Apr 26, 2008

Potash Makes Plants and Bank Accounts Grow

By Andrew Mickey, Q1 Publishing

If Potash were a movie it would be “Little Miss Sunshine”.  A feel-good investing story brimming with upbeat subplots, it is impossible to dislike.  Let’s get rich while feeding the hungry.

Potash is mined from deposits left behind when ancient sea beds evaporated.  95% of the world’s Potash supply is used in fertilizer.   There is no commercial substitute.   Surging global demand is being driven by macro-economic factors like global population growth, a decrease in arable land and increased consumption of meat in India and China.

Subprime mortgage fallout?  A pull back on gold?  Recession in the US?  Not a concern for stakeholders in the Potash industry.  As one wag put it: “As long as people are eating and having sex – Potash prices will continue rising”.

How solid are these fundamentals?  Potash Corp (POT-TSXv) – which controls 22% of the global Potash market is trading at $148 per share – up 246% in the last 12 months.  It’s an excellent company.  But a 300 foot tall oak tree, from a leverage point of view, has probably done most of its growing. Risk tolerant investors may wish to glance down the food chain juniors with a bigger upside.

Before I get into comparables, let’s make one thing clear: Potash is not gold.  There is no shortage of it.  The Saskatchewan basin alone could provide the world with enough Potash for the next ten thousand years.    The planet doesn’t need more “discoveries”, it needs more production.  The question for the juniors is: “who can run the fastest”?

I’ve identified three junior Saskatchewan Potash Basin plays that are frontrunners in the race to production: Anglo Minerals (ALM-TSXv), Athabasca Potash (API-TSXv) and Potash One (KCL-TSXv) .  All three have significant financing, great share structure and potential 200 year mine lives.

Anglo Minerals (ALM-TSXv) is partnered with the $200 billion global mining monster, BHP Billiton.    Nice for Anglo that they have a deep-pocketed friend to put the project into production and considering you need $2B to build a mine, that’s a positive.   Good team on the company with good partners.

Athabasca Potash (API-TSXv) owns the rights to 1 million acres of the Saskatchewan Potash Basin, with an inferred resource big enough to fertilize 100 planets our size for a century.   They will never run out of Potash but like any hard rock operation, investors shouldn’t hold their breath waiting for the mine to open.  They are at least seven years away.   Athabasca IPO’d on Dec 14, 2007 and is a fantastic trader.    API is a bullish long term play.

Potash One (KCL-TSXv) is taking a different approach. The team is building a “solution mine” (dissolving the Potash with salty water) which should incur significantly lower CAPEX than traditional mining - and appears to have a quicker timeline to production (4-5 years). Management secured their 100,000 acres three years ago, next to the Mosaic solution mine (MOS-NYSE).  Speed to production could be a big advantage. Management has pedigree – Paul Matysek sold his last company for $1.2B.

Here is a recap of the three companies since API went public on December 14^th

Remember, Potash juniors entering the basin will have millions of tonnes of Potash to boast about – it’s everywhere. But the reality is, the new players are probably 12 - 14 years away from production.   Demand is growing by about 2.5 – 3M tonnes per year and within 8-9 years; supply from new mines will meet the forecasted demand.

So let’s not get mesmerized by the size of the concession or the billions of tones of inferred resource, or the centuries of mine life.  Investors should be looking for an agile organized company that has the technology, expertise and financial muscle to get the stuff out of the ground.

The tortoise is not going to win this race.  Who is the hare?

Based on their early entry, advanced technology, and the experience of their management team, I’d give the edge to Potash One.  Word is just starting to get out on this company.  With a market cap 20% lower than ALM and 56% lower than API, there’s still a lot of room for growth.  In the time it has taken me to write this article, the Potash One stock price has risen 4.7%. 

Could be a good time to get in, if you want to leave this movie smiling.

Good Investing,

Andrew Mickey,
Chief Investment Strategist, Q1 Publishing