Potash Companies Blasting Off
Monday, April 14, 2008
The Mosaic Company (MOS) reported blowout earnings on April
4 due to strong demand from farmers for their agriculture fertilizer products.
Earnings increased twelve-fold from the same quarter of last year with the
company also increasing its gross margin to 33.9% of net sales from the previous
year's gross margin of 8.8%. The market was quite pleased with this and
subsequently pushed Mosaic's share price up 20% to new all-time highs.
broke out to new highs after an extremely positive earnings report where
earnings increased twelve-fold over the previous year's quarter.
Looking forward at the earnings calendar, we see that
Potash Corporation of Saskatchewan (POT) will be reporting before the market
open on Thursday April 24. Also reporting on that date before the market open
will be Terra Industries (TRA) which holds a 75% stake in Terra Nitrogen
Company, LP (TNH). One would expect that both companies will deliver strong
earnings reports and that Potash Corp. could surprise the market a bit more to
the upside than Mosaic if they began selling some of their extra capacity they
had begun to hold off of the market last year due to supply constraints related
with the 'Russian Sinkhole'. Potash Corp. is the Saudi Arabia of the potash
industry as they possess the unique ability to add capacity quicker than any of
the other potash companies in the world at this moment. Currently they have
plans in place to spend two billion dollars to add capacity over the next few
years and cement their status as the world's dominate potash supplier.
earnings propelled the entire industry higher, and although investors now are
expecting blow-out earnings from Potash Corp. of Saskatchewan now, the company
could still come out and blow those inflated expectations out of the water. The
stock is already at all-time highs, but with its extra capacity as well as it
being the next one to bring more production online, there is room to run.
Also of interest to investors is the fact that Canpotex
Limited, an export company owned equally by all three big potash producers in
Saskatchewan (Potash Corp. of Saskatchewan, The Mosaic Co. and Agrium Inc.), and
its Russian counterpart have been signing ever more profitable contracts abroad
with the likes of India, China and Brazil. As the world rushes to grow more food
due to the U.S.'s insistence on burning corn for gas rather than feeding the
world, more and more fertilizers will be needed to increase crop yields of such
crops as corn, soybeans and wheat. As mentioned in previous articles, all three
of these crops use their fair share of potash, so it is logical to believe that
as the world plants more of these crops that they will also consume more
In the potash industry today investors are faced with two
options when picking out a suitable investment: purchasing shares in a current
producer or shares in an explorer. There are currently three large producers of
potash which derive large percentages of their revenue and profits from it. They
are Potash Corp. of Saskatchewan, The Mosaic Co. and Agrium Inc., and all
possess mines in Canada's prolific province of Saskatchewan. Coming to market
soon via an IPO in the United States will be Intrepid Potash, which mines its
potash in the Western United States (two mines in Utah and one in New Mexico).
Other options include CF Industries (CF), Terra Industries (TRA) and Terra
Nitrogen Company, LP (TNH). Terra Nitrogen pays rich dividends- one that will be
lower next year- and requires one to spend a bit more time on their tax return
due to the unique nature surrounding how its payouts are accounted for under
U.S. tax code.
There are a handful of explorers out there which hold
promise, yet none are currently constructing a mine and it will be years before
the first comes online. To be specific, the first new Canadian potash mine (not
run by one of the 'Big Three') will open no earlier than 2013, or five years
from now. The two companies vying to bring mines into production in 2013 are
Athabasca Potash(API.TO) and Potash One (KCL.V) with Anglo Potash, formerly
Anglo Minerals, (AGP.V) gunning for 2014. These are the most advanced explorers
and ones which have a large following among investors.
some support, it seems that Anglo Potash is ready to test its old highs. It is a
unique situation where they have a JV with BHP Billiton and are able to use that
firm's engineering and exploration expertise. They will also have access to
capital later from their much larger partner.
Other stocks with potash exposure include MagIndustries (MAA.V),
Raytec Metals (RAY.V) and a few other companies which we will cover in a later
article. MagIndustries is in the process of doing an IPO for its potash claims
in Africa. The claims are located in the Democratic Republic of Congo, so make
of the situation what you want, but they are expected to beat all of the
Canadian explorers by two years to production as the projection for their mine
opening is 2011. When the mine reaches full capacity it should have annual
production of 500,000 lbs. of KCl. Raytec Metals offers investors an interesting
play on nearly all things Saskatchewan- they just miss out on the Triple Crown
as they do not have oil sands in their portfolio, but the company does possess
both uranium claims and potash claims as well. Currently the company has seven
of their uranium claims being explored by Triex Minerals and the other ten by
Solitaire Minerals. All claims are in the prolific Athabasca Basin and the
company has a carried interest as its partners spend on exploration to complete
their earn-in process. The company possesses a large land package in and around
the Saskatchewan potash mines and deposits and is very prospective for potash.
There is one historic area on the company's lands where drilling was conducted
and a deposit could potentially exist. The company continues working on this
area and it is a main focus. The kicker for Raytec shareholders is the fact that
the company also has a land package of iron-ore claims. This completes their
tri-fecta of hot mineral holdings and makes it very attractive for a number of
investors. The company had a nice run-up in its share price last Thursday and
should it take out the $0.80 level it very well could be off to the races. Also
of note, the company's shares are very liquid with it trading over 200,000
shares daily with volume rising to the 1,000,000 volume traded level regularly.
The stock has
recovered to levels seen earlier in the year as more investors hear this new
story. One part uranium explorer, another part iron-ore explorer, and third part
potash explorer. Right now the potash portion of the company is behind this
great story, but at any moment the other two portions could provide a nice
'kicker' to investors should positive news arise.
Investors remain intrigued by commodities and equities
involved with commodities. We could see commodity prices fall and share prices
rise as investors realize the large amounts of profits still to be had by those
firms involved in the process. An interesting point of view here would be to
invest in the potash and fertilizer stocks knowing that they are the 'fuel'
behind this super-cycle. Much as National Oilwell and other suppliers to the oil
industry benefitted from high oil prices, even when they fell, potash companies
will reap the same rewards. Even if crop prices hold steady or fall by 10-20%,
they will be near all-time highs still and farmers will have to continue to
purchase fertilizers to maintain or improve their crop yields. In this game it
is not about the absolute price, but rather the relative price. So long as
prices remain relatively close to record highs suppliers should continue to
perform well, and if crop prices continue to rise for farmers then it should be
off to the races for all.
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