Ethan Park of Extract Capital could teach a college graduate-level course on the differences between phosphate and potash. Park's basic advice to The Energy Report: Don't miss out on making money with these essential commodities just because they smell like, well, fertilizer.
The Energy Report: Investors who follow the metals may not pay much heed to the phosphate space. What are the agricultural and industrial uses for phosphates?
Ethan Park: Phosphate is an essential nutrient required for agriculture. About 80-82% of phosphate is used for fertilizer. Specifically, phosphate is used for root development, flowering, and prevention of diseases and stress. The bag of fertilizer you purchase in your local home improvement store contains phosphate.
There is really no substitute for phosphate. Outside of agriculture, about 20% of the global phosphate supply is used for industrial purposes, such as in ceramics and flame retardants. It is also in detergent and food additives.
TER: How does phosphate occur geologically?
EP: Phosphate occurs in three types of deposits: sedimentary, igneous and guano deposits. The sedimentary deposits are formed from decayed organic matter in ancient seabeds and have a 15-30% phosphate content. Igneous deposits are formed through cooling and solidification of magma. Typically, those deposits have a 5-10% phosphate content. The third type of deposit, guano deposits, occurs when small ocean islands are formed on corals crusted with guano deposits from seabirds.
Sedimentary deposits are generally easier to mine, but they contain higher quantities of heavy metals, such as uranium and cadmium. Igneous deposits are lower grade in situ, but they can be concentrated to much higher levels, up to 39%, compared to 30% for sedimentary deposits. Guano island deposits have no-or very few-contaminants. The mined phosphate-laden rock and guano is concentrated and refined into phosphoric acid and fertilizer, such as monoammonium phosphate [MAP] or diammonium phosphate [DAP].
TER: How has the market been treating phosphate in terms of supply and demand?
EP: The supply-and-demand equation looks good for the juniors. Phosphate is mined on all continents except Antarctica, but it is normally consumed within the continent on which it is produced. Each year, about 180 million tonnes [180 Mmt] of phosphate rock are produced, but only 15% of the volume is exported outside the continent of origin. The largest exporter of phosphate rock is a state-owned company in Morocco called OCP [Office Chérifien des Phosphates]. Morocco, Jordan and Peru generate 50% of the export volume.
About 70% of the phosphate fertilizer producers are integrated, meaning that they have secured the whole supply chain all the way to MAP and DAP processing capacity.
Phosphate firms without a captive rock supply are finding it difficult to secure supply. The Mosaic Co. (NYSE:MOS) purchased CF Industries Holdings Inc.'s (NYSE:CF) phosphate assets in Florida. Mosaic also acquired Vale S.A.'s (NYSE:VALE) Peruvian operations. In the U.S., phosphate is mined in Florida and North Carolina, and lesser amounts are extracted in Utah and Idaho. The grade has been declining generally in Florida, and there are permitting issues there of late.
TER: How are the phosphate stocks performing?
EP: The phosphate juniors have taken a hit along with the market. They absorbed a more unjustified beating after the potash cartel breakup. The price of phosphate has recovered to $500 per tonne for DAP. There was a bit of a drop in H2/13. Before that, DAP had traded at $450-650/tonne since 2010.
TER: Let's look at the potash space, which you also cover. What are the ramifications of the recent breakup of the potash cartel?
EP: What happened is that Uralkali (OTC:URALL), the Russian part of the cartel, decided to pursue a volume-over-price strategy, rather than participate in supply management with Belaruskali, the state-owned Belarus part of the cartel. This breakup is the equivalent of one of the Organization of the Petroleum Exporting Countries [OPEC] countries leaving OPEC and flooding the market with its own oil. The result of the breakup is that the muriate of potash [MOP] price has declined. The lower pricing will definitely impact major producers like PotashCorp. (NYSE:POT), but it is not going to derail them.
TER: Does that mean that as share prices fall, there will be bargains out there for people interested in potash investing?
EP: It is difficult to assess those prospects right now because the decline in the price, and the uncertainty created by the cartel breakup will defer development of new projects. The situation will hinder the ability of juniors to raise money and will impact their valuations. Because of the volume-over-price strategy, larger quantities of potash will be readily available in the market. Those seeking a natural supply of potash, such as China and India, will be less incentivized to buy and develop a greenfield operation.
TER: Please explain the synergy between phosphate and potash, and what that means for the markets in the long run.
EP: Like phosphate, potash is predominantly used for fertilizer; it provides potassium to plants. The potash that is mined in Saskatchewan and Russia is MOP. MOP makes up 90% of the potash that's being applied to the ground. However, there are multiple forms of potash. Sulfate of potash [SOP] is the second most widely used form of potash. SOP includes about 18% sulfur and 50% potassium. Unlike MOP, it lacks chloride, which makes it a very useful substitute for MOP, as chloride can be detrimental to the health of the soil. SOP can be used for plants that require sulfur and potassium. SOP is a premium form of potash and is useful for growing fruits and vegetables, as well as high-value crops such as tobacco and nuts.
In my view, the macroeconomic fundamentals for MOP are rather bleak, but fundamentals for SOP demand are robust and promising. With the cartel breakup, we saw the potash price drop 30-35%. At the same time, SOP's price stayed above $600/tonne. The world appetite for healthier and richer foods is increasing. People in emerging countries are changing from a grain-based diet to a more diversified diet, with emphasis on fruits and vegetables. As climate changes become more drastic, there will be a need to increase yields in the face of extreme weather. SOP is useful in drought conditions because it does not need water to dilute its chloride content, as MOP does.
TER: Are we in danger of running out of potash at some point?
EP: From an MOP perspective, there is no real danger. Saskatchewan is reported to have more than 100 years of reserves left. The same is true for Russian reserves. That said, there are not a lot of naturally formed SOP deposits out there. And SOP usage is bound to increase going forward.
TER: Does drought have an impact on the potash market?
EP: Yes. Remember, conventional MOP needs water to leach chlorine from the ground. In dry conditions, chlorine can reach very high levels and cause toxicity. But SOP doesn't contain chlorine, so this toxicity is not an issue. SOP is used in California for high-value crops like almonds and grapes. There has been a lot of press recently about almond trees. I just read a report about the consumption of almonds skyrocketing in the U.S. because of the popularity of almond milk and other health trends.
TER: Are there any other potash companies that you like?
EP: Great Quest Metals Ltd. (OTC:GQMLF) [GQ:TSX.V] has a phosphate project in northern Mali. The phosphate is being tested for direct application use. The company also has a SOP project in Botswana. As we mentioned earlier, phosphate is more of a regionally traded commodity, as opposed to globally traded. Positive agricultural development in Africa could not only alleviate poverty on the continent, but could also aid in feeding the rest of the world. Fertilizer usage is very low in Africa. Local development of agricultural projects will require a lot of phosphate and potash. [Editor's Note: In June, Great Quest Metals announced a name change to Great Quest Fertilizer, pending approval by the TSX.V. The stock symbol will remain the same.]
TER: Is now a good time to get into the fertilizer space, generally?
EP: Yes, because the macro fundamentals of the agriculture input sector, and of agriculture in general, have not changed. The global population is always growing. Diets are changing in the emerging nations. The change in weather dynamics is going to impact food production. We believe that investing in the phosphate and potash juniors is a great way to track the changing trends.
TER: Thank you, Ethan.
This interview was conducted by Peter Byrne of The Energy Report and can be read in its entirety here.
With eight years' experience in capital markets and private investments, Ethan Park currently serves as a financial analyst at Extract Capital, reviewing public and private investment opportunities in agriculture and the power and infrastructure and mining support sectors while assisting in due diligence and structuring deals for private investments. Park started his career as an analyst at Rothschild, an international boutique mergers and acquisitions advisory firm, in 2006. He was a founding member of Extract Capital. Park holds an Honors Business Administration degree from Richard Ivey School of Business.
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