Some Important Notes on Potash (And Ways to Profit)

Almost everyone is familiar with the leader in potash, Potash Corp. of Saskatchewan (NYSE: POT) [TSX: POT.TO]. But most people (at least the people I know) have a vague idea and don’t really understand what sets it apart from other fertilizers.

This is most likely the case among Seeking Alpha readers but It can’t hurt to reinforce one’s understanding of such an important product. Additionally, although I bought some potash in early January, my focus was on a small-cap producer, with an incredible valuation. So the following is a brief summary of potash and its unique characteristics:

1. Potash is not your typical fertilizer in that it is mined just like metals and looks like a crystallized rock before processing.
2. Potash is unique in the sense that it is only found in significant quantities in Canada, Belarus and the politically unstable Russia, thus putting a supply constraint over the coming years and decades.
3. It is superior in the sense that crops treated with potash are extremely high yielding, provides good crop protection and most importantly in drought ridden countries is high water retention.
4. It has a broad use in agriculture products including wheat, rice, sugar, corn, cotton soybeans. Not to mentioned some tobacco products and soap.
5. Potash has been used for centuries, but not until recently has the use been so far reaching nor has the quantity used annually come close to present day use.

As previously mentioned, the price of potash will be pushed up over the years not only due to a supply constraint but also the demand side. The reasoning behind this is that emerging countries i.e. BRIC, will soon start demanding higher quality food. The standard of living, although still far from ideal, continues to improve in these countries and looks to be an increasing trend for the foreseeable future.

Here is an all inclusive valuation of Potash Corp. (DCF, ration analysis, H-model, Graham's formula and some other metrics).

But now, in these last paragraphs, I wish to point out a completely overlooked potash company, which has the potential to be a 5-10 bagger over the coming years. This company is Migao [TSX: MGO.TO], which can also be found on the pink sheets (MIGGF.PK). I consider this to be the Chinese Potash Corp., despite it being headquartered in Canada.

There are many compelling attributes of this company, aside from a valuation I have seen only a few times ever (growing earnings at 70%+ while currently trading just under 8x price: earnings and under 7x EV/EPS). This all in the face of them increasing production capacity 70% over the next 14 months.

Even more amazing is the company’s ability to generate rather significant free cash flow in the face of rapid expansion while also being a 400 million dollar company. This is reminiscent of Potash Corp. back in 2002-2003, when it was trading in the mid teens. It is at least worth checking out and a great way to play the price of agricultural goods for the next leg up in the commodity bull market.

My Migao valuation is here.

Disclosure: Long Potash calls, long Migao

Comments

[a5fung:]

I have been checking out Migao myself for the past little while, but if I'm not mistaken, Migao is a specialty potash company and their business is to sell value-added potash products and not actually mining potash themselves. They don't own or operate any potash mines, but instead purchase potash and process/package it and deliver to the end users or distributors. I also recall that much of their potash products are used in tobacco crops.

Anyways, thanks for the analysis, I'll check out your spreadsheets. Thanks.

Jul 05 06:17 PM

[Hyperinflation:]

Yes but their profits increase along with potash prices. I guess you could call them a potash pooling company, much like wheat pooling. they make long term contracts with producers for a specified amount of potash. Potash prefers it this way because as opposed to those purchase potash directly, they diversify themselves by doing business with migao who process potash into various components. They did have a large connection to tobacco product, but more and more is being used in China to satisfy the growing demand in fruit and vegetables. I think tobacco use will drop to 40% and continue to do so year after year as opposed to 2007 when nearly 70% of it was used for that reason.

Jul 06 01:43 AM

[SJMDESIGN LTD:]

Currently i would not go long on Potash it has seen 25%correction within last 2 weeks it trading in a range $102 to $114.
One must trade to gain currently .
Over 1.5 to 2years this stock could gaing 40 to 50% min.

Jul 06 05:29 PM

[bassmaster17:]

Man, what a beating today for the Potash contingent!!! I hope Can and the Russian cartel isolate Silvinit as a desperate cash strapped company desperate to sell at any price.

Jul 10 02:23 PM

[Canuck Inve...:]

Despite what Potash Corp says about demand for higher quality food driving higher fertilizer prices the real cause is the increase in biofuels production. The World Bank published a paper entitled: "A Note on Rising Food Prices." To quote: "It concludes that the most important factor was the large increase in biofuels production in the U.S. and the EU. Without these increases, global wheat and maize stocks would not have declined appreciably, oilseed prices would not have tripled, and price increases due
to other factors, such as droughts, would have been more moderate.

So, fertilizer prices are tied to oil prices and corn prices. At lower oil prices ethanol is not an attractive substitute.

I'm long Potash Corp myself.

Jul 13 11:51 AM

[Hyperinflation:]

I agree to an extent, but not with ethanol comment. In the U.S there is a mandate so that ethanol is necessarily used in gasoline. To be honest ethanol is never attractive because it costs more to turn the corn to ethanol than the energy derived from it. Ultimately, if your looking to hold onto these equities for 5-10 years it will be driven by the demand for higher quality food from china and other emerging countries. it is also worth noting that getting the maximum yield from your crop is a must given the fact it has become very difficult for farmers to get loans.

Jul 14 06:18 PM