The Mosaic Co. said Jan. 24 that it recently identified a new saturated brine inflow located approximately 7,500 feet from its existing brine inflow management area in a mined-out area at its Esterhazy, Sask., potash mines.
Mosaic is continuing to evaluate the new inflow, but does not currently expect any impact on fiscal 2007 production from Esterhazy’s K1 and K2 mines. Mosaic estimates that the mitigation efforts to address the brine inflow will cost in the range of $20-$40 million in its fiscal year ending May 31, 2007, a portion of which is expected to be capitalized. This is in addition to the expenditures that had already been budgeted for managing Esterhazy’s existing brine inflow area.
“We have been successfully managing brine inflow issues at our Esterhazy mines for over two decades,” said James Prokopanko, Mosaic president and CEO. “The recent data collected suggests that the new inflow could be at the rate of 20,000 to 25,000 gallons per minute, which is significantly greater than inflows we’ve previously experienced at Esterhazy and warrants aggressive mitigation efforts. Our mitigation teams have been deployed and, based on prior success in treating other inflows, we are optimistic that the new inflow can be mitigated successfully through pumping, grouting and other measures.”
In addition, Mosaic plans on increasing its existing pumping capacity of 6,000 gpm to assist in the mitigation.
Mosaic said it first observed a decline in well pressure, which was the first sign of an increased inflow of brine, during the second week of December 2006. It said the inflow appeared to be similar to historical inflows that have been successfully remediated, but that recent data indicates a more substantial inflow (20,000-25,000 gpm), which is in the “old workings” area of the K2 mine, and larger than past inflows (10,000-15,000 gpm). The same mine had a fire about this time last year (GM Feb. 6, p. 8).
Mosaic began to have saturated brine inflows at Esterhazy in 1985. Since that time the company has been managing brine inflow areas as part of its ongoing operations. Without abatement, and assuming current estimates to be accurate, the company has storage capacity to handle the new brine inflow for several months without adversely affecting production at Esterhazy.
Mosaic said that it is optimistic that the new inflow can be mitigated; however, it noted that with any underground mine, there are many unpredictable variables in treating inflow areas, and if not successful, the mine could flood.
Mosaic said potash production will continue while the inflow is treated, and shipments from Esterhazy are expected to continue at normal levels.
The Esterhazy mines, which recently completed a 400,000 metric mt expansion, have an annual production capacity of approximately 4.3 million metric mt. Actual annual production averaged 3.8 million mt/y during the years 2002-2005.
One industry veteran downplayed the need for any concern, saying Mosaic folks are old hands at dealing with inflow conditions. Another agreed, saying the most impact will be the extra costs from mitigation. Still, others noted that the major flooding at Uralkali’s Berezneki mine in Russia is fresh in the minds of many, and that that incident wound up taking out that mine and about 1.2 million mt/y of production.
Financial analysts were not as generous after the announcement. Fitch Ratings put Mosaic on Rating Watch Negative. It said the inflow could jeopardize long-term earnings and cash flow, adding that the current rate is more substantial than those dealt with before.
Fitch is concerned about what happens if mitigation efforts fail, saying any abandonment of Esterhazy would have a permanent long-term impact on future earnings and cash flow. Fitch said potash earnings have been a significant and steady source of income while Mosaic struggles to improve its phosphate segment.
Fitch also fears that extra mitigation expenses will take money away from debt reduction at the highly-leveraged Mosaic. It says no insurance receivables are expected to offset expenses related to the mitigation.
Fitch noted that the more dire consequences of the inflow – abandonment or conversion to a solution mine – would also affect Potash Corp. of Saskatchewan Inc., which receives a portion of the potash mined from its reserves at Esterhazy. The negative rating will likely remain in place until resolution to the new inflow is better understood, said Fitch.
Mosaic shares were off slightly Jan. 24, the date of the announcement, by 1.2 percent ($.26), down from Jan. 23’s close of $21.60 on the New York Stock Exchange.
Prior to the inflow, Mosaic, along with Agrium Inc., got the nod from celebrity analyst Jim Cramer. Citing good prospects for corn, he said stock for the two should be bought and held, selling them into the presidential race caucuses in the 2008.