Leigh Creek Energy aims to be lowest-cost sovereign producer of critical ingredient urea

For weeks, news stories have appeared reporting about a problem which most Australians — and probably many investors — know little about: urea supply, and one small cap Leigh Creek Energy (ASX: LCK) may have the answer.

At one stage, it looked like a urea shortage was about to derail Australia’s supply chains – all caused by China’s sudden cessation of exporting urea on the grounds that its own fertiliser industry needed all that available.

This was serious as Australia has been sourcing 80% of its urea from China.

While nitrogen-based urea’s main offtake use is for fertiliser manufacturing, urea is also critical for a product called AdBlue.

And, without AdBlue, which reduces emissions from diesel exhausts, large numbers of trucks across Australia faced being taken off the road.

Fully integrated, low-cost plant

This event, as well as our heavy dependence on imported fertilisers vital to our agricultural industry, have brought home the need for Australia to become more self-sufficient in urea.

Adelaide-based Leigh Creek plans to address this.

The company’s Leigh Creek urea project — located at South Australia’s former coal mining town — will be the only fully integrated urea production facility in Australia.

Average operating cost is expected to be $109 per tonne, which is within the lowest cost quartile of the global urea production cost curve.  This drives a strong estimated internal rate of return (IRR) for the project of 30%.

An independent bankable feasibility study is being completed and will be released very soon.  The company expects this to confirm the previous IRR and net present value outcomes from the company’s pre-feasibility study, which was completed a few years ago when urea prices were tracking sub-$500/tonne.

All inputs for low carbon urea will be on-site.

Its own power plant and 1 million tonnes per annum urea production facility will use Leigh Creek’s gas reserves, which are sufficient to power the plant for 30 years.

Urea production can be increased to 2Mtpa at a later date.

The company says its project will be carbon neutral this year, eight years ahead of schedule.

Fertilisers vital for food as populations rise and arable land decreases

Leigh Creek says it will provide “additional security to a critical product for the Australian agricultural sector and avoid risks associated with transport, exchange rates, commodity prices and import logistics” — all front and centre issues now facing this country.

Cropping removes nutrients from the soil, including nitrogen, phosphorous and potassium from the soil.

These have to be replaced by the use of fertiliser; in the case of Australia, most of this is imported.

A new potash mining sector is evolving, but phosphate projects have made little progress here in recent years, but now urea is on the move.

Not only is the world’s population increasing, but more people in the developing world are moving to middle class status — and so their consumption of food, especially meat, increases. Raising animals means that meat requires much more fertiliser per kilogram of food than cropping.

Meanwhile, cities in developing countries are expanding, gobbling up farmland to use for housing and industry.

Granular urea the world’s most common fertiliser

Granular urea is the world’s most common fertiliser, 46% of which is nitrogen.

The most common manufacturing process is converting the methane contained in natural gas to hydrogen.

Nitrogen is separated from air (which contains more than 70% nitrogen) and then nitrogen and hydrogen are mixed at high pressure to form ammonia.

The ammonia is then reacted with carbon dioxide to form a liquid urea, which then is sent through the final stage to end up as a granular product.

International expansion planned with Chile project

Leigh Creek has completed an institutional placement for up to $20 million, which will allow the company to accelerate its stage one commercial works program.

Procurement of long lead items and detailed engineering have already begun.

In terms of stage two costs, a major South Korean bank has issued a letter of support to provide debt finance for up to 70%, or $1.5 billion, to cover construction costs.

Meanwhile, last week Leigh Creek signed a memorandum of understanding to acquire the Mulpun in-situ gasification (ISG) project in Chile.

The company is now conducting due diligence before finalising the acquisition.

The ISG project, which is being purchased from Santiago-based Antofagasta Minerals, comes with freehold land and is at an advanced exploration stage with estimated recoverable gas of 1,100 petajoules, doubling Leigh Creek’s production capacity

Leigh Creek plans to produce urea in Chile for the world market, but it will also take into account Chilean energy needs.

Approvals in place

Leigh Creek secured its crucial petroleum production licence in November 2020.  This is a first in Australia, and perhaps the world.

It backed that up in late 2021 when the South Australian government issued Leigh Creek with an approval under Section 23 of the state’s Aboriginal Heritage Act 1988, which will permit the development of a proposed ISG project within the former Leigh Creek coalfield.

The South Australian government granted this authorisation following extensive consultation with the local people and traditional owners. Leigh Creek has declared its intention to “exceed the conditions of the authorisation, which we see as a minimum standard”.

Leigh Creek executive chairman Justyn Peters said several important points were made in the Treasurer’s statement on 31 December 2021.

“That consideration was given to a large range of views but that the economic benefits of the project, along with protection conditions in the authorisation would ensure proper protection of cultural heritage whilst at the same time deliver the economic benefits of our project to the state.”

“The Treasurer importantly also pointed out that our project not only has the support of the current Liberal government but also the previous Labor government,” Mr Peters added.