Asia Pacific revises strategy for Udon Thani project

The potash industry is dominated by a handful of producers with sufficient resources to operate for centuries to come, which partially explains why new entrants are not exactly shown the welcome mat. Vancouver-based Asia Pacific Resources (APQ-T) had hoped to break into the industry by developing a project in its most important market — the Pacific Rim. Unfortunately, after years of effort and still no mine, the company was forced to revise its strategy in hopes of giving a much-needed push to the Udon Thani concession in northeastern Thailand.

“It’s still a solid project,” says spokesman Patrick Cauley, “but it has some challenges.”

That’s an understatement, given recent events. Potential partners have come and gone, leaving the junior in the unenviable position of having to raise direct and indirect capital costs of US$505 million (or US$648 million after working capital and other costs) to bring one of two known deposits into production. Add to that the considerable and subtle complexities of doing business and permitting a mine in Thailand.

Cauley says the company has made steady progress on the permitting front. With environmental approvals in hand, only a final mining licence is needed. “We expect to get that once proposed amendments to the Mining Act are passed, though we don’t have a firm date on when that will happen.”

The existing mine plan is based on a minable resource of 180 million tonnes at the Somboon deposit, sufficient to support a 2-million-tonne-per-year potash mine. Design recovery is estimated at 90%, with a typical product grade of 60.3% K2O. A second deposit, Udon, has much larger resources, but is less advanced and was not included in previous feasibility studies. As part of its new strategy, Asia Pacific intends to treat Somboon and Udon as one asset. “This will allow us to focus on the development of a single, unified and highly competitive Thai potash producer,” the company states.

The new strategy has two other components. The first is to “recognize that project optimization and preliminary design engineering, contract evaluation and negotiation, corporate structuring and other work must be completed before construction can begin.” Simply put, this means 12-18 additional months of work, at a cost of US$19 million (including a US$5-million payment to the government upon receipt of the mining licence), to convince bankers and investors that the project is indeed economically viable.

Asia Pacific has already spent US$66 million at Udon Thani, including $21 million on exploration and development, and $45.5 million to boost its stake in the project to 90% from 62.5%. The government holds a 10% interest, plus a 1.5% royalty calculated on 75% of the gross revenue received from the sale of potash production.

The need for more work comes as no surprise to industry-watchers who have long questioned the feasibility of the project. “I’ll believe it when we begin to see the ground move,” a rival producer told Chemical Market Reporter in May 1999, just after Norsk Hydro agreed to acquire 20% of the project and provide 20% of the equity requirement for development. Others say they aren’t convinced the deposit is continuous and flat-lying enough to allow the use of large-scale continuous miners.

The withdrawal of Norsk Hydro in March of this year was a major blow to Asia Pacific, which, in 1999, had told shareholders that the deal “provides security to the lenders now being asked for debt financing.” The hydro company placed its financial and managerial participation on hold “pending the resolution of certain issues relating to the financing and implementation of the project.” Other potential partners failed to materialize.

The third component of the revised strategy is “to encourage the participation of partners with the interest and strength to finance, build and operate the Somboon project, [and] acknowledge that such companies may require management control and be prepared to negotiate this in return for a stronger implementation plan with an enhanced probability of optimum success.”

Simply put, Udon Thani is on the block.

Whether the project’s two deposits will attract attention from existing producers remains to be seen. However, their development would be a long-term threat to Saskatchewan producers, which are major suppliers to Pacific Rim markets.

Saskatchewan accounts for about 25% of world production, and ranks, along with Russia and Belarus, as a leading supplier to international markets. Its competitive advantage is the exceptional extent and quality of reserves. The high-grade ore lies in basically flat beds, allowing the use of highly efficient continuous mining machines. As a result, the province’s industry is widely considered to have the lowest production costs in the world. Saskatchewan producers also are well-positioned to meet any increases in demand, as some mines aren’t operating at full capacity. By conservative estimates, the province could supply world demand at current levels for hundreds of years.

Asia Pacific says its project offers competitive advantages, too, including proximity to Asian markets, sizable resources, good grades (about 24% K2O), low risk of water ingress, and shallow depths (less than 350 metres at Somboon, allowing access by twin ramp decline). If developed, Udon Thani would be the only significant indigenous producer in Asia, which currently imports most of its potash requirements.