Passport Potash's Low-Cost Project Stands Out In Potash Sector Meltdown

| About: Passport Potash, (PPRTF)

Editor's Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

Passport Potash (OTCQX:PPRTF) was down, "only" 7% on July 30th, while some potash companies were down a multiple of that. For example, PotashCorp (NYSE:POT) and Mosaic (NYSE:MOS) were each down as much as 25% earlier in the day before bouncing back modestly. The worst performing stocks, (as of the close on July 30th) were Karnalyte Resources (OTC:KRLTF) and Encanto Potash (OTCPK:ENCTF) down 45% and 36%, respectively. Other noteworthy stock performances came from, Intrepid Potash (NYSE:IPI) down 29%, Potash Ridge down 27%, Allana Potash (OTCPK:ALLRF) down 20% and Verde Potash (OTCPK:AMHPF) down 20%. What was the BIG news that sent the sector into a tailspin?

Top-Five Producer Uralkali Quits Russian/Belarusian Cartel, BPC

There are, (or I should say "were") two potash cartels that controlled up to 70% of the global potash market. One of them, the Russian/Belarusian cartel known as BPC has broken apart. As a result, a top-5 potash producer, operating at about 10 million metric tonnes. "mt" per year, has threatened to flood the market, i.e. produce at 100% capacity. Furthermore, the CEO stated that he sees prices falling to $300/mt by year end. That compares to current spot prices of about $380-$400/mt.

This is a huge development in the sector, a bombshell that was not anticipated. However, the following are some mitigating factors to the doom and gloom…

1) The news almost certainly had some grandstanding component, why price potash at $300/mt if the going price is 30% higher? Uralkali (OTC:URALL) wanted to demonstrate its market clout. It succeeded, but will the company follow through with its threat?

2) Uralkali plans to increase annual production by 2.5-3.0 million metric tonnes. But, how quickly can the company accomplish this? Most customers that Uralkali will target already have purchase commitments in place. It may take years to place those incremental tonnes. Will potash prices fall on this news? Probably. Will prices fall all the way to $300/mt? Probably not.

3) Uralkali's stock was down about 20%. Like any public company, Uralkali has an obligation to preserve and grow shareholder value. The negative reaction by shareholders signals that the company's bold pronouncements might have to be scaled back.

4) Many companies near production, or planning to ramp up production, will be forced to delay or cancel projects. Most notably, BHP's (NYSE:BHP) massive Jansen project is now less likely to go into production anytime soon. Judging by the stock price declines by companies like Karnalyte and Encanto, junior potash companies will have even greater difficulties obtaining funding.

5) PotashCorp and Mosaic won't take the hits to their respective market caps lightly. The Canadian potash cartel, Canpotex, has a lot of industry pull itself. Potash and Mosaic were the first and third largest producers in 2012.

6) Russia's Putin likes to exert significant control of important natural resources including natural gas, oil, uranium and potash. There's a decent chance that Putin will have something to say about Russia's market power potentially diminishing.

For potash juniors like Passport Potash, that won't be in production for at least 3 years, this news has less of an impact. At $300/mt, many potash juniors will not advance projects, pushing back new production for years. Therefore, the lower the near-term potash price, the more likely that potash prices will be higher in the longer term. The longer-term cure to low prices is... low prices.

Passport Has a Viable Project Even at $300/mt

Passport Potash has a viable project at $300/mt. The market's reaction to today's news suggests that Karnalyte, Encanto and a few others may not be so lucky. As long as Passport can obtain ongoing funding to advance its project, today's news possibly makes Passport MORE likely to reach production as higher cost juniors fall by the wayside.

Passport's Preliminary Economic Assessment demonstrated a very robust project with operating costs of $114 per tonne. Most peer juniors have proposed projects with operating costs of $125-$225 per tonne. Equally important, Passport's location in Arizona gives it unparalleled access to the U.S. market west of the Mississippi, as well as a sustainable shipping advantage into Brazil. This major market disruption may end up being more of a regional problem for Asian and European potash players than a true threat to Passport Potash.

The Junior Potash Sector Just Got Riskier...

With a market cap of just $25 million, Passport trades at an unwarranted 75% discount to the average valuation of Karnalyte, Encanto, Allana Potash, Elemental Minerals (OTCPK:EMINF) and Western Potash (OTC:WPSHF). Each of these has a higher cost structure than Passport. Each stock was down substantially more than Passport. Today's news proves that many potash juniors are in serious trouble.

On the morning of July 31st, Passport released this Statement regarding the market turmoil facing the industry. Investors who read Passport's excellent response to Uralkali's unexpected move will recognize like I do that the company has a tremendous management team and a fantastic project in Arizona.

Disclosure: I am long OTCQX:PPRTF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.