By Marc Davis, www.BNWnews.ca:The recent headline-grabbing $39 billion bid by the world’s largestmining company for the planet’s top potash producer appears to bespurring potash-hungry Chinese investment funds into action. On theheels of BHP Billiton’s unsuccessful initial takeover offer for PotashCorp of Saskatchewan last month, China Mining United Fund has announced amove to more than double its treasury to $760 million. Launched justlast year, it is one of China’s first private mining-oriented investmentfunds.
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 labour force that is increasingly demanding feed-intensive animalprotein in their diets. Hence, potash is obviously at or near the top ofthe fund’s shopping list, especially since it already has small butstrategic investments in place with privately-owned Brazil Potash Corpand Toronto-based Allana Potash Corp. Investment industry analystsbelieve that China Mining United Fund will likely favour Allana’sEthiopian potash project in the near-term. That’s partly because theChinese government committed earlier this year to investing billions ofdollars in Ethiopia’s underdeveloped economy, which obviously also buysplenty of political influence.
Allana’s deposit, which sits at the heart of Ethiopia’s historicDanakhil potash basin, has an inferred resource of 105 Mt of potash,averaging a favourable grade of 20.8%. Drills continue to turn in theanticipation of building upon this initial resource estimate, as well asvalidating the company’s view that one of the world’s lowest costpotash mines is in the offing. Company president Farhad Abasov says thatas yet he hasn’t received any solicitations from China Mining UnitedFund to take a bigger stake in his company. “However, we’re already intalks with several other prospective Chinese and Indian investors, aswell as other international mining organizations,” he says. “That said,there’s no urgency on our part to strike any additional deals,especially since we believe that our ongoing drilling successes willallow us to double or triple our existing potash resources by the year’send.”
A leading Toronto-based investment banker whose expertise is in thefertilisers and agricultural sectors told BNWnews.ca: “I think thistrend towards consolidation is a global trend and not entirely focusedon Canada. These recent developments might propel the Chinese to getmore aggressive by getting more involved in some of the junior potashdevelopers. Certainly the juniors are much more ‘in play’ than they werebefore.”
China Mining United Fund may therefore be keen to increase its stakein Allana, said the source, who chose to remain anonymous as he is notauthorized to talk to the media. “So I think some of these investmentdollars could very well be earmarked for Allana. It certainly is anindication that this Chinese fund is more liquid than was the casepreviously, which puts them in a good position to increase their stakein 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. Whetherthe sovereign wealth fund is participating in China Mining UnitedFund’s latest financing has not yet been disclosed. Alternatively, ChinaInvestment Corp may opt to directly finance part of the project’sconstruction costs, according to remarks attributed to a senior officialin China’s central government. Such developments demonstrate howanxious the Chinese are to ensuring long-term supplies of such anindispensible agricultural nutrient that is key to boosting China’s cropyields, an increasing amount of which is now needed for livestock feed.
This imperative is underscored by the fact that the potash miningsector is in the process of a game-changing global consolidation. Andthis could conceivably place well over a third of the world’s potashsupplies in the hands of just two major players. One of them would beBHP Billiton (assuming it succeeds in a hostile takeover of PotashCorp.) and the other would involve the pending merger between Russia’stwo dominant potash producers, Uralkali OAO and Silvinit OJSC.
The advent of a major shake-up of the potash sector was the focus of aresearch report published this August by Jaret Anderson, aToronto-based chemicals, fertilizers and agriculture investment analystfor the investment bank, Salman Partners. “With 36% of the world’spotash supply potentially ending up in new hands, both China and Indiamust be feeling some threat with regards to the security and stabilityof supply,” he says. “In our view the (potash) consolidationdevelopments in Russia/Belarus and the BHP bid for Potash Corp haveincreased the incentive China and India have to fund the development ofgreenfield potash projects.”
“The strategic value of in-development potash deposits (greenfieldprojects) to countries like China and India and to major miningcompanies means that: “development potash companies are well positionedto benefit in this environment,” he adds. Anderson concludes that theworld’s four leading publicly-traded potash developers, which includeAllana Potash “offer upside of 40 to 80% from current levels.”
The three other companies that Anderson refers to are Western Potash Corp, Potash One and MagIndustries.