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King Potash
Tuesday, April 22, 2008

We must state for the record that we are as surprised as anyone with the rapid price appreciation experienced by Potash Corp. of Saskatchewan(POT) shareholders over the past ten years. We started following the stock back in 1998 and were intrigued by its dominate market position, large amount of reserves and potential future resources, as well as their business dealings abroad with foreign entities. Make no mistake, at the time the industry was in troubled times as they could not sell all of their production and relied heavily upon controlling supply into the market to get by.

All that was then right has continued, and that which was wrong has dramatically changed, in favor of course to the potash producers. Most notably Potash Corp., which closed Monday April 21 at a price of C$211.10 on the Toronto Stock Exchange and sporting a hefty sixty-six and a half billion dollar plus market cap, thus making POT Canada's largest company by market cap. Yesterday's price increase places Potash Corp. roughly C$1.5 billion ahead of Encana (ECA) for the title of largest company, and this gap could increase greatly on Thursday April 24 when POT announces earnings. Expectations are running high for POT, especially after The Mosaic Company (MOS) reported blow-out earnings and when considering the fact of how high the stock has risen in recent weeks. The market has set the bar very high and left little room for error, but if 'King Potash' (so long as POT is the largest company by market cap in Canada we will refer to it affectionately by this name) can find a way to surprise the market it will be off to the races once again for the industry as a whole. 

POT was a non-performer for nearly a decade, but over the past five years or so has become one of the best returning stocks in that period.

Times have changed dramatically since the late 90s and early part of this decade. Unlike in those days, POT, and others in the industry, have customers who are more than willing to purchase any quantity that they can currently offer due to the current market where demand outstrips supply. Not only can Potash Corp. sell all of its current production, but prices have risen steadily over the past three years to all-time highs, further adding to earnings. In the next year potash production should increase by roughly 5% worldwide, with at least 80% of that increase attributable to 'King Potash'. By 2010 POT should have production roughly a third higher than where it stands today, and that will be roughly half of all the added capacity created within that period.

The potash industry reminds us greatly of the go-go days in the uranium industry which occurred over the past three years. Currently those equities are in a funk, but there is no reason why potash companies must end their bull run anytime soon. These companies have earnings, production, and a cartel to market their production. Also, potash is not found in many places around the world, so there are very few companies who produce it, thus keeping IPOs to a minimum and limiting competition. It must be noted that Intrepid Potash (IPI) went public this morning and currently is trading up 50%. Nice to see established entities cashing in on the favorable market right now, and hopefully Intrepid will use a portion of these proceeds to increase production in some way. We currently have them producing 800,000 tonnes KCl for the future and if they want to please investors they will be forced to go about increasing production to increase earnings.

We doubt that many more potash focused companies will come public, not because of a lack of interest, but rather due to a lack of quality issues available. MagIndustries (MAAFF) will have an IPO for its potash subsidiary (which expects to have a mine in the D.R. Congo with capacity of roughly 500,000 tonnes KCl production), but there are still no guarantees that even this will happen- though the wheels have been set in motion. There are not many companies who can now attach themselves to ''King Potash's” coattails which will force interested investors into the readily available securities currently on the market. Fund managers will flock to POT due to its large market cap, liquidity, and dominate market position and will help to continue its upward march. Also of interest is the fact that many indexes will have to be rebalanced now that POT is the largest Canadian company- this has already happened to a large extent, but the higher its market cap goes, the more buying you should see. Many investors should marvel at their investment and how far it has come, and to those doubters we have but one thing to say: “Long live the king!”

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