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  • Not Potash Meltdown, Just Landscape Change

    It is not easy being a long-term investor. The most important characteristic is having nerves of steel. Short-term volatility and limited visibility for the future always makes one testy. Nerves are definitely being tested for those invested in the potash industry. For a long-time, potash has been relatively stable and untouched by the commodities cycle.

    The recent breakup of BPC, the Russo-Belarusian potash cartel, responsible for 40% of global potash exports, sent stocks plunging. Large players such as Potash Corp.(NYSE:POT) and juniors, Allana Potash (OTCPK:ALLRF), alike have lost 30-40% market value from their peaks.

    Now, protocol would dictate that I list all the reasons, as numerous as they are, for an investor to shun the potash industry for the short-term, at least until the dust settles. However, a great investor once said,

    "Be fearful when others are greedy and greedy when others are fearful" - Warren Buffett

    As more investors panic-sell their holdings, great investment opportunities develop for the hardened investors. In order to identify these investment opportunities, an investor has to keep these questions in mind while conducting due diligence on these companies:

    What is the true impact of the BPC breakup?

    Uralkali supplied only a meager 17% of their exports to the US and Europe combined. The company has very little infrastructure in place to increase their market share in North America, a Canpotex monopoly. So, while spot prices in China and India will face downward pressure, prices in North America should not be overly impacted. Juniors with low unit cost production that market their products solely within the North American continent can possibly see minimal impact of the breakup on their margins.

    Spot price changes?

    It is no secret that supply has outstripped demand for many years. The duopoly of BPC and Canpotex kept the lid on prices from sliding. The stability offered by the cartels attracted investment into bringing mines online. The biggest being BHP's Jansen project in Saskatchewan, Canada. The project had been put on hold as BHP weather the commodities downcycle. Now, the project may possibly be mothballed permanently as the risk-reward profile of the project has shifted considerably. This takes out a huge chunk out of the picture for the supply-side.

    Cost of production?

    Also, many mines that operate at a higher cost of production would have to be re-evaluated. There is a high possibility for many projects to be mothballed like the Jansen project until the price profile improves. So, as supplies dwindle, the supply-demand curve shifts, prompting prices to rise again. However, the timeframe for this happening is not certain.

    In conclusion, there are many reasons to be optimistic in the potash industry. The goal is to identify lower cost production projects and weather the short-term decline in spot prices. This strategy is not for the faint-hearted.

    Disclosure: I am long OTCPK:ALLRF.

    Aug 09 6:27 AM | Link | Comment!
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