INDUSTRIAL MINERALS — Asia Pacific takes steps to advance Thai potash project

As a result of a successful financing deal and promising joint venture negotiations, construction of a mine at the Udon Thani potash project of Asia Pacific Resources (APG-T) in Thailand could begin early next year.

The Vancouver-based junior closed a $48-million financing in August, proceeds of which were used to settle a promissory note for the $40.8 million it paid to acquire an 87.5% controlling interest in its chief Udon Thani partner, Metro Resources (MRL-V). That company holds a 27.5% interest in the project.

Asia Pacific now holds direct and indirect interests totalling 90% in Asia Pacific Potash Corp. (APPC), the Thai company that holds the exclusive right to explore, produce and market potash from the 1,730-sq.-km Udon Thani concession. The Thai government holds the remaining 10% interest in the concession, situated 500 km north of Bangkok in northeastern Thailand.

According to Gerald Wright, executive chairman of Asia Pacific, Metro’s decision to sell its stake in APPC “was motivated purely by the consequences of the economic conditions prevailing in Thailand.” He says the company had problems financing its interest, and that the sale will lead to the “timely development of the project.”

That Asia Pacific was able to raise $48 million despite the current state of capital markets and an adverse attitude toward investing in Asia speaks well of the Udon Thani project, Wright says.

The financing consisted of the equivalent of $36 million in the form of U.S. currency debentures convertible at $4 per share, as well as a $12-million private placement consisting of 3 million shares at

$4 each.

The debentures have a maturity period of two years and, upon conversion, a further 9 million shares would be issued for a total of 12 million shares in respect of the financing. These shares would then represent approximately 19% of the company’s total shares.

Asia Pacific currently has 51.4 million shares outstanding, or 65.1 million on a fully diluted basis, including the convertible debentures.

Of those investors who subscribed to the financing, more than 80% had never held shares in Asia Pacific. The largest subscriber was Olympus Capital Holdings Asia, which, following the purchase of $28.8 million in convertible debentures, accounted for 60% of the total financing. New York-based Ziff Brothers Investment (ZBI), the primary investment vehicle of the Ziff family, is the founding investor in Olympus.

Since June of 1993, Asia Pacific has spent more than $17 million on exploration and development of the Udon Thani concession, outlining two large potash deposits known as the Somboon and Udon Thani fields. Together, these deposits contain gross in situ resources of some 1.4 billion tonnes of sylvinite, which is a combination of potash (potassium chloride) and common salt (sodium chloride) with a small amount of insoluble material, such as clay. The deposits have been delineated by some 500 km of two-dimensional seismic surveys and 160 diamond drill holes.

A recently completed feasibility study based on a production capacity of 2 million tonnes per year over 23 years confirms the technical and economic feasibility of the proposed Somboon mine, Wright said during a conference call.

The report includes studies by Kilborn Western, Golder Associates, Sandwell International, Commodities Research Unit and TEAM Consultants of Thailand, as well as previous work by H.A. Simons.

Approximately 80% of production is destined for export to Asian markets, including China. Potash will be transported via the existing state railway system, which connects the project site to deep-sea ports in the Gulf of Thailand.

Direct project costs are estimated at US$496 million, including US$46 million for the construction of a port and warehousing facility. Project costs escalated from a previous estimate of US$472 million as a result of a reallocation of US$20 million in life-of-mine sustaining capital to direct capital, as well as scope additions to the proposed mill. The increased costs are partially offset by a more favorable exchange rate between the Thai baht and the U.S. dollar.

The total cost of the project increases to US$584 million once US$44 million in working capital, US$18 million in owner costs (including land acquisition), and US$26 million in interest are taken into account.

Conventional underground plans designed by Kilborn call for the extraction of about 65% of the minable resource, which stands at 180 million tonnes of sylvinite ore. Generally, the deposit lies less than 350 metres below surface and will be accessible via twin decline tunnels. A chevron room-and-pillar mining technique is proposed and ore will be transported to surface and the processing mill by a series of conveyor belts.

Extensive beneficiation testwork shows the ore to be of high grade, low in insolubles and magnesium, and amenable to conventional flotation processes. The mill will use conventional and proven potash industry technology and processing equipment. Design recovery is estimated at 90%, with a typical product grade of 60.3% K20.

An evaporator-crystallizer circuit will recover 180,000 tonnes of high-grade white potash per year, with the balance of production divided equally between standard- and fine-grade potash. Additionally, 200,000 tonnes of industrial grade salt will be produced and sold, primarily to the local chemical industry.

During the first five years of mining, tailings will be stored at surface and disposed of in brine injection wells. After that, tailings will be disposed of underground.

The estimated life-of-mine cash production cost of US$29.80 per tonne includes mine site, general and administrative costs and a 10% contingency. Additional rail transportation, handling and ship loading costs are expected to bring the total production costs to about US$45.00 per tonne.

Asia Pacific prepared a base case project analysis on the basis of the feasibility report and predicts an internal rate of return of 26.7%, assuming a potash price for Southeast Asian port deliveries of US$135 per tonne, a debt-to-equity ratio of 70-to-30, a life-of-mine sustaining capital of US$140 million and a payback period within six years.

The net present value based on an 8% discount factor is US$606 million; at 10%, that value is US$443 million; and at 12%, US$330 million.

Said Wright: “APPC believes that the economic indicators for the project make the Somboon mine one of the most economically attractive projects in today’s industry.” He added that the project becomes increasingly attractive in light of the project’s economics and location in a region with high demand.

Asia Pacific has signed a memorandum of understanding with Norsk Hydro Asia, a subsidiary of Norway’s Norsk Hydro ASA (NHY-N) that is the largest mineral fertilizer producer in the world, for a strategic alliance to finance and develop both the Somboon mine and the larger Udon Thani deposit.

The memorandum of understanding envisions the parties entering into an offtake and marketing agreement, with Norsk Hydro becoming an equity participant in APPC as well as a partner in managing and operational aspects of the company.

The offtake and marketing agreement will extend for the life of the mine and will include all potash production from it.

According to Wright, Norsk Hydro wishes to take a more direct role in the production of potash. It currently produces 19 million tonnes per year for markets all over the world.

Wright considers Norsk Hydro to be an ideal partner. Since the Norwegian firm doesn’t have any potash production interests or operations, the potential for conflicts of interest that could affect the development of the project is low, he says.

APPC has recently undertaken the formal permitting process for the project, including environmental permits, mining licenses and board-of-investment certification. The process is expected to take about five to six months to complete.

“Within that same time frame, I like to think that we can complete the Norsk negotiations and have a term sheet from a banking syndicate,” Wright said. “Th
at would enable us, we hope, to start construction on the project in the first quarter of 1999.”

Given an estimated construction time of between 33 and 36 months, mine start-up could come in early 2002.