PERTH (miningweekly.com) – Potash developer South Boulder has signed a joint venture (JV) agreement with the Eritrean National Mining Corporation (Enamco) to develop the Colluli potash project.

Under the terms of the agreement, both parties would hold a 50% stake in the project through a newly formed company called Colluli Mining Share Company.

The new company would have five board members, including two representatives from Enamco, while the Eritrean firm would provide a stabilisation agreement under which it would bear the risk of adverse changes in the Eritrean fiscal regime for ten years from first production.

It was proposed that the Colluli project would be funded through 70% debt and 30% equity. If third-party debt was not available, South Boulder would be required to provide the debt to the JV company.

The project equity would also be funded by South Boulder, which would be entitled to recoup 50% of this equity as a preferential payment from 50% of the project cash flows, which would have otherwise been available to all equity holders.

This would result in South Boulder receiving 75% of all free cash flows, after debt service obligations, until such time as 50% of the equity contributed by the company is repaid.

“The signing of a binding term sheet with Enamco is a significant milestone for South Boulder,” said CEO Paul Donaldson on Tuesday.

“The agreement establishes clear terms for a partnership with the Eritrean government through Enamco, clearly aligns South Boulder and Enamco’s interest in moving the project forward with project development, and provides certainty, which will facilitate interaction with potential financiers and strategic investors.”

Earlier this year, South Boulder announced the results of a staged development model for the Colluli project, which examined the potential economics of starting production at a rate of one-million tons a year and expanding to two-million tons a year after five years.

At a potash price of $450/t, the staged development would have a net present value of $1.3-billion, at a discount rate of 7%, and an internal rate of return of 15.1%.

Total capital for exploration would amount to some $1.2-billion, which was significantly lower than the two-million-ton-a-year scoping study estimate of $1.5-billion.

The staged development model pegged the start of construction for 2014, with expansion capital only required by 2017, if potash production started in 2016. The project was expected to reach a steady-state production of two-million tons a year by 2020.