Agriculture has been in a bear market since February 2011, as evidenced by the Rogers Commodity Index for Agriculture (RJA). But surprisingly, since June 2012, something interesting happened. We got a spike of 16% in the agriculture price due to supply concerns in the corn, soybean and wheat market (Chart 1). This spike is also felt in stocks like Potash Corp. of Saskatchewan (POT) and Mosaic Company (MOS). As agriculture prices increase, so will the fertilizer prices increase.
Chart 1: Rogers Commodity Index Agriculture
Agriculture is one of the sectors I'm very bullish on, and it's not just me. Marc Faber's recent outlook for agriculture has been very positive. Marc Faber expects more weakness in industrial commodities, though he said agricultural commodities "look better".
In the past year, fertilizer developers have been decimated. One of these developers: Western Potash (WPSHF.PK), had additional problems due to development doubts in their project due to market speculation that a deal with a potential Chinese investor in the company fell through. Another company, Ethiopian Potash, has been on the brink of collapse due to its dire financial situation. And more recently, BHP has been exiting Ethiopia due to weak exploration results.
On the other hand, Allana Potash (ALLRF.PK), which I talked about in this article, had increasingly positive news over the past year. Though, the share price hasn't increased yet (Chart 2). Let's go over the recent developments.
Chart 2: Allana Potash
First, financing deals have made significant progress. On 5 March 2012, Allana Potash published that it received significant indicative interest from lenders to finance its Dallol potash project. Once the technical and commercial details of the project are finished in the feasibility study, it could start construction early 2013. As I noted before, the construction phase is the best period to buy mine developers, since the share price will typically increase the most here, in anticipation of production. The company estimates that work on the feasibility study will be completed by Q4 2012.
Second, unlike Western Potash, Chinese investors have been very active in Ethiopia recently. On 25 June 2012, China Communication Construction (CCCC) signed a $US 1.5 billion railway deal with Ethiopian Railways (ERC). This railway will be connecting the port of Djibouti to the potash mines in the northeastern part of Ethiopia. This railway is scheduled to be completed in July 2015, right on time for Allana Potash to bring its mine to full capacity. On top of that, the highway that's being constructed to the Allana Potash property is making significant progress. Thirty-five percent of this highway has been completed already, and the Ethiopian government estimates that this highway will be completed by the end of 2013.
Third, Allana Potash has already got a $US 20 million financing deal in February 2012. This means it can complete the feasibility study without any problems. Allana Potash currently has approximately $US 58 million in cash on hand. By the time that project financing will be received, it is estimated that 35% of the project financing will be done by equity financing. The other 65% of project capital will be acquired by debt financing.
And finally, Allana Potash had a recent 90% surge in its measured and indicated resource estimates. This development will give a critical indication on where to start the project construction to improve the geological setting for sylvinite mining.
Farhad Abasov has been giving an update on Smallcap Power recently. You can watch the interview here.
Disclosure: I am long (ALLRF.PK).