Christopher DonvilleDec 13, 2013 4:46 pm ET
(Corporate Canada news alerts: SALT CACOL
Dec. 13 (Bloomberg) -- MagIndustries Corp., a China-backed potash company, plans to spend $1.3 billion on a mine to supply farmers in the Asian nation, adding more of the crop nutrient to an industry operating at only 71 percent of global capacity.
MagIndustries, based in Toronto and controlled by Shanghai- based Evergreen Industries Group, is developing the Mengo mine in Republic of Congo, which is scheduled to produce 1.2 million metric tons of potash annually starting in 2015. By tapping other Congo deposits, MagIndustries may eventually boost its output to 5 million tons a year, Chief Executive Officer Longbo Chen said in a Nov. 27 interview from Beijing.
China is the world"s largest consumer of potash, which boosts crops" resistance to drought and strengthens roots, and imports most of its supplies. As domestic demand increases, the country is trying to cut its reliance on foreign producers, such as Russia"s OAO Uralkali, which dominate the $20 billion market, according to Peter Prattas, a Toronto-based analyst at Cantor Fitzgerald LP.
China is preparing "some sort of defense, or plan, to influence future supply, so that the major potash producers don"t have them at their mercy," Prattas said by phone on Dec. 11.
The price of potash delivered to Brazil, a major market for the fertilizer, has fallen 20 percent since the end of July to $330 a metric ton, according to data from Green Markets, a unit of Bloomberg LP, which is the parent of Bloomberg News.
Market Upheaval
The potash market has been in turmoil since the end of July when Uralkali quit a marketing venture with Belarus that accounted for about 40 percent of global exports, and said it would step up output to gain a greater market share. The industry is producing at about 71 percent of capacity this year and won"t exceed 75 percent through 2015, according to Green Markets.
Uralkali"s move has put pressure on its competitors. Potash Corp. of Saskatchewan Inc., the second-largest supplier, said Dec. 3 it will cut about 18 percent of its workforce to reduce production costs amid weaker-than-expected demand. In November, Moody"s Corp. cut its rating on the debt of German producer K+S AG to junk, citing uncertainty about potash prices.
Global potash shipments will be 52 million tons this year, Potash Corp. Chief Executive Officer Bill Doyle said in a Dec. 3 interview. That means MagIndustries" Mengo, located about 15 kilometers (9.3 miles) northeast of Congo"s Atlantic port of Pointe-Noire, would have a capacity equal to 2.3 percent of the current market.
China Push
None of that has deterred China Development Bank Corp. The state-controlled bank will lead a group of lenders contributing $740 million toward Mengo"s construction, MagIndustries said in a Nov. 21 statement. A Beijing-based press officer at the bank didn"t answer two calls made to his mobile phone today.
The accord "increases the likelihood of other Chinese- backed funding for projects such as those in Laos, South America, and others in Africa," Jeremy Redenius, an analyst at Sanford C. Bernstein in London, said in a Nov. 26 note. China imports about 7 million metric tons of the 12 million tons it uses each year, he said.
"China has the economic incentive to fund potash projects around the world to help ensure oversupply and lower prices," Redenius said. "We see evidence of this happening already."
Officials at Evergreen in Shanghai didn"t immediately respond to questions submitted to the company by fax as requested.
Open Market
MagIndustries" Chen denied that Mengo is part of a strategy to suppress potash prices.
"I don"t think our target is to keep the lower price for the Chinese government," he said in the interview. MagIndustries is developing the mine "to assure that Chinese agriculture will get sufficient supply of potash" and will sell the fertilizer at the prevailing price on the international market, he said.
MagIndustries doesn"t just exist to implement Chinese natural-resources and agricultural policy, said Rich Morrow, a company spokesman in Toronto.
"We"re a public company, we have public shareholders who are looking for a return," he said in an interview. He estimates Mengo would be Africa"s largest potash mine.
MagIndustries fell 2.7 percent to 18 Canadian cents at the close in Toronto, giving the company a market value of C$136.1 million ($128.6 million). The shares have gained 89 percent this year, compared with a 34 percent decline in the 56-company S&P/TSX Materials Index.
Australian Mine
Evergreen, a closely held company that also has investments in shipbuilding and logistics, bought a 76 percent stake in MagIndustries in 2011 for $107.9 million including debt, according to data compiled by Bloomberg.
Mengo isn"t the only potash project in which Chinese companies have an interest. According to its website, Western Potash Corp., a Vancouver-based company planning to develop a mine in Saskatchewan, is 20 percent-owned by a joint venture between two Chinese companies. John Costigan, Western Potash"s vice president of corporate development, didn"t immediately return a call seeking comment.
In April, Hong Kong-based Dingyi Group Investment Ltd. agreed to buy Australia"s Elemental Minerals Ltd., the developer of the Sintoukola potash project in Republic of Congo, for A$190 million ($169.7 million).
For every $100-a-ton decline in the potash price, China will spend $700 million a year less on the commodity, according to Bernstein"s Redenius.
"The opportunity cost of funding multiple projects like this may be small relative to the potash price reduction," he said.
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