IN HIS SIXTH FLOOR APARTMENT in Pamplona, Spain, Australian-born mining boss Anthony Hall is pouring over the cash flow statements of the world's largest potash producers.
     The biggest players in potash have announced profits in recent weeks, but are closing down production, lowering their dividends and reporting negative cash flow. Hall thinks they are losing money. “Apples aren't apples,” he warns. “You can dress up margin, but cash is the best proxy because you can't hide things.”
     A former lawyer with a degree in accounting and finance, Hall listed Highfield Resources in Australia in 2012, before buying-up five potash deposits in northern Spain. At the time, he says, the company did not quite appreciate what it had bought. “We put some drill holes in and we got lucky,” he says. “We actually didn't realise that the resource was as big as it is.”

Upside Down

     Despite being the newest player in potash, Highfield's Muga project, the first of five mines it plans to bring into production, will have the highest margins in the industry and by far the highest returns, reflecting the upside down economics of an unusual commodity.
     Having studied the market for five years, Hall says it is the opposite of iron ore. In most commodities, the biggest producers are the lowest cost. But in potash, the largest mines are 40 to 50 years old and are guzzling cash, just to stay open.
     That means big producers are inclined

towards closing mines and lowering production, rather than battling-out a price war. Canada's PotashCorp recently shut down its New Brunswick operation, whilst Florida-based Mosaic cut production 16 per cent last quarter to under 8m tonnes per annum, leaving it with around 15 per cent of the global market.
     “When you're operating 50-year old mines, it's never going to be cheap,” says Hall, “especially when they're salt mines down a thousand metres. You get to the bottom and you've got to drive eight miles to get to your mineralisation.”

Mild Obsession

     According to Hall's estimates, large North American potash producers are spending $50 per tonne just to keep their mines open, plus another $50 in freight. Factoring in G&A, royalties and basic operating costs and companies are struggling under prices of roughly $250 per tonne, down from $900 in 2008.
     Highfield, which is within trucking distance of customers in France, Portugal and Spain, expects to make money even if prices go considerably lower. A recent report commissioned by four European banks showed that at current prices, Muga would have margins higher than 60 per cent. “Nobody can get anywhere near us on a margin basis,” Hall says. “This is a bulk commodity and logistics is king. If you look at cash margin, it's just a different game.”
     Cash margins have become a mild obsession

for Hall, who has moved Highfield's head office to Spain; according to one colleague, he had to be dissuaded from giving a talk on the topic at a recent industry event, when he was meant to be talking about Muga.

Debt Funding

     Sources outside the company say it is in the final stages of landing a €222m ($245m) debt funding package, adding to its cash position of A$108m ($78m). A mining permit is all that is needed to push Muga into initial production of 1.1m tonnes per annum over 47 years from 2017.
     Melbourne-based private equity group EMR Capital, led by former Rio Tinto executive Owen Hegarty, has backed Highfield heavily and holds a third of its stock. So far it is paying off: New York and London-based funds including BlackRock have jumped onboard and shares have risen six-fold in four years. Muga is the best undeveloped project in the mining industry, one London-based broker says.
     Hall thinks there is further to go. “Our number one priority is to take Muga into construction, as soon as possible, but the reality is that Muga's a small portion of a significantly larger portfolio of assets that we have.”
     “It's the hardest time to raise money, but it's a wonderful time to build a new project.” The cost of mine construction in Spain, he says, has dropped to prices last seen in 2005 and '06. “It continues to be a very, very difficult market, but I think that in any market, good projects get built. We're just very fortunate. There's no substitute for good luck.”