Saskatchewan won't review potash tax until BHP mine decision

Tue Dec 18, 2012 1:38pm EST

* BHP board to decide on Jansen mine by mid-2013

* Province fears new production could hurt prices

* Saskatchewan's potash taxes are highest in world

By Rod Nickel

WINNIPEG, Manitoba, Dec 18 (Reuters) - Saskatchewan, the world's richest potash-producing region, will not review how it taxes miners of the crop nutrient until late next year at the earliest as it waits to see if BHP Billiton PLC follows through on plans to develop a huge mine in the Western Canadian province.

"We're going to monitor the market behavior, and if there's change in the market structure we'll take a look at that," Kent Campbell, Saskatchewan's deputy minister of energy and resources, said in an interview with Reuters. "If there's a whole bunch of production that comes on, that could change the nature of the market.

"The BHP decision is obviously a big one."

Potash taxes in Saskatchewan are the highest in the world, according to Campbell, with producers Potash Corp of Saskatchewan, Mosaic Co and Agrium Inc collectively paying hundreds of millions annually.

Those companies are investing billions in mine expansions, while new players such as BHP and Germany's K+S AG are doing preliminary digging on Saskatchewan's first new potash mines in 40 years. With crop prices surging in 2008 and again this year on bullish outlooks for food demand, potash has attracted new interest for its ability to boost crop yields.

Saskatchewan's royalty system is weighted toward the price of potash, rather than production. If too much new capacity comes to market and pressures prices, Saskatchewan's revenue could drop.

One of the aims of a revised royalty system would be to give additional weight to production levels, Campbell said.

"That's one of the things you would want to look at, for sure. One of the weaknesses of the current system is it's highly reliant on price."

BHP, the world's biggest miner, has started construction on an 8-million tonne potash mine at Jansen, Saskatchewan. A final go-ahead by its board, however, is not expected until mid-2013.

NEW MINERS TO SELL OUTSIDE OF CANPOTEX

Both the BHP and K+S mines, which aim to start production as early as 2015, would sell potash to offshore markets independently of Canpotex, the marketing arm of Potash Corp, Agrium and Mosaic. That scenario has raised concerns about Canpotex losing negotiating leverage and prices weakening due to an expanded field of sellers.

Still, it's possible Saskatchewan will wait as long as several years, until both mines have started production or backed away from it, to review the tax system, Campbell said.

"My sense is there's nothing in the immediate plans (for a review) and it would be at the very least sometime following (BHP's) decision before we would initiate a process."

In August, Saskatchewan Premier Brad Wall said the government may need to adjust the potash tax formula because of the additional production. Shortly thereafter, Potash Corp said it is not worried about a review, and doesn't see it as a revenue grab.

Wall's comment seemed oddly timed as a subsequent buildup of North American supplies, due to Canpotex's inability to sign new contracts with China and India, has made it unlikely that tax changes will come in the near future, said Spencer Churchill, an analyst at Paradigm Capital.

"Right now, it's not on anybody's front burner, it's there in the background," Churchill said. "It could become a bigger issue depending on how aggressive they wanted to be."

Saskatchewan justifies charging the highest royalties in the world on the basis that it has the globe's richest reserves, Campbell said.

But with new mines planned outside the main potash-producing areas of Saskatchewan, Russia and Belarus, the province must stay competitive, Churchill said.

Projects are on the drawing board in Africa, Brazil and, on a smaller scale, the United States, although capital markets remain tough for them to crack, Churchill said.

Saskatchewan's potash tax reviews have yielded big changes in the past.

In 2005, the province gave miners a 10-year holiday on the base tax payment on new production capacity, one of two components of the potash tax. After the last review in 2010, Saskatchewan changed the way new potash miners are taxed to close a loophole that would have given the miners an advantage.

Saskatchewan usually collects several hundred million dollars annually in potash royalties and taxes, and pocketed a record C$1.4 billion ($1.4 billion) in 2008.

This year, with prices sliding, Saskatchewan's potash revenues are expected to tumble to C$465.4 million from earlier estimates.

Any Saskatchewan review of the formula would include consultation with existing producers and companies that own permits and leases to mine potash reserves. They include Rio Tinto PLC, Vale SA, Western Potash Corp , Karnalyte Resources Inc and Encanto Potash Corp, Campbell said.

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.