China inks 10-year potash supply deal with US miner

A State-owned Chinese fertilizer company has signed a 10-year potash supply agreement with Prospect Global Resources Inc, Reuters reported Monday. The deal is expected to guarantee China a steady flow of the crucial fertilizer and help it partially sidestep multinational suppliers like Potash Corp.

The deal with Sichuan Chemical Industry Holding (Group) Co, worth more than $2 billion, is part of a Chinese trend to partner with small mining companies hungry for capital to develop their land.

Potash is one of the most important fertilizers for farmers to apply, after nitrogen and phosphate.

"In China we've got a key customer who is really motivated by national food-security issues," said Devon Archer, the Prospect director who helped negotiate the deal. "And securing our first customer was really a breakthrough moment for Prospect."

Prospect's mine in Holbrook, Arizona, is estimated to have the largest potash reserves in the US with nearly 40 years of supply, but the company has yet to obtain financing or regulatory permits to develop it. The mine is not expected to open until at least 2015.

The Denver-based company, which launched an initial public offering in July and has a market value of roughly $160 million, can now use the agreement to secure financing to develop the mine. Archer declined to discuss funding amounts or potential financiers, but similar-sized projects have cost more than $1 billion to develop.

China has been aggressively negotiating for lower potash prices with Canpotex Ltd, the marketing agency that sells Canadian potash. Canpotex, owned by Potash Corp, Mosaic Co, and Agrium Inc, is one of the world's largest potash exporters.

So far neither Canpotex nor China has been able to agree on a price, and a deal isn't expected until the end of 2012 or early 2013. The Prospect deal gives China some leverage in negotiations as it will be less reliant on Canpotex for supply.

China buys potash through contracts that are generally renewed annually at prices used as a benchmark for spot sales. The country consumes more than 9 million tons of potash per year.

At current market prices, the Prospect deal is worth roughly $2.4 billion.

China paid $470 per ton under previous contracts with Canpotex and wants to pay less in future contracts, according to Lazard Capital Markets analyst Edlain Rodriguez.

The Holbrook mine is expected to produce 2 million tons of potash annually when online, and China will take at least 500,000 tons of potash each year for 10 years.