Spurred on in China
Spur Ventures'(SVU-T, SPVEF-O) Chinese odyssey began back in 1996 when the company'smining-focused founders saw potential in some rock phosphate mines inthe country.
Twelve years on, under the stewardship of aseasoned veteran from the agricultural complex, the company is strivingto forge itself into the key fertilizer supplier in China.
No easy task, especially as the country findsitself grappling with the dilemma of how to feed its surging populationin a time of rising inflation.
That concern has lead to such recent drasticmeasure as proclaiming all phosphate mines in the country state assetsthat cannot be foreign owned, and slapping a massive export tax onfinished fertilizers so that they remain in the country.
Not the type of government edicts that foreign investor likes to hear.
But Rob Rennie, Spurs president and chiefexecutive, says Spur is shielded in many respects from such changes bythe fact that its joint venture partner already secured the necessarymining licences, and the company has been assured that they won't berevoked.
What the company does have to wait on, however,is the transfer of those licences from its partner to Spur – which isthe majority owner of the joint venture – so that mining can begin.
Like most processes in China – where thebureaucracy is as thick as the smog on a polluted Beijing morning – itis taking some time.
Granted three years ago, the approval processis finishing up at the municipal level – it required a resourceestimate to be finished which Spur has recently submitted – but stillmust gain provincial and federal approval.
Rennie -- who has over 20 years of experience that includes stints with the UN and one of the head's of Agrium's(AGU-T, AGU-N) international divisions – explains that the added layerof federal layer of approval came in January of this year, and makes itdifficult to estimate how long it will take.
"China, like many countries is protective ofits non renewable resources. The central government continues to haveproblems with city and provincial government in terms of followingguidelines," he says of the government's reason for adding the extralayer.
The additional bureaucracy combined with the export tax has made it tough on the fertilizer industry in the country.
"Most people that have built fertilizer plantshaven't made money recently -- what you need to be successful iscontrol of raw materials, you need economies of scale, a strong brandthat reflects quality, and you need to be fully integrated," Renniesays.
While there were a handful of companies doingwell using that approach, they were hit hard by the export tariffimplemented for the second half of this year of 135%.
The tariff meant that phosphate which was beingsold on the international market for as much as US$1,200 per tonne, nowhad to be sold domestically for just US$500 per tonne.
The tariff came as part of a push towardsself-sufficiency. With and increasing population, less arable land dueto over-use and environmental degradation, and a largely uneducatedfarming base that lacks good technology, the country has been importingfood at higher western prices which has in-turn sparked inflation andfuelled growing political unrest.
While addressing such issues are well outsideof the scope of western company such as Spur, Rennie hopes that thesituation will rectify itself soon.
But if it doesn't, the company does have a significant advantages by way of arranging a low cost structure.
Spur's assets in China break down into two majorgroups: one covers five phosphate deposits called Yichang, while theother is for a fertilizer plant. Both are in the province of Hubei.
The two key deposits at Yichang have a combinedtotal of 60.9 million tonnes of proven and probable ore reserves at 24%phosphate. The three other subsidiary deposits have a combined measuredand indicated resource of 396 million tonnes grading 20.8% phosphate.
As for its other key asset, the fertilizerplant, Spur is busy transforming it from a nitrogen, phosphorus andpotassium (NPK) plant – that produces end product fertilizer – to aMono-ammonium phosphate (MAP) facility that produces the phosphate thatis used in NPK facilities.
The switch -- which will upgrade the plant toproduce 200,000 tonnes of MAP per year – will free Spur from the risingcosts of potash required in NPK production.
"We're going from being a supplier to frontlineagriculture, to moving back a step to being a supplier to industry thatproduces that fertilizer," he says.
Currently in China 90% of MAP production goes to NPK facilities.
He also notes that as an agriculture end product,NPK sales are seasonal – it has two seasons – which raises inventorycosts as production must be stored in off seasons.
"By us taking a step back we minimize inventoryand lower our working capital costs and get higher margins due toincreased cost of potash," he says.
Construction is expected to be done the end ofDecember with commissioning coming in the latter part of the firstquarter next year.
The MAP facility will need 400,000 tonnes ofrock phosphate to turn out the 200,000 tonnes per year rate. If theprocess starts in 2009, Rennie says Spur will need to source 150,000tonnes from the Chinese market. The current price in China is justUS$60 per tonne – a bargain compared to Western prices which are in therange of US$250 per tonne.
And once the mines are up and running heestimates that phosphate ore will be supplied for just US$50 per tonne,further reducing costs.
The longer term plan is to produce over one million tonnes per year of MAP for domestic consumption.
Once finished the expansion, and after the twomining licenses come through, Spur would start construction of a600,000 million tonne per year plant at the same location as thecurrent plant.
"If we get the mining licences in early 2009 it would take 32 months to build the first fertilizer plant," Rennie explains.
After that time, the company would make adecision regarding the construction of a second plant that would bepart of the same centralized infrastructure.
With the company committed to a long termpipeline, Rennie has to continue to carefully navigate the trickyChinese political and business scenes.
"My philosophy for doing business in China isthe same for any foreign country: you need a strong local partner thatunderstands the politics and how the process works,"he says.
"In China, the number of actual success storiesof American companies is very slim. Hundred of companies have beentrying to get mining licences, but I can count on one or two hands theones that have had them issued," he says "and we've got two of them."
At press time the company's shares were tradingfor 51¢, and have moved between $1.24 and 41¢ over the last 52 weeks.The company has roughly 60 million shares outstanding. |
