in developing economies and the subsequent need for phosphate fertilisers, strong demand for phosphate rock saw many companies in Australia dust off old plans for phosphate mines and greenfields explorers tout potential discoveries.
This year, things have changed; like most commodities, the global economic downturn has impacted the phosphate industry. Prices have softened, demand weakened and project finance is more difficult to come by. Still, there are number of phosphate projects in Australia that continue to move forward, albeit at a slower rate compared to last year, and there are many in the industry that remain positive about the commodity’s future.
With a step-down in aggregate demand in 2008/09 of nearly 10 per cent, according to Andy Jung of British Sulphur Consultants, a division of CRU, the benchmark Moroccan product has declined from peak spot market pricing of more than $US400 per tonne in mid-2008, down to around $US200-250 tonne at the start of 2009, and around $US150 tonne during March 2009.
“Our expectation is that by the second half of the year, the price will be around $US120-150 tonne,” Jung said.
While the deterioration of prices has certainly made life much more difficult for Australian phosphate projects, Jung said it is the smaller projects or those with only marginal quality reserves that have been primarily impacted.
“Most of the junior mining companies are not advancing their projects any longer or are doing so very slowly,” Jung said, “But that would have happened to most of them anyway due to the marginal nature of their projects.”
“The more serious new entrants understood that prices would eventually be likely to fall below $US100 tonne, and they knew that they had to build their financial models around that.
“The two most well-known projects, Minemakers and Legend International Holdings continue to advance their projects, albeit somewhat slower and with slightly different business models,” Jung said.
Jung believes that Legend is probably in the best position because of its relationship with IFFCO – an international buyer of phosphate rock and India’s largest fertiliser seller. Legend secured a long-term association with IFFCO to supply five million tonnes of rock phosphate per year from its Lady Annie and D-Tree projects.
“We are one of the few new projects that are being developed instead of being closed in the Mt Isa region,” Legend’s chief executive officer Joseph Gutnick said.
“I hope that by the time we start producing the market will pick up,” Gutnick said, “Though IFFCO are committed to take all our rock and we have all types of contractual agreements with them that if prices are low we are pretty secure in our sales to them and at the levels of $US200 we are still profitable so we are moving our project ahead as quickly as we can.”
The company intends to start shipping rock at the end of 2009.

Minemakers on acquisition trail
Australian-listed company Minemakers has Africa-focused Bonaparte Diamond Mines in its sights. But it looks like it may have competition from Bonaparte’s joint venture partner in the Sandpiper-Meob phosphate joint venture in Namibia, Brisbane-based Union Resources Limited.
Minemakers, which is developing the Wonarah rock phosphate project in the Northern Territory, sees its takeover target as a logical fit its portfolio.
“It would give us diversification in both deposit style and geographic location and therefore markets,” said Neville Bergin, general manager-projects development.
“We see the Bonaparte resource being developed using cashflow from Wonarah...[A] strategy [that] will keep us very much focused on Wonarah to ensure that it enters production and starts generating cash as soon as possible…looking longer term, we see the acquisition as part of our development as a world force in rock phosphate.”
Earlier this year the board of Bonaparte Diamond Mines recommended shareholders accept Minemakers’ $A9.1 million scrip offer, for all of Bonaparte’s issued shares, offering one Minemakers’ share for every 10 Bonaparte shares.
Since then Minemakers has been increasing its stake in Bonaparte. Despite this, Union Resources is progressing with a takeover proposal after securing conditional underwriting for a $A4 million rights issue.
Union said there is an “unassailable logic” to combining with Bonaparte and it is the best way to develop the Sandpiper-Meob project, which it holds with Bonaparte (each owning a 42.5 per cent stake); with the remaining 15 per cent held by Namibian-based Tungeni Investments.
The project incorporates an area of some 8,000 square kilometres in granted licences and licence applications covering the core of the regional phosphate province to the south of Walvis Bay.
Bonaparte announced has announced a cumulative Indicated Mineral Resource estimate for the three primary tenements in the Joint Venture area at some 789.5 Mt comprising 611.1 Mt at 18.1 per cent (from gravity cores samples) and 178.4 Mt at 15.6 per cent P2O5 (from grab samples)
Neville Bergin told The Australian Journal of Mining that from the levels of enquiry the company is receiving, there is certainly still significant demand for rock phosphate; he believes that demand and therefore prices will only increase as the world struggles to feed itself.
The company has more than quadrupled its Main Zone deposit resource estimate; it jumped from 72 million tonnes at 23 per cent phosphate to 330Mt at 18.9 per cent phosphate at a 15 per cent lower grade cut-off.
In combination with the Arruwurra deposit, the Wonarah project has a total of 461Mt at 18.8 per cent phosphate that makes it the largest JORC compliant phosphate rock resource in Australia.
With capital costs estimated at $A107 million, production is scheduled to commence in the second quarter of calendar 2010, with the company expecting to start production at a rate of about 1Mtpa increasing to 3Mtpa over a period of 18 to 24 months, though Minemakers are looking to accelerate this based on customer demand.

To read the final part of this report, click here.