Spur Ventures digs in to ride the dragon

Spur Ventures’ (SVU-T, SPVEF-O) Chinese odyssey began in 1996, when the company’s mining-focused founders saw potential in some rock phosphate mines in the country.

Twelve years on, under the stewardship of a seasoned veteran from the agricultural complex, the company is striving to forge itself into a key fertilizer supplier in China.

That’s no easy task, especially as the country finds itself grappling with the dilemma of how to feed its surging population in a time of rising inflation.

That concern has recently led to drastic measures, such as a proclamation that all phosphate mines in the country are state assets that cannot be foreign-owned, and the introduction of a large export tax on finished fertilizers so that they remain in the country.

Not the type of government edicts that foreign investors like to hear.

But Robert Rennie, Spur’s president and chief executive, says the company is shielded in many respects from such changes by the fact that its privately owned joint-venture partner Zhong Chuan already has the necessary mining licences, and the company has been assured that they won’t be revoked.

What the company does have to wait on, however, is the transfer of those licences from Zhong Chuan to Spur — the majority owner of the joint venture — so that mining can begin.

Like most bureaucratic processes in China, it is taking some time.

Granted three years ago, the approval process is finishing at the municipal level (it required a resource estimate to be finished, which Spur has recently submitted) but provincial and federal approvals are still to come.

Rennie — who has over 20 years of experience that includes stints with the UN and as one of the heads of Agrium’s (AGU-T, AGU-N) international divisions — says that the added layer of federal approval came in January of this year, and makes it difficult to estimate how long it will take.

“China, like many countries, is protective of its non-renewable resources. The central government continues to have problems with city and provincial governments in terms of following guidelines,” he says, explaining why the extra layer was added.

The additional bureaucracy combined with the export tax has made it tough on the country’s fertilizer industry.

“Most people who have built fertilizer plants haven’t made money recently — what you need to be successful is control of raw materials, you need economies of scale, a strong brand that reflects quality, and you need to be fully integrated,” Rennie says.

While there was a handful of companies doing well using that approach, they were hit hard by the export tariff of 135% implemented for the second half of this year.

The tariff meant phosphate that was being sold on the international market for as much as US$1,200 per tonne, now had to be sold domestically for just US$500 per tonne.

The tariff came as part of a push toward self-sufficiency. With an increasing population, less arable land due to over-use and environmental degradation, and a largely uneducated farming base that lacks good technology, the country has been importing food at higher Western prices, which has in turn, sparked inflation and fuelled growing political unrest.

While addressing such issues are well outside of the scope of a Western company such as Spur, Rennie hopes that the situation will rectify itself soon.

But if it doesn’t, the companydoes have a significant advantage by way of its low cost structure.

Spur’s assets in China break down into two major groups: one covers five phosphate deposits collectively called Yichang, while the other is a fertilizer plant. Both are located in the province of Hubei.

The two key deposits at Yichang host a combined total of 60.9 million tonnes of proven and probable ore reserves at 24% phosphate. The three other subsidiary deposits have a combined measured and indicated resource of 396 million tonnes grading 20.8% phosphate.

As for its fertilizer plant, Spur is busy transforming it from a nitrogen, phosphorus and potassium (NPK) plant that produces end-product fertilizer to a mono-ammonium phosphate (MAP) facility that produces the phosphate used in NPK plants.

The switch, which will upgrade the plant to produce 200,000 tonnes of MAP per year, will free Spur from the rising costs of potash required in NPK production.

“We’re going from being a supplier to frontline agriculture, to moving back a step to being a supplier to industry that produces that fertilizer,” Rennie says.

Currently in China, 90% of MAP production goes to NPK facilities.

Rennie also notes that as an agriculture end product, NPK sales are seasonal (it has two seasons), which raises inventory costs as production must be stored in off seasons.

“By us taking a step back, we minimize inventory and lower our working capital costs and get higher margins due to increased cost of potash,” he says.

Construction is expected to be complete by the end of the year, with commissioning coming by the end of next year’s first quarter.

The MAP facility will need 400,000 tonnes of rock phosphate to turn out 200,000 tonnes per year. If the process starts in 2009, Rennie says Spur will need to source 150,000 tonnes from the Chinese market. The current price in China is just US$60 per tonne — a bargain compared with Western prices, which are around US$250 per tonne.

And once the mines are up and running, Rennie estimates that phosphate ore will be supplied for just US$50 per tonne, further reducing costs.

The longer-term plan is to produce more than 1 million tonnes MAP per year for domestic consumption.

Once finished the expansion, and after the two mining licences come through, Spur would start construction of a 600,000-tonne-per-year plant at the same location as the current 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 a decision regarding the construction of a second plant that would be part of the same centralized infrastructure.

With the company committed to a long-term pipeline, Rennie has to continue to carefully navigate the tricky Chinese political and business scenes.

“My philosophy for doing business in China is the same for any foreign country: you need a strong local partner that understands the politics and how the process works,” he says.

“In China, the number of actual success stories of American companies is very slim. Hundreds of companies have been trying to get mining licences, but I can count on one or two hands the ones that have had them issued,” he says. “And we’ve got two of them.”

At presstime, Spur Ventures’ shares were trading at 51 within a 52-week window of 41-$1.24. The company has roughly 60 million shares outstanding.