October 23, 2012


China's Sichuan Chemical signs potash deal with US' Prospect Global


A 10-year, US$2 billion potash supply contract has been signed by Prospect Global Resources Inc. with China's Sichuan Chemical Industry Holding Co., guaranteeing China a steady flow of the crucial fertiliser.


Under the agreement, Sichuan Chemical Industry Holding Co. will buy at least 500,000 tonnes of potash annually over 10 years starting in late 2015 or 25% of the projected output of Prospect Global's American West Potash field in Holbrook, Arizona.


The deal will help Sichuan Chemical, one of China's largest fertiliser producers, to supply a growing need for potash, one of the most-important fertilisers for farmers.
The conservative deal valuation reflects current market prices of about US$475 per tonne for a total of five million tonnes. The contract is take-or-pay, backed by a letter of credit. The agreement also provides an option for American West to sell and Sichuan Chemical to purchase an additional amount of potash.


This year's drought in the US cut grain production, contributing to higher prices and adding pressure on the world's food reserves. China is seeking similar deals to help secure food for the world's most populous country, the companies said in a joint statement.


Prospect Global will sell the potash to Sichuan Chemical from its American West Potash project in Holbrook, Arizona, which is estimated to have the largest potash reserves in the US with nearly 40 years' worth of supply. But the company has yet to obtain financing or regulatory permits to develop it and expects the project to generate 700 jobs.


On the other hand, the deal is part of a Chinese trend to partner with small mining companies for lower potash prices. At current market prices, the Prospect deal is worth roughly US$2.4 billion.

Pat Avery, Chief Executive Officer of Prospect Global, said: "This agreement is a major vote of confidence both in the long-term potential of our American West Potash site as a mineral resource and in Prospect Global's ability to create a state-of-the-art mining operation to capitalise on that potential. Bankable off-take contracts are a top priority in our detailed strategic plan, and we continue to execute on key drivers."


Xiaojun Chen, Chairman of Sichuan Chemical, said: "This agreement with Prospect Global has important long-term strategic benefits for Sichuan Chemical and also will make a significant contribution to the economic development of Sichuan Province and the Chinese potash industry."


Once the mine is in production, it will create an estimated 700 US domestic jobs in mining, transportation and logistics, located mainly in eastern Arizona but also at warehouses and North American ports. Its multi-generational economic presence will spill over into the community and promote the development and growth of local businesses for many years.


China has been aggressively negotiating for lower prices with Canpotex Ltd, the marketing agency that sells Canadian potash, Reuters reported. Canpotex, owned by Potash Corp, Mosaic Co, and Agrium Inc., is one of the world's largest potash exporters. According to Reuters, so far neither Canpotex nor China has been able to agree on a price, and a deal is not 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 paid US$470 per tonne under previous contracts with Canpotex and wants to pay less in future contracts, according to Lazard Capital Markets analyst Edlain Rodriguez.


Potash, the common name for various mined and manufactured salts that contain potassium in water-soluble form, is produced worldwide at amounts exceeding 30 million tonnes per year, mostly for use in fertilisers.

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