Thursday, July 2, 2015

Sirius Minerals: Financing will be a serious challenge

Sirius Minerals has just received approval for their polyhalite (potash) mine under the North York Moors National Park.

The stock was up about 50 percent yesterday and the market cap is now about half a billion pounds.

Now they have the small matter of financing the mine, building it and operating it to specification.

It is a big project. Here is the corporate video:

The mine is roughly 1500 meters deep and workers need to descend by very long shafts.

The video proposes mining with continuous mining equipment (long-wall coal would be an analogy - but coal is never mined that deep).

Longwall equipment is expensive to maintain.

The rock at York Potash looks pretty hard. Moreover deep mines have all sorts of problems (eg the rock in the wall simply explodes as it is depressurised) and the mines are usually fairly hot.

Deep mining is - usually - difficult and expensive. Hard rock leaves high maintenance costs. [Polyhalite is 3.5 on MOHs scale, a lot harder than coal but not truly hard.]

Still, according to the company and its feasibility study this will be a very low cost mine. The feasibility study gives costs as follows:

Yes, that is USD36.9 per tonne in operating costs. Net of processing at port the cash costs are USD24.9 per tonne.

Now I like to compare this to iron ore operating costs.

Iron ore is pretty simple to mine. It comes in large open cut seams, you don't do much to it and you load it onto trains and then to a port. Moreover it is done on huge scale - hundreds of millions of tonnes per year - which tends to lower cash costs (per tonne) dramatically.

Still York Potash estimated cash costs are about the similar to the West Australian ultra-large very low cost iron ore mines. [The linked Sydney Morning Herald article questions the viability of iron ore mines at prices around $35 per tonne.]

Sure some iron ore mines have lower cost than that - but the cash costs cited here are consistent with mega-scale open cut mining, not mining 1500 meters underground. The cash costs that York Potash suggest are in the range of the lowest cost large scale open-cut mining operations in the world.

The management of Sirius came from Fortescue - a giant Western Australian iron ore mine. So they must have learned something about low cash cost mining.

I am just wondering how they do it. Because without a reasonable explanation as to why this is just so cheap I am not buying it.

Count me out of the financing. Financing and building something that cheap to run is going to be a serious challenge.


PS. There is a mine (Boulby) owned by Israel Chemicals operating about the same depth in the same area. The cash costs are likely to be in the mid-200s per tonne.

PPS. If you want to understand the challenges of mining hard rock really deep this Wall Street Journal story on mining in South Africa is instructive. [The proposed Yorkshire mine is about a third of this depth and probably in less brittle rock so the WSJ story overstates the problems that York Potash might have.]

This South African mine has thousands of staff and removes 6,400 tonnes of hard rock per day. By contrast York Potash intends on removing 35,000 tonnes per day at much lower costs.

Still this is what the WSJ has to say:

A deep mine is a truce that will always break. Mining at depth makes rock unstable. Every day at Mponeng mine they detonate 5,000 pounds of explosives. Every day they take away 6,400 tons of rock. The laws of compressive force dictate that the rock will try to close the spaces left by mining. To prevent this, engineers backfill stopes with rock and concrete. They reduce rock stress at the mining face, "softening" the rock before they blast it by drilling complex patterns around the blasting holes. In one deep mine they "fool the rock" by drilling out six-foot horizontal slots above the stopes. Since stress propagates through rock, but not through space, the empty spaces hinder the transmission of stress. 
In tunnels, yard-long rock bolts anchor the unstable rock on the tunnel roof to the more stable interior of the rock mass. Patterns of rock bolts inserted in clusters are said to "knit" the rock together. Wire mesh and sprayed concrete stabilize the tunnel walls. Seismic sensors in the mine detect tremors at the first twitch, warning men to leave the rock face. 
Earlier the article indicated just how much force rock explodes with:
Some of the rockbursts had been so powerful that other countries, detecting the seismic signature, had suspected South Africa of testing a nuclear bomb. 

Whatever, despite extreme depth and the problems that arise Yorkshire Potash will not be expensive to operate. The feasibility study suggests this is all going to be done for open-cut mine cash costs.


For mine opponents there may be no need to lament the decision to mine. With this sort of financing and engineering requirement I suspect the York Moors National Park is fairly safe.


Anonymous said...

Best comp to look at is a canadian potash mine. They usually operate at about 1000m depth and have striaght mining costs of around $15 per tonne of ore. The floatation, drying and transportation is where it gets expensive.

Anonymous said...

John, Thanks for this. While I enjoy your Herbalife posts, we'd all appreciate reading about your newer thoughts and ideas. Also, write more and tweet less.

John Hempton said...

huh? POT op costs very different

You are out by a factor of 10 at least.

John Hempton said...

or this...

Dmitry Kozlov said...

IDK WTF you are comparing. Open mines to deep mine is, like, grape terroirs and banana plantations. Everyting is different, you can't convert one to other anyways, and such.
I have no problems imagining how open mining costs could get more expensive then deep mining, too. This comparison only dilutes the message, notice that.

All that said, the magic number for deep potash was 100-120 $pt back '10 when I was actually inside. and that magic number had a magic propensity of holding across the globe (e.g. russia, australia, america, you name it).

A lot has changed since then, probably, but I can trust you not to the 40 pt. However, you really should take other deep mining as a benchmark and not open craters.
VERY rough, last time I heard, deep mine coal was like 70-90 $pt '14. so that;s about a starting point, e.g., I am inclined to believe costs above and question costs below.
potash is not coal but close enough.
hope this helps.


Glenn said...

The most common potash mines make MOP (muriate of potash). The ore that is mined out of the ground consists of sylvite (KCl) and halite (NaCl, or rock salt). Some processing is applied to the ore so that the KCl concentration will go above a certain level (e.g. 95%). The Cl part of the final product is sometimes desirable and sometimes undesirable, depending on soil conditions and whether or not the plant is sensitive to chloride.

Sirius' deposit has a 85.7% grade of polyhalite or polysuflate (K2Ca2Mg(SO4) 2H2O). Polyhalite can be converted into SOP (sulfate of potash, K2SO4), which has a higher potassium (K) concentration. SOP provides both potassium and sulfur for plants that need more of both nutrients.

MOP, SOP, and polyhalite all have different market prices. Currently, Sirius' plan seems to sell polyhalite with a future possibility of selling SOP derived from polyhalite. As a fertilizer, polyhalite has its advantages (considered to be organic, good source of S, no chloride) and disadvantages (not a good way of providing K due to weight / low K concentration).

I haven't done much research so I don't know if Sirius' projections about the price it will receive for polyhalite is realistic.

2- There aren't a lot of comps for polyhalite mines. Israel Chemicals, ticker ICL on the NYSE and TLV, provides a small amount of information on its polyhalite (polysulfate) mine. See page 75 of its latest 20-F filing on SEDAR.

It has a potash/KCl mine in North York Moors National Park (Boulby) with first extraction in 1973. A few decades later, it started exploring the potential of the polyhalite layer 150m below the potash deposits. In 2010, the company completed an access decline to the polyhalite layer. In 2012, it started commercial production of polyhalite. Presumably the polyhalite operations have improved economics because it is piggybacking off of the infrastructure of the KCl operations. The very late entry into the polyhalite market suggests that it has only recently become economic despite having the infrastructure in place.

The cash costs and operating costs are unclear to me. The following flyer
suggests that the grade is over 80% polyhalite.

Sirius' deposit is likely part of the same orebody that ICL is extracting.

3- My guess is that Sirius' deposit could very well be cash flow positive if a mine is built, given that the polyhalite extraction at Boulby is currently expanding.

I don't know if Sirius would make back its capex. Unlike Boulby:
- No shared infrastructure with a KCl mine.
- Sirius is planning to build a 35km underground tunnel to transport ore from the mine site to a processing plant. This minimizes the surface disturbance at the nature reserve. However, it will cost a lot more than the pipeline that was originally proposed by Sirius. It will also cost more than the rail option that ICL's Boulby mine uses.

The economic projections provided by Sirius have some obvious problems, such as no contingency. But it could be possible that this turns into a profitable mine??

I'd feel more comfortable shorting some janky mining stock that will obviously have negative cash flow after ramping up production.

4- Unlike the South African gold mines, heat and rockburst should not be problems for Sirius. Subsidence could be a problem. One article on the Boulby mine suggested that subsidence was 0.5M at some places and not a problem. Water is a mine-ending problem for a few KCl/sylvite potash mines.

The Boulby mine will likely use some variation on room and pillar mining, the same technique used for many coal and potash mines. Room and pillar comps would be more relevant than open pit/cut.

Anonymous said...

The West Ridge coal mine in Utah operated a longwall at a depth of 3000 feet. Coal prices in Utah are sub 40 according to the EIA.

Anonymous said...

Re: potash costs - You're not comparing apples with apples - Potash corp costs are quoted in per tonne of MOP, FOB. You mine 5 tonnes of ore which needs to then be wet processed into 1 tonne of MOP, then dryed, granulated and railed 500km to the coast. As far as i understand, Sirius mine 100% product and the port is only 40km away, hence costs are extremely low. Potash corp mining costs (per tonne of ore) are about $15/t.

Anonymous said...

Were the management of Sirius via Fortescue also involved in Anaconda?

Anonymous said...

John, Can you maybe explain how "huge scale" tends to dramatically lower cash costs for iron ore? Thx.

John Hempton said...

Scale = using railways lines to capacity, using ports to capacity etc.

Anonymous said...

The marginal costs of the best deposits of the big iron ore miners, excluding rail, port and overheads, but including ore processing, are about $10/t. Don't know anything about underground mining but this would suggest you are ~250% more expensive underground. I am not saying you position is wrong, but you comparison didn't ring true to me.

Richard Close said...

Hello John - I am a geologist who left the industry and now work in the stock market - having worked as a mining analyst for a large fund manager, I'm now on the sell side.
Firstly, 1500m is not a deep mine and you cant compare it to Sth African deep mines in the Witwatersraand. Pressure does increase with depth but its not a simple linear relationship - its not exponential either but not far off it. Other factors relating to structural geology and rock types complicate it even further. 1500m is a depth that they can cope with fairly easily.
Underground mines and Open cut mines also can't be compared - Underground mining can be much cheaper than open cut - simply because you have to dig less for every unit of mineral you're after - but, again, there are many variables that need to be taken into account.
A comparison with a bulk mineral like iron ore or coal is not possible either. With bulk commodity mining, the economics are completely different and revolve far more around materials movement rather than the actual mining cost. So if you look at the two extremes of this concept - Bulk miners spend so so much capital getting infrastructure for overburden removal correct - and then an enormous amount on rail & ports just to transport it to the customer - they have to move millions of tonnes of material weekly. Whereas a decent sized underground gold mine can take their weekly production from mine gate to refiner in just one helicopter and will have removed no overburden and, relatively speaking, a miniscule amount of waste rock. So, in the Pilbara, geologists & mining engineers aren't as important as the bloke who runs the rail ops or the bloke who looks after port loading ops. At a gold mine though, the mining engineers and geoologists are king.
What I would be looking at when I look at this mine is the big capex items - like the development cost of the shaft - it will be a capital item which will have an amortisation expenses - and then look at similar u/ground mines for operating cash costs, thats probably going to be difficult given the lack of comparable mines. Cheers RC

Anonymous said...

Of no investing significance, but Boulby Mine also hosts some serious scientific stuff btw. The potash has very low radiation levels so is a good place to site sensitive radiation detectors

"Boulby is one of just a handful of facilities world-wide suitable for hosting ultra-low background and deep underground science projects. Boulby is a special place for science - 'a quiet place in the Universe' - where studies can be carried out almost entirely free of interference from natural background radiation. Studies underway at Boulby range from the search for Dark Matter in the Universe, to studies of cosmic rays and climate, astrobiology and life in extreme environments, development of techniques for deep 3D geological monitoring and studies of radioactivity in the environment."

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