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SRK Consulting Sukulu Phosphate Project Scoping Report Page i

MURR/MCDA Ch 11 Marketing-final 25 October 2010

Table of Contents 11 Marketing ........................................................................................... 11-1

11.1 Background ................................................................................................... 11-1 11.2 The Global Situation .................................................................................................. 11-1 11.3 Phalaborwa and Sukulu Deposits .............................................................................. 11-2 11.4 Markets and Uses ................................................................................................... 11-3

11.4.1 STPP Sodium tripolyphosphate Na5P3O10 .................................................................. 11-3 11.5 Phase 1: Manufacture and Distribution of Fertiliser ................................................... 11-4

11.5.1 Description of products ............................................................................................... 11-4 11.5.2 The East African Market for Super Phosphates .......................................................... 11-5

11.6 Phase 2: Manufacture and Export of 1 Million Tons per Year of Phosphate Rock Concentrate ................................................................................................... 11-8 11.6.1 Current pricing ............................................................................................................ 11-8 11.6.2 Pricing forecasts ....................................................................................................... 11-10

11.7 Conclusion ................................................................................................. 11-12

List of Figures Figure 11.1: Average global phosphate rock quality over time ............................................. 11-9 Figure 11.2: Price CFR India 70-72 BPL .............................................................................. 11-9 Figure 11.3: Price CFR India adjusted to 87 BPL less $40 (freight) ................................... 11-10 Figure 11.4: Structural Changes Shift Equilibrium Pricing .................................................. 11-12

List of Tables

Table 11.1: Geographic distribution of world reserves ........................................................ 11-2 Table 11.2: GDP Comparison of the Agriculture Contribution ............................................. 11-5 Table 11.3: Crop types ................................................................................................... 11-6 Table 11.4: Local and World Phosphate Usage .................................................................. 11-6 Table 11.5: Annual Phosphate Consumption in East Africa ................................................ 11-7

SRK Consulting Sukulu Phosphate Project Scoping Report Page 11-1


11 Marketing 11.1 Background

Nilefos has an exclusive Retention Licence on a phosphate deposit which is located close to the town of Tororo in Eastern Uganda. The project involves the mining of this phosphate body and the subsequent processing of the ore into mineral phosphate. Two processing phases are envisaged: • Phase 1 will involve the beneficiation of the phosphate into fertiliser. The final product

will be Super Phosphate (Single and Triple, or a combination of both). In this phase the processing plant is relatively small, producing 66 000tpa of Super Phosphate.

• Phase 2 envisages the construction of 3 additional processing plants each producing 330 000tpa of phosphate rock for export (990 000 tonnes) to world markets from the port of Mombasa.

The objective of this section is to examine the feasibility of marketing the fertiliser (Phase 1) and subsequently the phosphate concentrate (Phase 2) as detailed above. It should be noted that this section of the report was prepared by Nilefos, using their current knowledge of the East African fertiliser market.

11.2 The Global Situation

The essential elements of fertiliser are nitrogen, phosphorus and potassium. Nitrogen is obtained from the air, but phosphorus and potassium have to be mined. The world has enough potassium to last several centuries but supplies of phosphate may be running out by the end of this century. The depletion of these limited reserves is caused not only by the active mining of the mineral but also by the runoff into waterways, exacerbated by modern agricultural practices. This depletion (mining and natural run off) amounts to an estimated 37Mtpa, of which mining accounts for about 22Mt. The International Geological Correlation Program in 1987 estimated that there could be some 163 000Mt of phosphate ore worldwide corresponding to 13 000Mt of phosphate rock. However these estimates include types of rock which are technically not able to be mined and also include deposits which are not accessible because of their depth or location offshore. In the intervening years much of this material has been extracted and is no longer available. The current estimate of economically recoverable resources are 15 000Mt, enough to last about 90 years at current consumption rates. However the rate of consumption is likely to



increase over this period as standards of living improve worldwide (see Table 11.4) and the overall population of the world increases with the subsequent increase in demand for food. In Table 11.1 it is interesting to note that China has reserves for 82 years only, compared with South African reserves estimated at 625 years at current mining rates.

Table 11.1: Geographic distribution of world reserves

Country Phosphate Rock

Reserves

Per cent of Total

Mine Production

– 2008

Per cent of Total

Reserves at Current

Production (Mt) (%) (Mt) (%) (years) Australia 82 0.53% 2.3 1.38% 36 Brazil 260 1.69% 6.0 3.60% 43Canada 25 0.16% 0.8 0.48% 31 China 4 100 26.59% 50.0 30.00% 82 Egypt 100 0.65% 3.0 1.80% 33 Israel 180 1.17% 3.1 1.86% 58 Jordan 900 5.84% 5.5 3.30% 164 Morocco 5 700 36.97% 28.0 16.80% 204 Russia 200 1.30% 11.0 6.60% 18 Senegal 50 0.32% 0.6 0.36% 83 South Africa 1 500 9.73% 2.4 1.44% 625 Syria 100 0.65% 3.7 2.22% 27 Togo 30 0.20% 0.8 0.48% 38 Tunisia 100 0.65% 7.8 4.68% 13 USA 1 200 7.78% 30.9 18.54% 39 Other 890 5.77% 10.8 6.48% 82Total 15 417 100% 166.7 100% 92 It should be noted that the current world population is estimated to be 6.7 billion. This is expected to increase to 9 billion by 2050. It is evident that 83% of the world‘s reserves are concentrated in four countries: China, Morocco, United States and South Africa and on an annual basis these countries account for two thirds of the world’s production.

11.3 Phalaborwa and Sukulu Deposits

In order to better understand the product from a marketing point of view, which is to be produced at Sukulu, it may be helpful to compare the IDC’s investment in the Foskor Phosphate Mine at Phalaborwa with the potential mine at Sukulu. Both deposits at Phalaborwa and Sukulu are igneous in origin. The majority of other major producing deposits in the world are sedimentary. The origins of the two deposits are therefore similar, geologically referred to as “carbonatites”. Phalaborwa is a heavily mineralised carbonatite with, in addition to phosphates, iron (as magnetite) titanium, copper, gold, silver, vermiculite (mica), uranium and a host of minor minerals and 'rare earths'. It is a cornucopia of minerals.



Sukulu although of similar origin is rich in phosphate but the additional mineralisation is restricted to iron (again as magnetite) and some niobium. The host rock that underlies the ore deposit at Sukulu is thought to be very similar to the material at Foskor. However the grade is much lower at about 5% P2O5. However over geological time the host rock has weathered and the weathered material has collected in the three surface valleys. The weathering process has resulted in a concentration of the phosphates to some 13-14% P2O5 and the resulting weathered material is a fine to very fine silt. This implies relatively simple surface mining and no significant crushing required. However, there will be a significant percentage of very fine material which, when it contains phosphate, will be difficult to recover. The innovative process that has been suggested handles the fine material better than the traditional route, and it better suits the characteristics of the deposit. An advantage of the Sukulu material is a lack of radioactive elements that are found at Phalaborwa. This is often a characteristic of igneous carbonatites and normally disqualifies them for use in food grade or pharmaceutical grade applications. At Sukulu this option remains open, as a potential market.

11.4 Markets and Uses

Rock phosphate is phosphorous pentoxide (P2O5) which is the common form. The main use for phosphates is fertilizer, which comprises 90% of the world’s supply. Another potential application is as an animal feed supplement Di-calcium Phosphate which is fed to cattle, predominantly to increase milk yield/quality. There is a good market for this product in East Africa where cows are often in need of this type of supplement.

11.4.1 STPP Sodium tripolyphosphate Na5P3O10

STPP is produced in two grades; Industrial Grade and Food Grade. The industrial grade product is used as a component of synthetic detergents, a synergist for soap and as a water softener. It is also used in tanning and dyeing. It is used as a dispersant agent for coatings with kaolin, calcium carbonate (the paper industry) and it is used as geological drilling mud to keep the mud in suspension. The food grade product is used as an improver for canned food, fruit juices and for milk and soya products. It is used to tenderise canned meat, generally a softener or densifier in the food industry. It is also used in Coca Cola and other fizzy drinks. There are also medical uses, e.g. codeine phosphate, the major component of medicines designed to combat digestional complaints. For food grade and pharmaceutical grade the feed material has to be very pure. Many igneous phosphate deposits have radio active elements associated which tend to concentrate as the rock is concentrated. Sukulu has much lower (vanishingly small) radioactive components and is thus



potentially a feedstock for food and pharmaceutical grade phosphates, a small but lucrative market.

11.5 Phase 1: Manufacture and Distribution of Fertiliser

11.5.1 Description of products

Single Super-phosphate (SSP)

SSP has been the principal world fertiliser for over a century. It has the following advantages:

• The process is simple, requiring little technical skill and not much capital investment

• Economies of scale are minimal, so small plants can be economic to a certain degree

• The effectiveness of the fertilizer is unquestioned.

It also provides sulphur and calcium to soils that require them. Uganda has such soils hence the Ugandan Sugar industry (as well as other industries) uses this type of phosphate. The main disadvantage is that it typically contains between 16 % and 22% phosphate which is low and hence transport costs become an issue. Large volumes have to be transported with small phosphate content. Manufacturing SSP is a relatively simple process. Sulphuric acid is added to phosphate rock. The amount of acid is proportional to the grade of the phosphate rock. The higher the grade of rock, the smaller the quantity of acid required per tonne of final product.

Triple Super Phoshate (TSP) To avoid the problems associated with low phosphate content TSP was devised. In the case of Sukulu (42% P2O5)the high grade rock needs to be ground very fine as igneous phosphate rock is not very reactive. Iron compounds tend to complicate the process to some degree but this can be handled. Sulphuric acid is added to phosphate rock in a mixer. The resultant mix is put into a container called a “den” and then left to react. After 0.5 to 4 hours the reacted product is excavated from the den and put on storage piles to “cure” (basically the reaction carries on in the storage piles for between two and six weeks. It is then ground, bagged and sold. TSP contains 40 to 48% P2O5 of which 40 to 45% is water-soluble and gets absorbed into the ground very quickly. It is made by basically the same process as single super-phosphate but the sulphuric acid is used to make phosphoric acid using some phosphate rock. The



phosphoric acid is then added to more phosphate rock. After a mixing process it is put into a den, broken up and left to cure as with SSP. It is basically the same process as SSP but with phosphoric acid being made as an intermediate stage. In this curing stage it tends to granulate. As a result the product is often referred to as GTSP (Granulated Triple Super Phosphate). The phosphoric acid does not need to be of very high quality but it does help if it is of higher strength. Volumes In Phase 1 it is envisaged that 66 000tpa of super phosphate will be produced. This section now addresses the following 2 questions: • Is there a market in East Africa for Super Phosphates? • Given that there is a market , can super phosphates be sold in East Africa at a price which

will give shareholders an acceptable return?

11.5.2 The East African Market for Super Phosphates

Background:

Nilefos approached US AID Agricultural Productivity Enhancement Program in 2007 to prepare a study on the market characteristics of the East African fertiliser market. This section relies on the subsequent report published by USAID. In the East African Region agriculture is the dominant industrial sector. Table 11.2 shows agriculture’s relative importance to the Economies and the Gross Domestic Product (GDP). Table 11.3 shows the main crops that are prevalent in the East African countries.

Table 11.2: GDP Comparison of the Agriculture Contribution

Item Uganda Kenya Tanzania Rwanda and Burundi Contribution to GDP 43% 25% 45% 50% Rural Employment 80% 75% 80% 9% Export Earnings 85% n/a 60% 90% Population 27 million 33 million 33 million 15 million



Table 11.3: Crop types

Item Description Cash crops Cashew, Coffee, Cotton, Tea, Sisal, Pyrethrum, Tobacco, Sugar Cane Cereal crops Maize, Wheat, Barley, Rice, Sorghum, Millet Horticultural crops Bananas, Fruits, Vegetables, Cut Flowers Roots and Tuber crops Cassava, Sweet Potato, Irish Potato, Yams Legume crops Beans, Cowpeas, Groundnuts, Grams

The total population of the region is 127 million, which makes it an attractive market for any product.

Current use of fertilisers:

Annual actual use of fertilisers is estimated at 30 000 tons in Uganda, 300 000 tons in Kenya and 110 000 tons in Tanzania, giving a total of 440 000 tons. This does not include Rwanda and Burundi where consumption is difficult to estimate.

Potential use of fertilisers

World average use of fertilisers is 100kg/ha. Table 11.4 shows East African current usage extrapolated to world usage rates.

Table 11.4: Local and World Phosphate Usage

This table indicates that, if price, availability and affordability issues were addressed, the potential market is 5 times greater than the current market. The potential fertiliser market is, therefore, in the region of 2.4Mt annually.

Fertiliser Handling and Distribution

The following points on Phase 1 fertiliser handling and distribution are made: • There is no fertiliser manufacturing plant in the East African Region • All mineral fertilisers are imported through the ports of Mombasa and Dar Es Salaam • Importing requires high levels of up front financing making it difficult for dealers

Country Local Usage Current Local Consumption World Usage Potential Local

Consumption (kg/ha) (tpa) (kg/ha) (tpa) Uganda 8 30 000 100 375 000 Tanzania 10 110 000 100 1 100 000 Kenya 31 300 000 100 970 000 Total 440 000 2 445 000



• There is adequate warehousing in the major cities of the Region • There is a sizeable network of agricultural fertiliser dealers and traders in the Region who

could easily handle the distribution of the 66 000 tons of super phosphate envisaged in Phase 1.

• The rail network is better in Tanzania than in Uganda and Kenya. However this is expected to improve over the next few years.

• Whilst many of the roads in the whole region require maintenance, a reasonable network is in operation.

Phosphate Share of the Market

Even in the current market, annual straight phosphate fertiliser consumption is as shown in Table 11.5.

Table 11.5: Annual Phosphate Consumption in East Africa

Country Annual Consumption (tpa)

Uganda 1 500 Kenya 46 000 Tanzania 35 000 Total 82 500

Pricing

End User Prices in the region are high due to sea freight charges, port handling charges, warehouse costs and transport costs. In 2007 Di Ammonium Phosphate (DAP) was selling for US$620/t. Triple Super Phosphate typically sells at about the same price whilst Single Super Phosphate sells at a 10% discount to DAP. The comparable FOB price for DAP was US$415/t. The difference of US$205/t for local distribution if parity pricing was adopted would give a local manufacturer a significant profit opportunity. Local freight and distribution charges should not amount to more than US$50/t. On the previous Nilefos Minerals financial model, selling prices of US$520/t and US$670/t for SSP and TSP respectively have been used. These prices are certainly realistic in this market (in July 2009 SSP was selling in Uganda between US$650/t and US$700/t) and could result in attractive returns to the project, depending on capital and operating costs.



Conclusion: Phase 1

The following points summarise the expected marketing for Phase 1:

• This is a large market: 127 million people. • It is growing annually at 2.5%. • Food production is not matching population increase. • All fertilisers are imported (440 000 tons per year). There is no significant local

production. • In Uganda alone 350 000 tons of fertiliser is needed per year to replenish lost nutrients. • Uganda currently imports 30 000 tons per year. • By 2020 fertiliser consumption in East Africa could exceed 2 000 000 tons per year. • At import pricing parity a local manufacturing facility (66 000 tons per year) could yield

attractive shareholder returns, depending on capital and operating costs of the production facility.

11.6 Phase 2: Manufacture and Export of 1 Million Tons per Year of Phosphate Rock Concentrate

11.6.1 Current pricing

Phosphate Rock shared in the commodity boom of 2007 and early 2008. Prices rose above US$400/t FoB during this period. There has been a significant price adjustment in the market which has now stabilised around a level of US$150/t FoB for good quality phosphate rock. Prices are currently heavily influenced by the world recession but should pick up gradually as the recession falls away.

Sukulu benchmark quality:

In Phase 2, approximately 75% of production will be at 42% P2O5 with the remaining 25% at 37% P2O5. This mix of quality will be compatible to the highest in the world market comparing favourably with Foskor’s 37% P2O5 and Russian Kola’s 38%.

Average global rock quality:

Over the last 30 years average rock quality has fallen to just below 30% P2O5, as shown in Figure 11.1. The introduction of Sukulu’s 1Mtpa at 40% average P2O5 should be welcomed by a market looking for food grade quality rock.

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SRK Consulting Sukulu Phosphate Project Scoping Report -10


Figure 11.3 shows the CFR India price adjusted to Sukulu’s weighted average P2O5 of 40%, less and estimated US$40/t for sea freight.

Figure 11.3: Price CFR India adjusted to 87 BPL less $40 (freight)

11.6.2 Pricing forecasts

Recent Market Developments 2006-2008

The following points are made in the latest British Sulphur Consultants’ presentation giving a 10 year outlook: • World production has levelled at 173 million tons per year; • Exported/trade volumes 31 million tons per year; • Prices moved up significantly due to strong demand; • Fundamentally a strong market. The increased phosphate rock demand is primarily driven by the following industries: • Industrial and food phosphate demand; • Animal feed phosphate demand; • Phosphate fertiliser demand. World demand is split by industry type as follows: • Fertiliser 87% • Industrial food 6% • Animal feed 7%



Fertiliser demand: • Will grow at 2.1% annually; • Driven by world population growth (see Figure 11.4); • World population will grow by 700 million over the next decade. Industrial food demand: • Expected to be flat • Plagued by environmental issues Animal feed demand: • Will grow by 3.2% per year

Phosphate rock demand growth - 10 years: • Demand is expected to grow by 42.6 million tons to reach 216 million tons by 2017. The

largest growth will be in East Asia (16.6 million tons). Africa will grow by 6 million tons by 2017;

• Production will match demand. Pricing “ we believe that rock prices over the long term have undergone a permanent upward shift; however prices will decline as more rock enters the market and prices will decrease over the medium term” (British Sulphur Consultants). The BSC Graph reproduced in Figure 11.4 illustrates this permanent shift.



Figure 11.4: Structural Changes Shift Equilibrium Pricing

Offtake Agreements

Nilefos has received letters of offtake indications from Foskor in South Africa and from Nilefos Chemie in Belgium. These letters of intent cover more than half of the total envisaged production in Phase 2. Similar verbal commitments have been made by other Indian fertiliser companies.

11.7 Conclusion

• Having traded for the majority of the last 40 years at a level of US$50/t, phosphate rock has recently enjoyed 2 years of significantly higher prices.

• Although these levels have fallen in line with the commodity price slump they have levelled off significantly higher than the US$50/t level.

• The current world market of 173Mt is expected to grow to 217Mt by 2017. • The major growth will be in the fertiliser market as the world’s rising population demands

more food. • Sukulu’s 1.0Mtpa of average 40% P2O5 rock should be attractive to a world market

characterised by falling quality to an average below 30% P2O5.

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