Regarding trade partners, here's a recent article that reveals...

Regarding trade partners, here's a recent article that reveals some valuable insights:

Elemental’s Offtake Dilemma.
Article Comments Deal Journal Australia

By David Winning

Elemental Minerals, which is developing a potash deposit in sub-Saharan Africa, isn’t alone among junior resources companies in considering an offtake partner as a way to raise funds.

But while its ASX-listed peers look east to the rapidly growing economies of China and India, Elemental wants first to go west to Brazil. And that’s where the challenge lies.

Elemental owns the Kola potash deposit in the Republic of Congo and hopes to build a mine with an annual capacity of 2 million tons of the key ingredient in making fertilizer. First sales could start as early as 2015, with the mine ramping up to full production in 2018. An early estimate pegged the cost of developing the project at US$1.67 billion.

Shipping potash from the Kola deposit near Congo’s coast to Brazil makes sense from both a business and logistical point of view.

Brazil is the world’s biggest potash buyer by volume, using it in fertilizers for agriculture and for its ethanol industry as demand for biofuels globally grows. Elemental says Brazilian potash imports are expected to jump sharply from 6 million tons in 2010 to 12.2 million tons in 2025.

Moreover, the distance between Congo’s capital Pointe Noire and the port of Santos in Brazil is nearly half that of other major potash producing regions, including the Middle East, Russia and Canada.

The challenge for Elemental is that Brazil has traditionally relied entirely on the spot market for potash supply, buying cargoes on a free-on-board basis for shipping home, rather than offtake deals.

Iain Macpherson, Elemental’s chief executive, says the company has adopted a two-pronged approach to overcome this hurdle. It’s engaging directly with Brazilian importers of fertilizer, and at the same time courting half a dozen large funds in Brazil for investment that could then encourage a local offtake partner to come forward.

The company aims to appoint a financial adviser soon to assist with this process.

While the preference is to send product to Brazil due to the ease of logistics, Elemental also recognizes the appeal of China and India as major markets of their own. Chinese banks representing state-owned enterprises have already approached the company regarding offtake agreements, as have Indian fertilizer companies.


“The time to engage seriously with these potential offtakers is once we have got the pre-feasibility study in place around August because then we will have a strong negotiating position to then come out in reasonable shape. Otherwise it will be a painful process,” Mr. Macpherson said.

Elemental’s market value of 279 million Australian dollars (US$288 million) is three times its level in August 2010 when interest in the potash mining sector was ignited by BHP Billiton’s US$38.6 billion hostile offer for Potash Corp. of Saskatchewan. Although BHP dropped its bid in the face of opposition from Canadian politicians and regulators, the theme of long-term growth in global food demand continues to chime with investors in the sector, keeping companies’ stock high.

Foster Stockbroking rates Elemental a buy, with a price target of A$2.80, more than double its closing price around A$1.12 on Monday. The broker thinks an updated resource assessment at Kola this month, and the pre-feasibility study highlighting lower operating costs will give the stock fresh momentum.

Like many juniors in the resources sector, Elemental’s market value is dwarfed by the estimated cost of the Kola project.

That means fundraising is a necessity, and Elemental is keen to secure finance from several sources rather than rely on just one.

Preferred options include a strategic partnership with a major mining company that wants to grow in potash. “By this I don’t mean any of the existing potash producers as they have their hands full already,” Mr. Macpherson says.

Talks are underway with major miners, although nothing is likely to happen until Elemental has completed the pre-feasibility study at the earliest. That’s because the study will give the project better definition and help de-risk many of its elements, especially on the technical, environmental and political side.

Additional financing could also come from an infrastructure company that would take on construction of the railway from the mine to port, and a royalty company that would make an upfront payment to secure a royalty on potash sales to customers when the mine is operational. Lenders in Africa and Australia that would be willing to offer project finance are another attractive option.

“We have a lot of options, but the trick is making sure the jigsaw fits,” Mr. Macpherson says.