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South Harz Potash cranks up the pace of work at its huge Ohmgebirge project in Germany

Published: 09:59 06 Oct 2021 BST

South Harz Potash Ltd - South Harz Potash cranks up the pace of work at its huge Ohmgebirge project in Germany

Could it be the cheapest exploration spend ever, in terms of potential upside?

Hard to quantify such a thing, but the two holes that South Harz Potash Ltd (ASX:SHP) is about to drill 800 metres into the ground at Ohmgebrige in East Germany could end up delivering a 325mln tonne resource at a cost of just over A$2mln.

And it’s estimated that just seven further holes will take the total resource across the company’s three licences to 5.3bn tonnes.

How is this possible?

The answer is that the resource has been modelled before, but under the old Russian method.

Some consider the Russian system to be the equal of, if not superior to the Australian system but, be that as it may, the Joint Ore Reserves Committee requires a certain amount of verification.

In the case of potash projects, which tend to be uniform and consistent, two drillholes meets the bill, and the likelihood is that within the next few months South Harz will be able to say with confidence that it has a very sizeable resource in the indicated category, with some material also making it into the measured category.

But it’s not just confirmation of the size of the resource that’s at stake here.

Successful drilling at Ohmgebirge will likely trigger a whole series of events that will move South Harz rapidly along on the road to construction and production.

A scoping study is timetabled for March which, as time marches on, is now less than six months away.

And that study will entail “a lot of rigour” says South Harz chief executive Chris Gilchrist.

“We’re expecting a pretty punchy IRR.”

The reason he can say that, of course, is because internally South Harz has already got a good feel for the economics based on internal work already done at Ohmgebirge based around the existing Russian data, which incidentally classed much of the deposit as a reserve.

Exactly how the numbers will look when South Harz re-runs the rule over them using the new data remains to be seen of course, but it’s illustrative that as it stands broker Cenkos reckons that on its own Ohmegebirge has a net present value of US$500mln, and that the NPV of the project as a whole is US$1.3bn.

We are not talking small potatoes here, which makes it all the more remarkable that South Harz originally acquired the project very cheaply just a few short years ago.

Back then the company was nosing around Germany, trying out various different things, and when the package of potash assets was brought to its attention, there was some doubt that it was even real, or really available.

But there’s no doubt now.

In fact, everything’s in place to make the project great again.

It’s situated in an old mining area, three mining licences are already in place, infrastructure is available, including the ability to fill in old workings with new tailings, the government is keen to rebuild employment in an area that was decimated after the collapse of the East German regime thirty years ago, and South Harz itself has the people to make it all happen.

Gilchrist himself has worked in potash for many years, chairman Ian Farmer was the head of Lonmin, the world’s third largest platinum miner, and non-executive director Len Jubber was chief executive of Bannerman Resources.

These are serious players in a market that’s becoming more strategically important by the day.

Because the other factor that’s likely to work significantly in South Harz’s favour is its proximity to markets. Not only does this mean that shipping costs for what’s generally a bulky material will be kept low, but also the carbon footprint associated with the product can be kept to a minimum.

The back-of-the-envelope plan is to produce around a million tonnes of potash per year, and to ship 800,000 tonnes or so of it into key markets in Europe, including Germany, France, and northern Italy, with the remaining 200,000 making a longer overseas trek to the burgeoning market in Brazil during winter months when European markets slow down.

In part, this Brazilian component is a function of the seasonal nature of demand for potash, which is used at specific times of the year in relation to farming and harvesting.

As the world’s population continues to grow, so too will demand for food and the fertilizer that helps it grow. And with increasing resource nationalism at large, security of supply is going to become increasingly important.

So, in the immediate term, the German government may have one eye on all the jobs that South Harz is going to create. But in the longer-term it’s also looking to the security of its own food supply.

The results of this kind of dynamic? - Chinese inventories are running low and the potash price is spiking.

“We expect to see the price surpassing US$500 per tonne, but then settling down to US$300-to-US$350 per tonne in the longer term,” says Gilchrist.

The company’s own modelling has previously used a US$250 price, so there’s room for manoeuvre already built in.

But how does South Harz actually plan to get a mine at Ohmgebirge built?

First, it’ll need to do the relevant economic studies. But while they’re going on, there’s a strong possibility that the company may seek a listing in London, in order to widen its access to potential capital.

Given that a mine build in this region would be more akin to brownfield than greenfield due to the surrounding infrastructure, it’d be realistic to expect a mine this big should cost no more than around US$500-600mln to build, as demonstrated by peers Highfield and Emmerson.

Given the numerous attractions of the project, there ought to be plenty of interest.

“We think our capital efficiency will be very good,” says Gilchrist. “And we anticipate our opex will be in the bottom quartile.”

South Harz Potash Ltd uncovers more potash than expected

Dr Chris Gilchrist speaks to Proactive London with regards to progress on its current projects.  South Harz completed, successfully, the first of two confirmatory drill holes in the first quarter of the year, finding 11 metres of potash which was double previous expectations.  It also...

on 10/5/22