Potash Mining, Processing and Distribution. in the Real AZ Corridor. Sector Profile

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1 Potash Mining, Processing and Distribution in the AZ Corridor Sector Profile a CORRIDOR Introduction Potash Mining, Processing and Distribution is one of the four sectors identified by the AZ Development Council as having very strong economic development potential in the AZ Corridor. Potash Mining directly impacts the world agricultural, food supply and mining markets; has proven potential in the Holbrook Basin; and will be a source of sustainable, long-term economic growth and jobs in the region potentially for the next 8 years. The outlook is impressive. The potential for significant, long-term potash mining in the AZ Corridor has been demonstrated through drilling and resource reports and two global companies have begun major capital investment programs. A third privately held company is also at work in the region. Their combined efforts are expected to produce 5 to 8 short-term construction jobs once permitting has been completed, and up to 1,5 full-time mining and related sector jobs over the next 5-7 years. The development of the Potash Mining, Processing and Distribution sector will produce significant new capital investment throughout the AZ Corridor as supporting or complimentary businesses develop and result in significant annual payroll growth, incremental wage growth, facility construction, new business development and the retention and expansion of existing businesses that benefit from the expanding regional economy. Potash mining in the Corridor is expected to produce up to 2.5 billion tons of potash, be productive for more than three generations, and create full-time jobs that pay an average of $7, a year. Learn More Call us at (928) Potash s Role in World Markets Potash is the term widely applied to naturally occurring potassium salts and the commercial product derived from them. It is a primary source of mineral fertilizer and an important crop nutrient. Potash contains potassium, which helps produce healthier, higher crop yields and is one of the three most important nutrients to plants: nitrogen, phosphorus and potassium. It is primarily used as a soil fertilizer which improves water retention, yield, nutrient value, disease resistance and the taste, color and texture of food crops. Crops infused with potash are more likely to survive harsh environments and ward off attacks from disease and pests. Potash has application to a wide range of fruit and vegetables, grains (rice, wheat, corn), sugar, soybeans, palm oil and cotton all of which benefit from the nutrient s quality-enhancing properties. It is considered to be critical to the protection and expansion of the global food supply. Ninety-five percent of all potash produced worldwide is used for crop improvement. There is no known substitute that is as effective for this use. In addition to its use as a fertilizer, potassium chloride is important in industrialized economies, where it is used in aluminum recycling, in metal electroplating, to produce oil well drilling fluid, in steel heat-treating and for water softening. Salt gleaned from potash mining can be sold as road salt and other industrial uses, creating a secondary market that also minimizes the need to store tailings. These non-fertilizer uses typically account for about 15% of annual potash consumption in the United States..9 DEMAND 18 SUPPLY 9.5 DEMAND 1.2 SUPPLY North America Market Facts (U.S. and Canada) Population 352 million tonnes (combined); Account for approximately 14 percent of world fertilizer consumption; Major suppliers of food and fiber; U.S. accounts for about 4 percent of total global trade in wheat, corn, soybeans and cotton; Both countries are among the world s most efficient agricultural producers; Rising global food demand and domestic biofuel mandates have created competition for limited farmland. Source: Market data. All numbers in tonnes. A metric tonne is equivalent to approximately 1.23 U.S. tons. 1

2 According to the Fertilizer Institute, only 12 countries produce potash. The largest consumers of potash include China, India, Brazil and the United States. The U.S. relies on foreign production for more than 85 percent of its potash demand. Experts agree that the demand for potash will continue to grow in both the short and long run. The U.S. Department of the Interior s 212 Mineral Commodity Summaries projects that world potash consumption will increase by nearly 4 percent annually over the next five years due to world population growth and a corresponding need for increasing crop yields. Four powerful drivers are fueling demand for increased food production: population growth, changing diets in developing countries, the limited supply of farm land and the expanded use of farmland to grow crops for biofuels. Potash demand has tightened during postrecession recovery and additional capacity is needed to satisfy increasing demand in major consuming countries like China, India and Brazil. In the U.S., demand for potash declined during the recession, but began to expand again in 2. The need for increased global food production has led to huge increases in demand for fertilizers which, in turn, has pushed the price of potash to a sustainable $4 - $45 per ton on the world market. Worldwide demand is expected to reach 36.5 tonnes (4 tons) annually by 215. Most analysts expect potash prices to increase dramatically over the next 2-3 years, as the global hunger crisis expands, new uses for crops emerge and expand (e.g. biofuels), growing conditions continue to deteriorate due to climate change, and the pressure to increase yields increases dramatically worldwide. Sea Water Minerals deposited as salts Rivers Extraction by mining or from salt pans Nutrient Depletion/ Re-Stocking Shift to Higher-Protein and Higher Value Diets K in liquid fraction to water courses Global Population Growth MORE POTASH DEMAND Emergence of Biofuel Technologies K The Global Potassium Cycle Disposal of human waste Potash application to soil Separation of salt for use as fertilizer Food More Effective and Efficient Potash Applications Harvest Plant uptake & growth Decreasing Supply of Arable Land Market Outlook The leading drivers for fertilizer sales are the demand for food, economic growth and biofuels. By 25, The Food and Agriculture Organization of the United Nations (FAO) estimates that production of oil crops will more than double, with soybean and oil palm generating the largest increases. The sugar sector may also significantly increase as a result of the rapid expansion for biofuels. By 25, FAO expects world population to rise by 4% to 9.2 billion. Such an increase in population growth will result in an increasing need for crops used in food, animal feed, fiber and biofuels. Growing demand for a grain-fed meat and dairy diet in developing countries will further stress global grain inventories and exert extreme pressure on grain and potash prices. A new focus on the cultivation of biofuel crops has diverted much agricultural production away from food as farmers are induced to produce fuel inputs. High oil prices and increasing concerns about carbon emissions have driven the subsequent use of ethanol and biodiesel as alternative energy sources. These biofuels are produced from crops such as sugar cane, corn, oil palm and soybeans. This emerging demand is placing pressure on crop yields and prices. It is also placing increasing strain on a global food supply which is already struggling to feed the world s nearly 6.7 billion inhabitants. The International Fertilizer Association predicts the world s appetite for potash to grow at 3.7 per cent per annum based on current consumption patterns. This is a future growth rate that is generally accepted by analysts. Nearly two million additional tons of potash production will be required annually to meet that rate of growth. Global Potash Resources and Markets According to the United States Geological Survey (USGS), world resources of potash are estimated at about 25 billion tons, with reserves at about 8.5 billion tons of K2O (oxide content) equivalent. Canada has more than half of the global reserves (4.84 billion tons) based on an ore grade of 24% to 32% K2O and a maximum minable depth of 3,3 feet. The world s second largest potash reserves are in Russia which accounts for 21% of the global total. Belarus ranks third, with 9% of world reserves. Potash is used as a major agricultural component in 15 countries. The largest importers of potash are the heavily populated countries of China, India and Brazil. Asian nations produce only 3.1 million tons while consuming 23.1 million tons. As much as 85% of the world s existing potash mining and processing facilities are more than 25 years old. 2

3 The current potash market is estimated at 5 million tons annually. The U.S. remains one of the largest net consumers producing only 1.2 million tons per year while consuming 5.2 million tons/year. Potash is mined in small amounts in Utah, Michigan and New Mexico. Deposits in western Canada extend into northeastern Montana and North Dakota at depths of approximately 5, to 9, feet (currently considered too deep for conventional extraction). The Paradox Basin in Utah contains resources of about 2 billion tons, mostly at depths of more than 3,6 feet. A large potash resource also lies about 6,3 feet below central Michigan. In the Carlsbad mining district of southeast New Mexico, the Salado Formation contains 12 potash horizons covering 1,9 square miles. The Holbrook Basin of Arizona ( AZ Corridor) contains resources of at least 1 billion tons at much shallower depths of 7 to 2, feet. Potash from reasonably-priced domestic sources can have a competitive advantage because transportation costs are lower. Additional consideration is given to domestic potash because of the recent strengthening of the U.S. dollar versus the Canadian dollar. The location of northern Arizona potash resources also presents a geographic advantage, given the region s proximity to California, which is an epicenter for U.S. agricultural production. California s ports are also a gateway that could provide quick access to major markets in China, Brazil and India. Related Industries and Sectors The emergence of a significant potash mining sector can also be expected to attract the development of related businesses, including transportation (truck, rail), equipment sales, maintenance and repair; and road salt sales and marketing (an output of potash mining). There is also the potential to develop solar fields on land above underground potash mines. Marine algae farming requires water which is similar in brine content to that utilized in potash mining. It is feasible that successful algae cultivation could take place on land which is above or immediately adjacent to underground potash mines. Algae & Other Biosciences is one of the four high potential development sectors identified in the AZ Corridor. Primary targets for sector-related development would include trucking and transportation companies, including fuel providers and paving companies; ventures that support high volume industrial rail traffic; and companies which sell, maintain, rent and repair mining equipment and trucks or truck parts. A strong secondary road salt sales and marketing sector could emerge, targeting high snow and mountainous regions surrounding the Holbrook Basin. Importance of Potash to the AZ Corridor Potash mining can bring various benefits to a region. Economic benefits can include royalty revenues for mining on public lands, state and county ad valorem taxes and sales tax revenues. Short-term construction and permanent mining and processing jobs are created. Economic growth results from spending by mining companies and their workers, new business for local service providers and suppliers, payments to local property owners, and the creation of businesses that are necessary to support mining or that are enabled by it. Workforce training programs often develop through investment by nearby communities and educational facilities. Mining companies often make direct community investments by improving or expanding infrastructure, and by sponsoring new educational programs or medical facilities and services. Northern Limit of Salt HOLBROOK PROPOSED EXPANSION OF PETRIFIED FOREST B 4 Potash Deposits Arizona Land 2 PETRIFIED FOREST NATIONAL PARK NAVAJO CO. APACHE CO. LPG 3 2 T H I C K T H I C K T H I C K PAST HELIUM PRODUCING AREA Location Salt A MILES 5 A B ST. JOHNS 3

4 Summary of the Corridor s Suitability for Potash Development Potash was first identified in the Corridor in the 192 s. Later exploration (196 s) identified significant resources, but it was not mined in Arizona due to Saskatchewan s (Canada) subsidized overproduction in the late 196 s. Helium was explored and produced in substantial amounts near the northeastern potash deposit boundary between 1961 and 1976 in two fields: Pinta Dome and Navajo Springs. In the early 197s, 11 solution caverns were created within the region s salt strata as subsurface storage facilities for liquefied petroleum gas at Adamana. They are still in operation and are served by the Burlington Northern Santa Fe (BNSF) railroad. Northern Arizona s potash resources remain virtually untouched. According to the 28 Arizona Geological Survey (AZGS), there are between 682 million and 2.27 billion metric tons of potash in the Holbrook basin of east-central Arizona. U.S. potash production totaled just 1.1 billion tons in 211, by comparison. At a price of $45 per ton, the Holbrook Basin potash would be worth between $3 billion to $1 trillion. Depth to potash by basin The deposits have Depth relatively shallow (feet) depths between 7 and 2, feet -15 and lie in a 6-3 square mile area. Shallow deposits -45 with fewer faults are significantly -6 easier and less -75 expensive to mine. Michigan Carlsbad Paradox Holbrook The potash 6,3 ft District Basin, Utah Basin, Arizona 5,8 ft 3,6 ft 1,7 ft deposits in the Holbrook Basin are considered to be of a relatively high grade, available at shallow depths in uniform layers and, therefore, cost effective to mine. The region s proximity to existing infrastructure makes mining even more attractive, with rail, interstate access and power for utilities all nearby. The BNSF rail yard is located less than seven miles away, at Holbrook. Interstate 4 runs adjacent to the project and is a major artery connecting California with the rest of the U.S. Power is readily available from two major power generation stations located within 25 miles of the project area. Access and Infrastructure Much of the current domestic potash production in the U.S. occurs in the southwestern region of the country, where lower freight costs to regional markets provide a commercial advantage over imported products, mainly from Saskatchewan. The AZ Corridor is ideally located and has the infrastructure in place to expand on those transportation efficiencies. The Holbrook Basin is accessible via U.S. Interstate 4 (I-4) in the north, U.S. Route 77 in the west, U.S. 191 along the eastern edge and U.S. Route 18, which crosses the area. The town of Holbrook lies approximately seven miles northwest of the area. Snowflake and Taylor are nearby. St. Johns is close to the Apache County deposits. The BNSF railway transects the northern part of the region. The Apache Railway, a one-track railway with excess capacity, is located less than four miles west of the property. County maintained roads serve the entire project area. I-4 is a major west-east interstate which intersects with eight north-south interstate highways, making it a full service truck transport and support system throughout the southwestern portion of the U.S. The BNSF main line is located to the north of the Holbrook Basin and is a dual track built for heavy duty service. The BNSF southwest system runs through Fort Worth, TX (BNSF headquarters) through New Mexico, Arizona and into California. The sea ports of Stockton and Long Beach (CA) and the Mexican sea ports of Guymas and Topolabampo are easily accessible and suitable for international shipping. A coal-fired power station (Arizona Public Service s Cholla plant) provides electricity to the area and is located just west of Holbrook. Tucson Electric Power has a plant near St. Johns which has recently expanded. The region is covered by an electrical distribution network and a gas supply system. Water is relatively abundant in the region. Water for drilling can be obtained from range tanks, wells and the Little Colorado River. The Coconino Sandstone Aquifer provides water resources to the region. Map of resources in AZ Corridor Passport Potash, one of two major mining companies working in the region, estimates that there are up to 2.5 billion tons of potash in the Holbrook Basin, which could provide for an estimated 8 years of production. The Holbrook Basin deposits could prove to be very competitive in the global market, according to the Arizona Geological Survey in Tucson. 4

5 Conservative estimates for total capital investment for a greenfield potash development project typically range between $3.5 to $5 billion. Development costs are expected to be significantly lower ($1.4 - $2 billion) in the AZ Corridor, due to existing infrastructure and the quality and accessibility of the potash resources in the region. Workforce The region has a sizable resident workforce that can be trained for mining operations. The closure of the Catalyst Paper plant in Snowflake expanded the available labor pool. Workforce development programs in mining operations are being planned by educational institutions including Northland Pioneer College. Contract training programs are expected to develop as actual construction and mining jobs are created, potentially as early as late 213. Sustainability The Holbrook Basin is considered to have potash resources which could produce significant mining capacity for up to 8 years, given current technology. Future resource discovery and/or extraction technologies could expand the production capacity, output and life of the current resource area. What are the opportunities in this sector? The highest potential opportunities in this sector lie in the development of an active, high volume mining and rail operation which will encourage other industries to locate in and near the Corridor in order to capitalize on economic growth. Fertilizer and other processing plants could choose to locate in or very close to the region and create distribution centers that could also be utilized for related products. An active, multi-modal distribution system will encourage companies targeting similar destinations (California, agricultural markets, shipping ports) to locate nearby to take advantage of transportation efficiencies. Profiles of Current Potash Interests in the AZ Corridor There are three entities with major land interests in the region: Prospect Global Resources, Passport Potash and Hunt NZ Potash. Two are actively working to develop northeastern Arizona s potash resources: American West Potash (through Prospect Global Resources) and Passport Potash. The third company, HNZ Potash, is a private company that was formed from Hunt Oil and NZ Legacy. HNZ has interests in 75, acres in the region. Potash resources also exist on Native American lands, and the Hopi signed an agreement with Passport Potash in 212 to allow joint exploration and potential mining of resources on Reservation and private (non- Reservation) Hopi land. American West Potash American West Potash is based in Denver, CO and owned by Prospect Global Resources. The company has stated that it plans to invest more than $1.4 billion in initial capital costs in the Holbrook Basin, and that it expects potash mining in the region to be a catalyst for related industries, including vendors for supplies and services Prospect Global has acquired leaseholds on more than 93, acres of state and private land in the region. The American West Potash project is located within Apache County, immediately east of the Petrified Forest National Park. The center of the project area is approximately miles south of Interstate 4 and is close to the city of St. Johns. The company has completed an NI 43-1 Resource Report which included 7 miles of seismic studies, 12 new wells and 81 historic wells. The mineral resource estimate is 3 million tons measured, 25 million tons indicated and 53 million tons inferred at an average depth of 1,427 feet. An independent geologist s report concluded that Prospect Global s properties can produce 2 million to 3 million tons of potash per year for 4 years. At today s potash prices, 4 years of production could be worth $4 to $6 billion in sales. Preliminary design, budget and permitting plans call for a facility that will produce 2 million finished tons of potash per year. The company expects to create 5 to 8 temporary construction jobs in the first 18 to 3 months, and then 3 to 4 permanent mining/production jobs once operations begin. In 212, Prospect Global entered into an agreement with Sichuan Chemistry Industry Holding to buy a minimum of 5, tons (and up to 1 million tons) of potash per year for years. The amount could represent about 25% to 5% of Prospect Global s estimated annual production of potash. Passport Potash, Inc. Vancouver, BC and Apache Junction, AZ-based Passport Potash currently has interests in more than 86, acres in the Holbrook Basin (including leaseholds, lease/purchase agreements and prospecting permits on Federal and State lands). The company also has a letter of intent to purchase an additional 41, acres of private land. An exploration campaign that began in 29 is now in its second phase and the company has more than 47 new exploration drill holes in license areas and a seismic survey of its landholdings in Navajo and Apache County. According to a NI-43-1 (resource) estimate released in mid-212, the company has 3.7 million tons measured, 37.8 million tons indicated and 87.3 million tons of inferred potash at an average depth of 8 to 1,4 feet, and with an average KCI grade of 14.93%. 5

6 A 212 agreement with the Hopi tribe will enable the company to assess and potentially mine resources on Reservation and non- Reservation properties with greater efficiency. The cooperative agreement will allow Passport to access and conduct certain exploration activities on an additional 12,853 acres of privately held Hopi land (non-reservation land) while allowing the tribe to share in the study results. The company expects that conventional mining methods can recover up to 8 percent of the mineral in the deposits and that the life of the mine might be 4 to 5 years. Passport Potash and Prospect Global will compete for a share of the U.S. potash market, while their efforts in the Holbrook Basin will collectively increase U.S. competitiveness in the global potash market. Both projects will be huge regional economic development growth drivers in the AZ Corridor. Hunt NZ Potash Outlook Hunt NZ is a privately-held company without any obligation to share company information publicly. The company is known to be cooperating with Passport Potash, through a joint venture agreement to explore and potentially develop 21 permitted zones for which Passport holds the drilling permits but Hunt NZ owns the land. Prospect Global has prepared a Preliminary Economic Assessment and signed a provisional contract for selling some of its potash in China. Passport expects to release its Preliminary Economic Assessment in the first quarter of 213. Advanced construction is expected to begin in 215, including roads, rail lines, mining contracts, purchase orders for trucks, water and waste lines, etc. Both companies are forecasting production within a few months of one another, by 216. A typical potash mine needs approximately two years to ramp up to full production. There is much to be excited about in the Corridor. Resources Compiled by ED/c Partners from existing secondary resources and reports, including: Arizona Geological Survey, Major Potash Deposit Near Holbrook, Arizona Sources cited in Seeking Alpha investment blog, Greg Miller, November 13, 212; Troy Bayer, July 12, 212; Reports from Mining.com; Potash Development Association website, Potash Fundamentals, Passport Potash website, This profile is for general information purposes only and not intended to provide investment advice or an analysis of any company. It was developed to illustrate the potash sector s potential in the AZ Corridor. This sector profile was produced by the AZ Development Council utilizing funds from a 212 Vision Grant provided by the Arizona Commerce Authority. February