The stock market experienced one of its most tumultuous years in recent memory in 2012. Many markets saw investment dry up even as there were some very surprising results in both the implausible and likeliest of places. The German DAX index, representing Germany’s largest listed companies, for example was 29% at the end of the year than it was a year earlier. Even markets in the United States, Asia, South America, Eastern Europe and Africa proved resilient against a number of threats in 2012, not the least of which was the US ‘fiscal cliff’, over which a deal was reached at the eleventh hour.
Overall, and despite the sovereign debt crisis, the global economic slowdown and speculation against the euro debt countries, some markets performed better than expected. The real surprise was Greece’s Athens Stock Exchange (ASE), which went out of its way those brave herculean souls enough to have weathered the financial risks no less challenging than climbing Mount Olympus; overall the ASE rose 900 points or 36%. Moreover, while pundits had all but signed the Euro’s death certificate, enter Mario Draghi as head of the European Central Bank, who fulfilled his promise to do everything necessary to preserve the euro. With the exception of the Spanish Ibex, who finished slightly down, investors realized gains across Europe, whether in Lisbon, Milan, Copenhagen and Paris. Even the EuroStoxx50 is almost twelve percent better because as late 2011. Today, the markets reacted very favorably to the partial resolution to the ‘fiscal cliff’, which was one of the largest clouds hanging over world markets in 2012.
Commodities have been among the biggest gainers so far; however, given that Congress’s solution to the ‘Cliff’ was partial and not especially constructive, more fallout can be expected in 2013 and the while the gradients may be shallower, the markets’ roller coaster ride may not be quite over yet. Nevertheless, European governments may loosen their monetary policies in the wake of political elections in Italy and rising pressure to stimulate growth. For those looking for more reasons to be optimistic, Goldman Sachs, has predicted that the United States should start to see more growth in 2013. The last quarter of 2012, in fact, started to show signs of rising confidence as even the real estate market started to recover. How do potash and phosphate fit in to this framework?
The year 2012 has generally been good for fertilizers and these will continue to be a desirable commodity in 2013. Potash producers can look forward to strong growth potential but the markets are divided firmly into the different world regions. There are the very large players, operating according to cartel-like but fairly predictable conditions such as Potash Corp or Uralkali – and possibly BHP Billiton in the longer term, the medium players such as Yara International or K+S in Germany and the emerging players developing new projects in North America, South America and Africa. The medium players could become targets for mergers or takeovers, leaving the new plays as the most exciting from the markets’ perspective. There are risks and opportunities. The fiscal cliff, while resolved at the political level, will have lingering effects on the economy. One of these is higher inflation and a lower value for the Dollar. As noted in a previous article, agricultural products tend to increase in inherent value even without corresponding increases in transportation and production costs. Food consumption is increasing and changing to more fertilizer intense crops in Asia and in Africa.
In 2012, crop prices maintained high levels and this should continue well into 2013. Potash Corp announced the reaching of a deal to fill Chinese potash contracts at a lower price; however, the market may still have surprises in store as India may soon switch from subsidizing potash rather than nitrogen. It is better to avoid overly favorable expectations, while being prepare for positive surprises, for which there is considerable room given that population growth statistics and economic change dynamics point decidedly higher in the medium and long term. The emerging potash plays surely present a threat to the majors as they strive to achieve far lower production costs. The established potash and phosphate giants will face competition from smaller competitors based in Australia, Canada and Africa, all trying to limit production costs to the USD$ 100/ton range (as opposed to USD$ 300 and up). Not all the new players will make it, but for those that manage to develop, 2013 will be a very important year, given that many plan to start production by the end of 2014 or early 2015.
Start-up costs for potash mines are very high and the best performers of 2012 have been those that have best addressed the solution to start-up costs, leading to the production stage and the management of peripheral risks such as political risk (in the case of Africa) or regulatory risks in the case of the United States and the granting of Bureau of Land Management (BLM) exploration permits in potash rich areas like Utah or New Mexico. IC Potash Corp. (ICP, TSX: ICP; OTCQX: ICPTF) in 2012 completed construction two planned deep groundwater production wells from the Capitan Reef in Lea County in southeastern New Mexico, also addressing the requirements of the New Mexico Office of the State Engineer and the Bureau of Land Management to determine its compliance with regulations.
ICP intends to produce a premium quality sulphate of potash (SOP) at its Ochoa facility, which is usually priced anywhere between 30-50% higher than lesser varieties of SOP noting that production is expected to begin in the fall of 2015. For its part, another of the best performers Allana Potash (Allana, TSX: AAA) is set to become the first and largest potash producers in Africa thanks to its ongoing project in Ethiopia’s Danakhil Depression in the Afar Region. The Company has secured strong support from authorities as well as ‘soft’ commitments for USD$ 650 million for the project debt requirement, which will go a long way as the project move from exploration to production by late 2014. Others like Potash Minerals and Magna Resources, operating in Utah, can look forward to an exciting exploration period when they secure their BLM mining permits. Aguia Resources (ASX: AGR) announced that its phosphate project in Brazil is progressing on schedule having secured favorable results from its Tres Estradas project in the State of Rio Grande do Sul. U3O8 (TSX: UWE; OTCQX: UWEFF) experienced a volatile year, given that it trades in Frankfurt and Toronto, having been subjected to unpredictability in European markets and uncertainties in regions where U3O8 is active, such as Argentina, which is undergoing another period of politically driven economic uncertainty. The overall loss for the sector (-39.53%), as compiled from our sponsors, reflects a variety of risks and opportunities owing to the different geographic location of the projects and, of course, the different stages in the mining process. There is more cause for optimism in 2013.