Opportunity Erupts as the Potash Cartel Dissolves
North American potash producers got sucker-punched when Russian fertilizer giant OAO Uralkali suddenly said the price of potash could fall in a big way.
Uralkali should know. At the same time it made the bold statement, it broke the news that it will back out of Belararus Potash Co. (BPC), its partnership with a Belarus-based fertilizer maker.
The end of the deal could send the price of potash, a vital crop nutrient, to the $300-a-metric-tonne range, from the current price of about $400.
After hearing the news, I called David Salisbury, chairman of Passport Potash (TSXV: PPI). The company is developing a potash project in Arizona’s Holbrook Basin.
Salisbury is OK with a big drop in prices. He tells me Passport can make money with prices as low as $300. Most North American producers can’t.
The price of potash has been on a wild ride. It reached $840 in 2009 before plunging to $325 in 2010. It has since gained strength and moved close to $400, but this news from Russia is just one more kick in the teeth for producers.
To the head of Passport, all this stirs a big opportunity for investors. More on that in a minute.
Fertilize Your Portfolio
Potash is the broad term for fertilizer forms of potassium.
Some of the world's largest known deposits are in Canada, Brazil, Belarus and Germany. There are also large deposits in Arizona’s Holbrook Basin, which is where Passport Potash is working.
Potash rocks - ore at the Passport project looks similar.
The company controls more than 120,000 acres of land in the region. It’s one in a small group of potash companies working in this area. All of them got slammed in this year’s small-cap meltdown.
And any of the miners that weren’t already beaten into the dirt just got extra-slammed when the news of a potash price war broke.
And therein, says my contact, lies the chance to make big gains.
“This sell-off in potash companies is an overreaction,” Salisbury told me. He says producers look cheap at these levels. And he thinks his company, as a project developer, looks even cheaper.
Salisbury believes the price of potash could stabilize around $350 a tonne, but it’s too early to tell.
“You never know if this is the final deal or if they’ll renegotiate,” Salisbury said.
Either way, he says, the price haircut that potash companies have suffered “offers a great opportunity for investors to come in at a low price.”
A Passport to Profits?
Passport is a bargain. “I think our project in particular looks good,” Salisbury said, “because early economic analysis shows we have a viable project down to a potash price of $300 per tonne. A lot of producers don’t.”
He adds that Passport will be the lowest-cost greenfield (new) potash mine in North America when it comes on line. And it will be cheaper than a lot of brownfield mines, too.
They’re still in the early stage of estimates, but Passport is using $117 per tonne as its cost estimate. The industry average is $240 a tonne.
Passport has a long way to go to bring its mine on line. Mine construction will take 30 to 36 months, so 2018 would be the earliest we could see production.
“We expect the market to consume 70 million to 75 million tonnes globally by 2020,” Salisbury said. “We’re well-timed for that market.”
The company certainly has the potash. A recent report puts Passport’s measured and indicated resources in the Holbrook Basin at 314.11 million metric tonnes. There’s an inferred resource of 638 million tonnes beyond that.
At full production, the company says it could put 2.5 million tonnes per year on the global market for 26 years.
“We are in the US, and our project is right next to fantastic infrastructure,” Salisbury says. “For Passport, India, the U.S. or South America are natural markets to sell to. And our project still works at $300.”
Passport has a market cap of $23.9 million and 171 million shares outstanding. Its plans are ambitious, so anyone buying Passport would be wise to have at least a five-term time frame and do their own due diligence.
But if the market did overreact to the news out of Russia, then potash companies as a group - like Potash (NYSE: POT), Mosaic (NYSE: MOS) and Agrium (NYSE: AGU) are trading at fire-sale prices.