China signs potash deal with US miner Prospect Global Resources

22 October 2012 12:02  [Source: ICIS news]

LONDON (ICIS)--China’s state-owned fertilizer company, Sichuan Chemical Industry Holding (Group) Co, has signed a 10-year purchase agreement with Denver-based potash miner Prospect Global Resources for more than 5m tonnes of potash, it said on Monday.

The deal is worth over $2bn (€1.5bn) and will ensure that China, which is one of the world’s largest potash importers, will have a steady flow of crop nutrient.

The move is part of the Chinese government’s strategy to reduce the country’s dependence on imports from major global suppliers such as North America-based Canpotex, and Belarusian Potash Company (BPC) which markets potash for Russian and Belarusian companies.

China, which imported over 6m tonnes of potash in 2011, has delayed signing contracts for the second half of 2012 as it is holding out for lower prices.

The purchase agreement signed with Prospect Global is bound to put pressure on suppliers to agree to lower prices. A contract is expected to be signed in early 2013.

"This agreement with Prospect Global has important long-term strategic benefits for Sichuan Chemical and also will make a significant contribution to the economic development of Sichuan Province and the Chinese potash industry," said Xiaojun Chen, Chairman of Sichuan Chemical.

The Sichuan-Prospect deal valuation reflects current market prices of about $475/tonne for a total of 5m tonnes, the company's statement said.

In the first half of 2012, China paid $470/tonne CFR (cost and freight) to buy potash from global players. The price is decided through negotiations, and has been volatile in the past.

Under the agreement, Sichuan will purchase at least 500,000 tonnes/year of potash from Prospect Global’s American West Potash field project in Holbrook, starting late 2015 or early 2016, which amounts to 25% of the projected output of the site.

"This agreement is a major vote of confidence both in the long-term potential of our American West Potash site as a mineral resource and in Prospect Global's ability to create a state-of-the-art mining operation to capitalize on that potential," said Pat Avery, Chief Executive Officer of Prospect Global.

The agreement also provides an option for Sichuan to purchase an additional amount of potash from Prospect Global, and is believed to be the largest-ever contract signed by an under-development potash miner in the US.

Production at the American West site is expected to begin by late 2015 or early 2016, according to the company. The mine is expected to produce 2m tonnes of potash every year.

The Holbrook mine in Arizona is estimated to have nearly 40 years of supply, but is yet to secure financing or regulatory permits for development. The company expects the deal to help obtain financing for the mine.

Prospect Global is listed on the Nasdaq exchange and has a market capitalisation of around $160m.

($1 = €0.77)

By: Deepika Thapliyal
+44 208 652 3214

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