Potash, referred to in the trade as ‘pink gold’, has been thrust into the spotlight lately. Chicago’s full 7th Circuit recently ruled that potash sellers must face price-fixing claims. There was a number of interesting points in Joe Celentino’s article that hint at tremendous investment opportunity. I will talk briefly about the publicly traded defendants in the litigation.
Agrium (AGU) is a Canadian company. It is not involved in mining. It is a wholesaler and retailer, and through its advanced technology segment, an agricultural chemical innovator and purveyor. The Mosaic Company (MOS) is a United States company and operates three mines in Canada — Belle Plaine, Colonsay and Esterhazy. Potash Corporation of Saskatchewan (POT) is a Canadian company with mining rights to almost 850 thousand acres of Canadian land, principally in Saskatchewan. The company also has mining rights with four companies from Russia and Belarus: JSC Uralkali, JSC Silvinit, JSC Belarusian Potash and JSC International Potash. Uralkali and Silvinit merged last year.
The period covered in the litigation is from July 1, 2003 through the present day. During this period, “defendants sold millions of tons of potash in the United States.” Potash is selling at around $435 per ton, and there is no cost-effective substitute for potash. The CEO of Russian potash producer Uralkali (URKA.ME) has suggested that spot potash prices could reach $600 per ton. This is a realistic projection, given the fact potash rose 600 percent from 2003 to 2008.
It does makes you wonder if at some point, growing populations and resulting higher demand for food, will one day put U.S. farmers at the mercy of a Russian ‘potash cartel’ in the same vein as today’s ‘oil cartels’. After all, the defendants in the lawsuit we are discussing produce about 70% of the world’s potash. In 2008, the United States consumed 6.2 million tons. 5.3 million tons (85%) were imported that year. That’s a significantly higher percentage of import than we are experiencing with oil. Oil is important to the U.S. economy…but food is just as critical. Only a fraction of the potash produced worldwide is used for making soap, glass and animal feed.
I see strong value in potash investment. As an American, I am concerned about our ability to develop domestic supplies. Domestically produced potash would be less costly, improve our balance of trade, and make it less likely that our farmers (and our food) will find themselves in the grip of a greedy cartel.
We have already mentioned one U.S. company, Mosaic, but its mines are in Canada. How about a pure play Canadian mining company with rights in the United States? Passport Potash (PPRTF) is just such a company. Passport Potash controls mining rights to about 122,000 acres in Arizona’s Holbrook Basin. I think this particular property gives Passport Potash a strategic advantage over other domestic mining operations in the U.S. There is a railroad (BSNF) just seven miles away. The property is bordered by a major interstate highway that connects to the farmlands of California, and there is a major power station just 25 miles from the site. Another huge factor, although hard to put a monetary value on, is the fact that the State of Arizona is very mining friendly. Seriously, how do you put a price on red tape?
I like the management team as well. The CEO, Joshua Bleak, is just 32, but he has had a lot of exposure to the business as a fourth generation miner. I would like to think that assures some good instincts and maybe, at the very least, some good family advice. Estimates on the quantity of potash in the ground come in at around 600 million tons. In other words, if Passport Potash could produce one million tons annually at current prices, it has the potential to earn $4 to $4.5 billion per year for 600 years. Even if everyone is wrong by half…well, you do the math. Before we move on, there’s one more feather in Passport’s cap that deserves some attention. In this recent article, CEO Bill Doyle of Potash Corporation of Saskatchewan, said he doesn’t envision opening any new potash mines. Later in the article, he speaks of increasing food demand, acquisitions in the potash sector, and higher imports from Brazil. Doyle hasn’t convinced me and considering his remarks, I don’t think he has convinced himself. Passport Potash could easily undercut Doyle in the domestic market. To be sure, it will take additional capital to get Passport Potash producing for the domestic market. It is not an investment that one should enter into lightly, but on its face, it makes good business sense, and Passport Potash has already demonstrated that it can raise capital as it did for the Fitzgerald Ranch acquisition.
Prospect Global Resources (PGRX) is another domestic miner with high potential. Its holdings are not as large, and like Passport Potash, it is an early stage company. Its holdings are also in the Holbrook Basin, so it undoubtedly has access to most, if not all, the infrastructure we discussed earlier in the piece. I can’t speak with a great deal of authority on Prospect Global Resources as it has not been the focus of my research, but clearly, many of the same arguments apply. In any case, you will want to do your own due diligence.
Transparency/Disclosure: I am not a registered investment advisor and do not provide specific investment advice. The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research. I am a consultant to a third-party and have received one hundred fifty dollars for independent research. Always discuss investments with a licensed professional advisor before making any financial decisions. Statements made herein are often “forward-looking statements” as stipulated under Section 27A of the Securities Act of 1933, Section 21E of the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. While I have researched this company thoroughly, my due diligence is not a substitute for your own.
