Potash One Will Be Top Performer in Agriculture Bull Market

CIBC says this run is not over…not by a long shot.

Buried deep in a recently released 70-page report, analysts at CIBC, Canada’s 4th largest bank, states:

With the lack of announced greenfield projects needed to match growing demand in the next six to eight years, we believe the race is on to ramp up capacity, to take advantage of current potash prices of US$1,000/t or more.

CIBC goes on to detail the now all too familiar macro-fundamentals that have made potash into the top story so far in 2008. This is great news for Potash One (KCLOF.PK), which was one of the earliest movers into potash.

Potash One secured its prospective potash land package in 2005, long before the fertilizer story started attracting all the “hot” money moved into the sector. Potash One’s early mover status has put it on course to take its 330,000 acres of solution mineable potash deposit and compete right alongside the big boys.

Potash One’s deposit sits right in the heart of the world’s most prolific potash mining region, Saskatchewan’s Potash Basin. Potash Corp. POT), Mosaic (MOS), and Agrium (AGU) all have significant operations in the region.

Potash One has got a lot going for it. But most importantly, Potash One is developing a solution mine. That is the key and I’ll explain why in a moment.

By now I’m sure you’re familiar with the global agri-boom story…

Corn, wheat, soybean prices are at or near multi-decade highs. Skyrocketing wheat prices have caused bread prices to double. Fertilizer stocks have soared more than 500% across the board in the past two years.  Despite recent pullbacks, these five factors assure that that the agriculture boom is a long way from being over:

• Record global population growth
• Decrease in arable (farmable) land
• Biofuel Boom: Crops for fuel instead of food
• Soaring demand from growing global middle class
• Government intervention to “solve” the problem

Across the globe, hungry voters are rioting for affordable food.  Politicians are under massive pressure to provide solutions.

And according to CIBC, the solution to the global food crisis may be – excuse the pun – “solution mining”.

Potash is mined from deposits left behind when ancient sea beds evaporated.

In a solution mine, instead of spending billions of dollars to dig a shaft thousands of meters into the ground and scoop the stuff out, they pump water into the ground, dissolve the potash, and then pump it back to the surface.

Solution mining has been around for decades. It has been used to mine uranium in the United States since the 1960’s. And fertilizer giant, Mosaic Co., also uses solution mining to extract potash from the ground at its mine in Saskatchewan (just a few miles away from Potash One’s land).

There are a lot of benefits to solution mining. This method incurs significantly lower up-front costs than traditional mining. It has a quicker timeline to production. And it costs less overall.

CIBC states, “We estimate that the break-even potash price for a solution mine is US$200 [per tonne] and for a conventional underground mine US$235 [per tonne].”

“We prefer potash solution mining over conventional mining,” CIBC adds, “due to lower engineering risk and a shorter construction time period, thus capturing the benefits of higher potash prices. Based on our calculations, solution mines have a greater net asset value compared to conventional mines.” 

With the “race to ramp up capacity” in the potash mining industry, speed to production is key. Analysts predict the price of potash could double in the next five years and farmers are willing to pay. At current potash prices, farmers spend about $40 per acre on fertilizer. Considering they average $850 in revenue per acre this year, the cost of not using potash fertilizer is far greater than the extra $40.

As you can see, potash demand isn’t going to wane for a very, very long time and supply isn’t keeping up. CIBC believes solution mining is the answer.

CIBC Stated Benefits of Solution Mining:

• Low operating costs
• Low capital costs
• Well-known and well-understood procedure
• Reduced time to production
• Low demand for manpower
• Can mine deep or irregularly shaped deposits
• Flexible operations

A few weeks back I indentified Potash One as a possible buyout target (“The Majors Go Shopping: Who’s Next?”). Since then, shares of Potash One have traded flat as the junior resource markets experienced one of the worst months in the past five years.

CEO and President of Potash One, Paul Matysek is an experienced geologist with a sparkling track record of creating shareholder value. Matysek biggest success was the CEO of a uranium company which was bought out in 2007 for $1.2 billion.

The CIBC report confirms what many have been whispering. And it looks like Matysek is working on something pretty big…again.

When you look at junior companies, there are always a lot of risks. But if you can eliminate as many risks as possible, investing in the junior sector can be very profitable. By scouring for companies like Potash One, that are led by people with excellent resumes, who were very early into the region, and have a few years of development already completed, the rewards can certainly offset the risks.

We’re still in the third inning of the agriculture bull market. Potash will be one of the top performers, but it’s not the only one. There a lot of opportunities in the sector that haven’t taken off yet and Q1 Publishing has recently released a report on how to take advantage of the ongoing agri-boom. And you can claim the report here, 100% free of charge.

Disclosure: No position.

Comments

[Pythium:]

This is a very interesting article. I like some of your points on an overlooked stock, but i think it sounds more like propaganda then an analysis.

Agriculture production can be broken down into two crops and two areas.
1. Corn vs. Soybeans
2. US vs. World

1. Corn relies mostly on nitrogen needing 150-300 lbs per acre (in this poor soil area). Soybeans can make some nitrogen, so they are more dependant on potash. Most people don't realize that the soil can actually bank potash while most nitrogen leaches through the soil. The yields for soybeans range from 35-70 bushels per acre. It you take into account the commodity prices, growers can make a good profit. However, if you start to deduct fertilizer, gas, chemicals, equipment, and land rent, the profit can be chewed up. If the grower is pinched with nitrogen costs he can switch from corn to soybeans. If the grower thinks that potash costs too much, he can skip a year or two. Yes his yields won't be great, but he will still yield without spending 1000 per ton. Overall, in the US, it's the commodity prices that will dictate fertilizer prices and not the demand from the grower. Honestly, would you grow a crop when the overall profit could be negative? He can always find a different crop or just let the fields rest.

2. I suspect that in the US the only reason most growers are able to afford the fertilizer prices is that the commodity prices are up. HOWEVER, I have heard of growers wanting to sell beans but the seller though the price was too high and did not want to take the risk of a downturn.
I think that the only long term reason that the fertilizer prices might stay at this high level is directly due to the increase in production in places like china and brazil. Brazilian growers can clear rain forest and grow on great soil for 3-5 years before it completely turns to barren ground. Their inputs for chemicals, seed, and fuel are greatly lower then US growers. So, they can cheaply clear ground and pump in the fertilizer for a nice profit. Their demand may keep prices up, but like the US, they have a breaking point with the commodity price.

2008 Aug 29 11:48 AM

[flyingdutchman:]

Fertilizer stocks have had their run, the recent pull back in share price of the three major north american plays is seen by some to be an opportunity to buy more but as the price of fertilizerhas stablised and pulled back in certain areas it seems safe to assume that the run up in share price has peaked . China has imposed taxes up to 180% on its export fertilizer in an attempt to supply it's own needs. If this reduces global supply significantly then we may see a resurgence of rising fertilizer prices.

2008 Aug 29 12:22 PM

[QuasiYoda:]

Bottom Line is the US Dollar . . . . if it continues to head down after this bounce then inflation will continue to flourish throughout the entire commodity complex. Energy, Precious Metals, Agriculturals, etc all will rally. It will takes years to straighten out this credit crisis and much excessive printing of US dollar to paper over the problem so strong inflation will be our constant companion for years to come Timing when the Energy, Precious Metals, Agriculturals, etc will rally back to their highs is another matter. My read on that is we may have made the lows already but are still looking at a long consolidation before reaching the highs again.

However KCLOF or KCL.TO could well rally back to it's highs long before that as it is a highly undervalued stock based on it in the ground holding of Potash. Assets which will continue to rise as the BRIC nations continue to develop their Middle Classes. Investors with an eye toward the Agricultural Production choke points will see this stock as a true Diamond in the rough as it has large, relatively rare, potash assets. The Solution Mining detailed in this article points towards those assets being appropriately priced much faster than normal mining assets which will take this stock to exciting multiples of it's current price. Of course, all of that is outside the likely scenario that one of the major's such as MOS or POT buy up these assets on the cheap by buying out KCL and what better time then when it and the entire sector have sold off. Often in Commodity Stocks it is buyouts and mergers which kick off a new bull leg so only those who were already in get the benefit.

Technically KCL.TO made it's highs with high volume at 6.25 KCL has made it lows on low volume and is now beginning to rally. Today's strong action may be largely related to this article as numerous new holders are buying in which could signal the rally back to the high is on in this small stock. Or it could be a blip like late July's rally and subsequent sell off either way it is a bargain. I'll add little more next week as I continue to Scale in to this promising stock.

stockcharts.com/h-sc/u...

The Smart Money build their positions at the lows and hold only to take profits at the highs though I will keep a core position in this stock or subsequent owner for years to come.

2008 Aug 30 06:45 AM

[Alpine Butt...:]

Solution mining might not be a great idea over the long-term. They will be fighting oil and natural gas for water as they try to increase productivity of aging wells. Oil sands need water. Farm irrigation and beef also require water. Water-policy and conservation have been in the news for a few years.

2008 Aug 30 01:21 PM

[TheEconomyK...:]

Great article - I've been reading through the 70 page report from CIBC this morning on the commute in. Missed on some key potential opportunities/threats in the analysis - but great information nonetheless.

Alpine - you bring up an interesing point. A light should have gone off as soon as you wrote that (well it did for me anyways). Cheers.

2008 Sep 02 11:43 AM

[Agcapita:]

The author highlights a fundamental issue for future farm profitability and land values is whether demand for food or demand for energy (fertlisers) is more inelastic. The article and recent farm income data supports the intuitive conclusion that food demand is much more inelastic than fertilizer demand. If this continues, farm profitability to continue to expand and drive land values with it.

On a more general note, the equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. Research by our firm, Agcapita Farmland Investment Partnership (Calgary based agriculture private equity firm) shows investors must be prepared to rotate into asset classes with different characteristics.

During the last commodity bull market & high inflation period in the 1970’s, equities materially underperformed farmland. Western Canadian farmland went from around $100/acre to $550/acre (550% total return and 176% in inflation adjusted terms), cash held in a money market account barely kept ahead of inflation (6% inflation adjusted return) and the S&P 500 index returned less than 2% per year (a loss of almost 50% in inflation in adjusted terms)

Like the author, I believe the world is still in the early stages of this current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further increases:
 Corn is US$ 5/bushel currently compared to US$16/bushel in 1974,
 Wheat is US$ 7/bushel currently compared to US$27/bushel in 1974
 Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981

2008 Sep 18 08:20 PM