As one of the world’s largest agriculture-centric economies but the second largest importer of potash, Brazil is positioned to become the next major global producer of the fertilizer component that is essential for large-scale farming. That is the conclusion of a new report from Wellington West Capital Markets that suggests existing potash industry leaders who have benefited from market dominance in recent years stand to lose the most if Brazil becomes potash self-sufficient and the next major independent exporter of this strategic resource.
Analyst Robert Winslow said:
While this import dependency was seemingly of little national significance before potash prices escalated in the last couple of years, we now believe it puts the country’s economic growth engine, driven in large part by agriculture, in a precarious position.
However, he noted strong evidence that Brazil contains an undeveloped world-class potash ore body with the Amazon basin. If developed, it could could support several multi-million tonne producing mines for decades and lead to Brazil’s potash self-sufficiency.
Mr. Winslow said:
Given the potential economic and political benefits at hand, we submit it is only a matter of time before government and private investment moves to develop a domestic potash industry that rivals today’s leading producers. Brazil’s economic growth and as such the country’s future demand for potash fertilizer should remain robust and continue to grow for many years, if not decades.
Agriculture accounted for an estimated $110-billion, or 5.5% of Brazil’s GDP in 2008, according to the U.S. State Department. The country is now among the world’s top exporters of many agricultural commodities, including coffee, sugar, orange juice, soybeans, tobacco, beef, and poultry.
Brazil is also one of the few places with the potential to materially increase arable land and has an abundance of renewable frashwater, Mr. Winslow said, noting the government’s 37% year-over-year increase in agricultural spending.
The country must also compete with China and other emerging markets to secure potash. So guaranteeing domestic supply mitigates the risks to economic growth posed by potentially strained global supplies and the possibility of escalating prices. Establishing lower-cost potash supply due to lower transportation costs and the eliminating duties could also help establish Brazil as a sustainable, lower-cost grain producer, the analyst said.
While Brazil is likely at least five to seven years away from seeing its first large-scale potash mine in the Amazon, Mr. Winslow nonetheless warned that the equity value of publicly-traded market leaders could begin to reflect long-term potash prices well below current contracts.
He identified several Canadian-listed juniors that have exposure to potash in South America and could benefit from an emerging industry in Brazil. The include TSX Venture names like Allana Resources Inc., Amazon Mining Holding Co. and Atacama Minerals Corp. (OTCPK:ATAAF), TSX-listed Talon Metals Corp., Sprott Resource Corp. and Western Potash Corp., as well as Lara Exploration Ltd.
Mr. Winslow favours companies that have access to a potash resource with favourable economics, ease of permitting or permits in place, availability and/or proximity to infrastructure, strong management and/or public/private sector partners, and capital or access to it.