Sirius Minerals needs its small Chinese partners to meet their grand ambitions

Interviews with three of the Chinese partners announced by Sirius Minerals, the UK group attempting to dig a fertiliser mine in North Yorkshire, illustrate the gap between the scale of their businesses and the commitments made so that Sirius can secure $3bn in financing for the controversial project.

Sirius has unveiled a string of such deals with foreign customers this year, essential steps to demonstrate a viable market for its novel product, polyhalite, as it negotiates with lenders and seeks a $1.5bn UK government guarantee to underpin the project.

Sirius has described its two newest Chinese partners as small, entrepreneurial businesses. While their enthusiasm for the product is clear, so is the transformation required for them to distribute around $300m worth of fertiliser a year in the 2020s.

Guangzhou Eiliseng Biotech Co has agreed to buy at least 1.15m tonnes in year seven of the UK mine's production, which will be 2028 on current schedules, at a cost of around $165m based on the miner's indications for typical pricing. Sirius Minerals recently hosted a trip to its potash project for the customer, and we caught up with Jing Hai Shan, Eiliseng's youthful general manager, to find a bit more.

First the background. Eiliseng was founded in 2014. It has 400 staff and its “speciality areas” include Inner Mongolia, Hebei, Sichuan, and Yunnan. The company handles between 600,000 and 630,000 tonnes of seeds and fertilisers a year, selling mainly to distributors and wholesalers.

So the deal with Sirius is a serious undertaking for the company, a point acknowledged by Jing. But as China tries to avoid further contamination of its farmland, he says demand for Poly4, as the product is known, will take off.

“In a nutshell it’s because of change in government policy. Beijing is pushing towards a zero chemical fertiliser use by 2020. Poly4 fits into this perfectly. It’s organic,” Jing explained during the meeting at Sirius' London offices.

“So we are going to see a decline in chemical fertiliser usage and an increase in organic usage which is why we are daring to sign this contract. In terms of distribution I don’t see many issues selling this product,” he added.

(A change in policy is coming, but it overstates the impact to suggest a ban. The plan is for a zero increase in chemical fertiliser use from 2020.)

There are other attractions, including a shift in diet, according to Jing: “a lot of China’s arable land is damaged and we think Poly4 can help fix damaged land to a certain extent while providing fertilisers for the growth of plants. We see a huge market for this product,” he said.

“In 2015 the Chinese government came up with a new policy to make potatoes a main strategic crop because it’s healthy and it can be stored for longer. The government has put out a lot of new directives as well as providing subsidies to potato growers,” said Jing, who continued: “I see a bright future for Poly4.”

The other Chinese customer announced this year is the Yantai Service Agricultural Science and Technology Co. According to SAIC filings, it was incorporated in June last year. We reached company general manager, Zhang Yabin, by phone. He confirmed that the company signed a deal with Sirius at the end of July. 

Zhang said, “the fertiliser it's organic, good for the environment and it can improve the soil. These all fit in the national policy. So we are confident about the products.” However, Zhang admitted that the Chinese company has not locked in any potential buyers yet.

He declined to discuss details of the contract, but said: “we expect to see a small volume of polyhalite coming to us at the end of this year or the beginning of next year.” The mine is not scheduled to go into production until 2021, but Sirius said all customers receive small amounts of product to test on crops.

Yantai is a trading company, according to Zhang, which will not process the products imported from Britain, and instead will directly sell them to customers in China. Sirius said the entity has committed to buy 0.8m tonnes in the sixth year of production.

Sirius has a history of signing deals with optimistic Chinese customers which have not stood the test of time. In 2013 it announced a deal with Yunnan TCT Yong-Zhe Company Limited for as much as 1m tonnes of Poly4 a year, but cancelled that arrangement three years later.

TCT was replaced in 2016 by Yunnan Dian Huang Peony Industrial Group, described by Sirius as “a national peony seed oil production enterprise in China with strong government support and backing.”

Later that year we spoke to Dian Huang CEO Wang Xiaotian. He said it was a joint stock company in which 40 per cent was held by a Yunnan local government. He said the company had contracted with 1,000 rural co-operatives to grow walnuts and peonies on 2,000 sq km in Yunnan, and had ambitions to expand to 3,000 rural co-operatives.

Of the Sirius deal, he said “their mine will make fertiliser. We will be their biggest customer”, distributing in Yunnan, Guizhou and Sichuan.

Last year the company lost a local court case related to an unpaid bill for seedlings of around $35,000. In July, Sirus said it and Dian Huang had “mutually agreed to terminate the existing agreement for supply of up to 1 Mtpa”.

A spokesperson said, “as Sirius is providing a disruptive product its strategy includes partnering with disruptive businesses to gain market share.” Chinese companies represent 2.5m of the 8.2m tonnes in peak annual volumes the company has said it is contracted to supply.

Related links:
Sirius Minerals buys its way into Brazil — FT Alphaville
Sirius gets $250m cash boost from Australia’s richest woman — FT
Costs up and cash needed at Sirius Minerals — FT Alphaville
Sirius Minerals: money for a hole in the ground — FT Alphaville
Sirius Minerals and the battle to build Britain’s deepest mine — FT

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