The negotiation process is lower than expected, but it is still making steady progress. According to the company's announcement in February, it was planned to complete the negotiation and signing of EPC contract, financing agreement, product compensation and sharing agreement by the end of July. We believe that the progress of the project is lower than planned and is more due to the fact that due diligence has not yet been fully completed. The two sides had active communication and reached most of the consensus, indicating that the project is in steady progress.
The two sides have reached a consensus that the company will hold MPC (non-option), and the company will soon be transformed into a resource-based enterprise. The company obtained the option to control the MPC in the previous agreement. From the analysis of the development strategy and the cost and benefit of the company, we think that the exercise is a high probability event. This time, the two sides changed the option to direct holding, and the company's strategic intention to control potash resources has been fully demonstrated. According to McGonagall's announcement, in the future Zhongcheng will hold a controlling stake in a company (the company will hold a stake in 90%MPC), while McGonagall and the Congolese government will have a 39.9% and 10% interest in MPC. Through the calculation, it is known that Zhongcheng shares will eventually acquire no more than 50.1% of the interest of MPC. After obtaining the controlling stake in MPC, the company will successfully transform into a potash resource-based enterprise.
The two sides further clarified the financing arrangements and the EPC agreement. Under the conditions of cooperation and transaction between the two parties, the company will be responsible for all the financing of the funds needed for the follow-up construction of the MPC project, with a repayment period of ten years. We believe that the fundamental reason for McGonagall's cooperation with Zhongcheng shares and giving up control lies in the need for funds. At present, Zhongcheng shares have a controlling stake in MPC, which helps the company to obtain loan support from domestic financial institutions, and the probability of success of the project is greatly improved. In addition, the two sides further confirmed the company as the EPC general contractor of the project.
The two sides decided on the next action plan. According to McGonagall's announcement, the two sides will initialize the Project Development Agreement (Project DevelopmentAgreement) by the end of August 2010, and all agreements and ancillary agreements are expected to be signed and approved by relevant regulators in November 2010. The two sides clearly defined the progress of the future project, reflecting the good desire of both sides to jointly promote the project.
The potash industry has entered an upward cycle. From an international point of view, potash demand has rebounded sharply in the past 10 years, driving potash prices to bottom and rebound. International potash companies saw a big increase in net profit when prices fell by 40 per cent (for example, Potashcorp's second-quarter net profit rose 2.2 times).
Subject to low prices of agricultural products, frequent natural disasters and other factors, the domestic potash market is still depressed in the first half of the year. Under the expectation of inflation and production reduction, the price of agricultural products in China has formed an upward trend. We believe that China's potash market will gradually come out of the bottom under the pull of demand.
Be optimistic about the prospect of potash project and give it a buy rating. In view of the changes in the market, we have made appropriate adjustments to the previous assumptions: 1, the company will have a 50.1% interest in MPC; 2, the total capital demand for the Mengge potash project is 1.2 billion US dollars, which will be solved by Zhongcheng shares; 3. Among the funding sources of potash projects, 40% of the company will be solved through additional issuance, and the rest will be completed through debt financing; 4. The additional offering price of Zhongcheng shares is 11.79 yuan, which is equivalent to the average price of the company in the first 20 days.
We roughly estimate the market value of Zhongcheng shares by using the method corresponding to the potash equity and production capacity of two domestic potash companies, Salt Lake Potash Fertilizer and Guannong shares. Salt Lake Potash Fertilizer and Guannong shares have a corresponding market capitalization of 24000 yuan and 28400 yuan per ton of potash production capacity, respectively.
According to the company's potash production capacity of 600000 tons, the corresponding market value of each ton of potash production capacity is 26200 yuan (equal to the average value of salt lake potash and Guannong shares), the company's market capitalization can reach 15.8 billion yuan. We estimate that the additional share capital is 278 million and the post-issue share capital is 574 million. Corresponding to the company's stock price of about 27 yuan, give the company a buy rating.
Risk factors. 1. The two sides have not signed the final cooperation agreement, and there are still some project risks. 2. It is expected that the possibility of putting into production before the end of 2011 is low, and there is some uncertainty about the progress of production. 3. The fluctuation of potash market in the future may lead to a sharp fluctuation in the company's future earnings.