The Asian subsidiary of Norway’s
Vancouver-based
Norsk Hydro has agreed to provide a 20% share of the equity requirements for the development and construction of a 2-million-tonne-per-year underground mine. Direct project costs are estimated at US$535 million, including US$46 million for the construction of a new port and warehouse facility in the Gulf of Thailand. The total capital cost rises to US$640 million once working capital and interest costs are taken into account.
The Somboon deposit hosts a geological resource of 300 million tonnes of sylvinite grading 21.7% K2O. Minable ore reserves are estimated at 112 million tonnes of sylvinite grading 23.6% K2O, with a further 75 million tonnes of ore classified as inferred.
Kilborn Western, in co-operation with Golder Associates, completed a bankable feasibility study in June 1998. The study confirmed the technical and economic feasibility of the proposed Somboon mine.
The mine plan calls for the deposit, which lies less than 350 metres below surface, to be reached via twin declines advanced to a position within the orebody to allow for simultaneous development of several production headings. The plan is based on an advance-retreat system using a chevron room-and-pillar technique. A series of conveyors will transport the ore to a processing mill on the surface.
Metallurgical tests show the ore to be high in grade, low in insolubles and magnesium, and amenable to conventional flotation processes. Overall recovery is estimated at 90%, with a typical product grade of 60.5% K2O.
Two potash products — fine-grade and standard — will be produced, as will 195,000 tonnes of industrial-grade salt.
During the first five years of operation, tailings will be stored on the surface, but, by year six, they will be disposed of underground. Excess brine produced during milling will be injected into a contained geological formation using a disposal well system.
On-site cash operating costs are estimated at US$26.39 per tonne, and total costs (including rail transportation, handling and ship-loading) are expected to be less than US$45 per tonne.
Assuming the Somboon project is financed on a debt-equity ratio of 70-to-30, the equity component will total about US$192 million. Norsk Hydro will be responsible for contributing about US$42 million to cover its 20% interest.
In addition, Norsk Hydro has agreed to pay a fee for each tonne of potash produced. At current market prices of US$135 per tonne, this fee is estimated to be US$7 million per year. Based on an 8% discount factor, this has a net present value to APPC of $58 million. In total, the Norsk Hydro deal is worth about US$100 million in net present value.
Norsk Hydro is also committed to purchasing and marketing 1.5 million tonnes potash per year (or 75% of the production) at prevailing market prices for the entire 25-year life of the mine. Asia Pacific says this offtake and marketing arrangement will provide the necessary security to arrange project financing.
The involvement of Norsk Hydro adds credibility to the project, as the company is the world’s largest producer of fertilizer. On a yearly basis, Norsk produces 19 million tonnes for markets throughout the world.
Meanwhile, APPC is trying to bring a third party on board for a 20% equity participation in the Somboon project and an allocation of 500,000 tonnes of potash per year, or 25% of production, at prevailing prices. Samuel Kanes, an analyst with Scotia Capital Markets, speculates that the 20% interest will sold for about US$100 million in cash, thereby reducing to 54% Asia Pacific’s interest in Somboon.
“The Norsk value of the project establishes a benchmark for dealing with the other party,” states Asia Pacific. “We will not permit a delayed purchase of the other 20% equity. It was a special arrangement with Norsk to get the project off the ground.”
APPC retains a 100% interest in the nearby Udon Field potash deposit, which is estimated to contain a preliminary resource of close to 1 billion tonnes at 18.3% K2O, as defined by 82 drill holes and 300 km of seismic surveys. The company is making plans to advance this second deposit to feasibility.
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