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On the heels of BHP Billiton’s (NYSE: BHP)unsuccessfulinitial takeover offer for Potash Corp. of Saskatchewan (TSX: POT)(NYSE: POT) last month, China Mining United Fund has announced a move tomore than double its treasury to $760 million. Launched just last year,it is one of China's first private mining-oriented investment funds.
China Mining United Fund’s mandate is to secure long-termsupplies of key minerals and commodities, most of which are needed tostoke the furnace of China’s thriving economy and to sustain a growingurban labor force that is increasingly demanding feed-intensive animalprotein in their diets.
Hence, potash is obviously at or near the top of the fund’sshopping list, especially since it already has small but strategicinvestments in place with privately-owned Brazil Potash Corp. andToronto-based Allana Potash Corp. (TSX.V: AAA).
Investmentindustry analysts believe that China Mining United Fund will likelyfavor Allana’s Ethiopian potash project in the near-term. That’s partlybecause the Chinese government committed earlier this year to investingbillions of dollars in Ethiopia’s underdeveloped economy, whichobviously also buys plenty of political influence.
Allana’s deposit, which sits at the heart ofEthiopia’s historic Danakhil potash basin, has an inferred resource of105 million tonnes of potash, averaging a favorable grade of 20.8%.Drills continue to turn in the anticipation of building upon thisinitial resource estimate, as well as validating the company’s view thatone of the world’s lowest cost potash mines is in the offing.
Company president Farhad Abasov says that as yet he hasn’t received any solicitations from China Mining United Fund to take a bigger stake in his company.
“However, we’re already in talks with several other prospectiveChinese and Indian investors, as well as other international miningorganizations,” he says. “That said, there’s no urgency on our part tostrike any additional deals, especially since we believe that ourongoing drilling successes will allow us to double or triple ourexisting potash resources by the year’s end.”
A leading Toronto-based investment banker whose expertise is in the fertilizers and agricultural
sectors told BNWnews.ca: “Ithink this trend towards consolidation is a global trend and notentirely focused on Canada. These recent developments might propel theChinese to get more aggressive by getting more involved in some of thejunior potash developers. Certainly the juniors are much more ‘in play’than they were before.”
China Mining United Fund may therefore be keen to increase itsstake in Allana, said the source, who chose to remain anonymous as he isnot authorized to talk to the media.
“So I think some of these investment dollars could very well beearmarked for Allana. It certainly is an indication that this Chinesefund is more liquid than was the case previously, which puts them in agood position to increase their stake in Allana,” he adds.
In fact, China's $300 billion sovereign wealth fund – ChinaInvestment Corp. – may yet decide to underwrite China Mining UnitedFund's plan to develop Allana’s potash project, says the China MiningAssociation’s web site, www.chinamining.org. Whether the sovereignwealth fund is participating in China Mining United Fund’s latestfinancing has not yet been disclosed.
Alternatively, China Investment Corp. may opt to directlyfinance part of the project's construction costs, according to remarksattributed to a senior official in China’s central government.
Such developments demonstrate how anxious the Chinese are to ensuring long-term supplies of such an indispensibleagricultural nutrient that is key to boosting China’s crop yields, anincreasing amount of which is now needed for livestock feed.
This imperative is underscored by the fact that the potashmining sector is in the process of a game-changing global consolidation.And this could conceivably place well over a third of the world’spotash supplies in the hands of just two major players. One of themwould be BHP Billiton (assuming it succeeds in a hostile takeover ofPotash Corp.) and the other would involve the pending merger betweenRussia’s two dominant potash producers, Uralkali OAO and Silvinit OJSC.
The advent of a major shake-up of the potash sector was the focus of a research report published this month by Jaret Anderson, a Toronto-based chemicals, fertilizers and agriculture investment analyst for the investment bank, Salman Partners.
“With 36% of the world’s potash supply potentially ending up innew hands, both China and India must be feeling some threat withregards to the security and stability of supply,” he says.
“In our view the (potash) consolidation developments inRussia/Belarus and the BHP bid for Potash Corp. have increased theincentives China and India have to fund the development of greenfieldpotash projects.”
The strategic value of in-development potash deposits(greenfield projects) to countries like China and India and to majormining companies means that “development potash companies are wellpositioned to benefit in this environment,” he adds.
Anderson concludes that the world’s four leadingpublicly-traded potash developers, which include Allana Potash “offerupside of 40 to 80% from current levels.”
The three other companies that Anderson refers to are WesternPotash Corp. (TSX.V: WPX), Potash One Inc. (TSX: KCL) and MagIndustriesCorporation (TSX: MAG).
