A Quiet Day For Fertilizer, But Then…The Shocking Urukali Gambit

It was a quiet Wednesday in July in the potash markets.

The old rock, used to make fertilizers, was safely in the hands of two big cartels. The price was stable. The profits for mining it were healthy.

The two cartels — one in North America and one in Russia — controlled two-thirds of the market…

Then Uralkali, based in Russia and the world’s largest producer, ran its shocking gambit. It said it would break away from the Russian cartel BPC. (One analyst likened it to Saudi Arabia leaving OPEC.) BPC spoke for 43% of the world’s market. Uralkali said it would run at 100% capacity, instead of 70%, and chop pricing by 25%. The reaction was swift. The big fertilizer stocks such as PotashCorp and Mosaic fell by 20% in two trading days. Billions of dollars in value just evaporated.

The question before the house: Should you take a look at the beat-up potash miners? Short answer: Not yet. There are better ways to make money in agriculture. Longer answer below — including one of those better ways.

In the past, I’ve guided my readers to potash miners with great success. We more than doubled our money on PotashCorp in two years. And we made a 63% gain on Mosaic in little more than a year. (Fertilizer stocks were good to us. Earlier still, we more than tripled our money in Agrium in three years.)

We sold our last fertilizer stock in early 2011. That was good timing. We played a temporary bottleneck in supply and made good profits. But a commodity bull market always comes to tie its own noose. The rich profit margins attracted new investment in new mines. And now we’ve got too much of the stuff. Insert neck and pull.

CIBC forecasts that annual potash capacity will hit almost 71 million metric tons by 2015. This is up from just 62 million tons in 2012. Meanwhile, demand runs at about 54 million metric tons. So some combination of two things has to happen. Either the price falls a lot and forces some of this production off the market or demand has to grow — a lot.

Uralkali’s gambit aggravates the situation, but a picture of oversupply was already emerging on the board. According to the U.S. Geological Survey, we have 610 years worth of potash, and probably more. Even before the gambit, BHP was close to going ahead with a $14 billion mega mine. And The Wall Street Journal says there are as many as 75 startups looking to raise capital to begin mining potash.

We’ll hit bottom when most of those little guys go belly up. That’s the way bear markets work. That’s the way they scratch out market bottoms. I don’t think we’re there yet. Even after the carnage, PotashCorp, for instance, trades for a lofty 25 times last year’s free cash flow. The stock seems likely to go a lot lower.

Now, there is a hopeful theory floating around that Uralkali is just bluffing. It wants to win some concessions from its cartel partner. And it hopes this will do the trick. If so, then the potash stocks could be in for a mighty rally. But I wouldn’t put real money on such an airy thesis.

We have come a long way from 2008, when potash briefly traded for $1,000 a metric ton. The Uralkali gambit aims to take it to $300 — about 25% off prior pricing. The winners are the farmers. NPK fertilizer, an advisory service, says that $300 potash would save $10 per acre for the average U.S. corn farmer — about a 3% cut in costs.

This gets me to the idea I like, even though the potash story has little impact on it. On the Monday before the Vancouver conference opened, Input Capital had its IPO. It now trades on the Toronto Venture Exchange under the ticker INP. (See “Armchair Farming“) I won’t go through all the details again here, but I’ll give you a snapshot of the upside.

Beacon Securities is the only firm that covers Input at the moment. In a morning note, Beacon wrote, “[Input] has identified a HUGE market just in canola farming, with 20,000 potential clients. If they can convert just 1%, this is a $350 million opportunity and the company could grow by 20 times.”

Lots can go wrong, of course, but clearly, there is plenty of room to grow. As is, the stock trades for about 12–13 times estimated cash flow for the year ended March 2014. Insiders own a third of the stock, and the company has a clean balance sheet. If interested, pay no more than C$2 per share and sit on it for the long haul. (Put it in the coffee can!)

My guess is that Input will prove a far better investment than the fertilizer stocks from here. We’ll see.


Chris Mayer
Original article posted on Daily Resource Hunter

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Chris Mayer

Chris Mayer learned the art of valuing companies the hard way — clocking a decade as a corporate banker while also earning his MBA. He never lost money on a single deal. In 2004, he founded Capital & Crisis, making his one-of-a-kind research available to the general public. His second letter, Mayer’s Special...

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