Quote:
Keeping Chinese farms supplied with fertilizer is the goal of a Zhongchuan Mining initiative at a Canadian mine
September 17, 2010
Ever since the world's top mining concern BHP Billiton announced August 18 that it was bidding for Potash Corp. of Saskatchewan, the world's largest potash producer, resource anxiety has been rising in China.
Access to affordably priced potash that China needs to fertilize farm crops could become more challenging if BHP buys the Canadian company.
China fears a new resource struggle similar to the battle it's waged over iron ore dug from overseas mines – including some under BHP control – whose owners have become increasingly concentrated in recent years. So it yearns for ways to control prices and maintain supplies of Canadian potash.
The response so far has been to elevate previously little-known Zhongchuan International Mining Holding Ltd. to the status of industry star. The company drew fresh attention from government and industry following the BHP bid. And now, it's hoping to win government financing for a major project.
Zhongchuan controls rights to a potash mining area in Saskatchewan known as KP488. The company claims the untapped mine has proven reserves of 893 million tons, making it the largest potash asset held overseas by a Chinese company.
KP488's motherlode is equivalent to about 90 percent of China's estimated 1 billion tons in domestic potash mines, which account for a mere 1 percent of global reserves.
However, before getting the potash, Zhongchuan would have to pay high prices for studies and site preparation. A pre-feasibility study has yet to be completed, and an environmental impact assessment will be needed as well.
The company has already sunk more than 200 million yuan into the project and says it will need another US$ 2 billion just to get started – an amount beyond its means.
Laying Groundwork
Some time ago at a mining conference in Canada, Zhongchuan President Sun Ximing Mining found himself seated by Wang Min, China's vice minister of land and resources. Sun asked Wang to advise him on the types of mining assets he should invest in.
The vice minister suggested "going into iron and potash. That's what China needs most."
Farms in China consume up to 11 million tons of potash fertilizers annually, with about 70 percent of this supply imported, according to the 2009 edition of U.S. Mineral Commodity Summaries.
The Chinese government has put great emphasis on increasing potash reserves in recent years, investing more in exploration and expanding existing projects in regions such as Qinghai and Xinjiang. But these efforts have apparently failed to ease the shortage.
China's current reserves are mainly low-grade "salt lake" potash, said potash expert Zheng Mianping at the Chinese Academy of Geological Sciences. Exploitation costs are high in these areas, he said, and investment cycles are long.
Nevertheless, Zheng has called for China to overcome its reliance on potash imports.
"The potash fertilizer supply in China has been monopolized by suppliers from Canada and Russia, and the import price soared from under US$ 200 per ton in 2007 to US$ 600 in 2008," Zheng recently told Caixin. "Even during the financial crisis, potash fertilizer producers would rather limit production than slash their prices."
After speaking with Wang at the mining conference, Sun took the vice minister's advice to heart. He started looking at Canada's rich and easily accessible potash reserves, and soon he was targeting potash mining areas in Saskatchewan.
In 2007, Sun picked KP488 and obtained exploration rights via Zhongchuan's wholly owned subsidiary M&J Potash Corp. In November 2009, geologists determined the tonnage and rated it as high-quality potash.
KP488 has the makings of a large potash resource that Zheng thinks could be a foundation for a major fertilizer base.
But other industry experts doubt whether Zhongchuan can turn KP488 into a true potash base. Of all the reserves in Saskatchewan, "ours is the smallest plot," a Zhongchuan executive told Caixin. "But it is significant considering that China has found less than 1 billion tons in its ground after a decade of exploration."
Financial Needs
"It is impossible for us to single-handedly accomplish an investment of such scale," a Zhongchuan financial officer told Caixin. "Hence, we hope to bring in investors."
The mining concern will need not only "a mere US$ 2 billion in investments in the future," he said. "We also need support in the form of human and financial resources, as well as policy support."
The company has indeed found listening ears in Beijing. In June, the government approved an 80 million yuan special fund for the company to explore the risks of overseas mineral resources. This amount is set to be disbursed this year and in 2011.
Zhongchuan has also been negotiating with the nation's sovereign wealth fund China Investment Corp. Ltd. (CIC) since mid-2008. Since then, CIC has twice sent staffers to Canada to study KP488, with CIC President Gao Xiqing personally leading one delegation.
Sources from Zhongchuan said CIC has shown intense interest and is keen to obtain a controlling stake. The parties are still negotiating.
However, while Zhongchuan was in talks with CIC, BHP unveiled its plans to acquire the Canadian company for more than US$ 40 billion. Subsequently, news that Chinese companies might challenge BHP with their own bids began to spread. And CIC appeared ready to jump.
"CIC called me today to voluntarily hike its offer," Sun told Caixin on September 3.
Qi Wen, a professor familiar with Saskatchewan's minerals, told Caixin that nine mines are now being developed in the province. Mining rights have been issued for some 30 to 40 sites.
BHP and a potash fertilizer manufacturer have registered the most mining regions in the province since 2007, seizing most of the exploration rights.
Zhongchuan has rights to explore 96 square kilometers at KP488. Qi questions the value of such a relatively small-scale mine.
"Our view is that the mining area is too small for it to become an overseas potash exploration base for China," said Qi. "The reason is that its controllable reserves are low.
"We have been suggesting Zhongchuan acquire the exploration rights to the surrounding vicinity and expand its mining area," Qi said.
But the company would need investment partners for such an expansion as it lacks funds of its own. Qi thinks CIC could fit the bill – and help the country meet its potash needs.
"China is already lagging behind in the scramble for exploration rights to potash resources," he said. "In the long run, there is indeed a need for strong investors such as CIC to lead the establishment of overseas potash exploration bases.
"Private enterprises still lack the strength to do so."
