EDITOR: | December 3rd, 2012

Potash and Phosphate Month-in-Review: Fertilizers still in Demand despite Losses

| December 03, 2012 | No Comments

Last week, the Third International Agronomy Congress on Agriculture Diversification, in New Delhi, was held (November 26-30). The meeting highlighted one of the crucial issues surrounding the future of food production. Rising populations and rapidly changing dietary habits in developing countries are driving an increase in the demand for grains. This demand has buoyed prices for such commodities as soybeans, corn and cereals, which should help to sustain demand for mineral fertilizers worldwide. One of the clear messages from the summit was that the three main soil nutrients, Nitrogen, Phosphorus and Potassium (derived from Nitrogen, Phosphate and Potash respectively) have specific functions or roles to play and that all three are necessary to achieve nourishment equilibrium. India is already one of the world’s fastest growing markets for mineral fertilizers and the government has encouraged this through special incentives for farmers.

In 2012, the Indian government has been more active in facilitating nitrogen sales, bypassing potash; this policy has contributed to lower quarterly profits for the potash majors, which announced their Q3 sales results in November. India’s hesitation and focus on nitrogen was coupled with tougher Chinese buyers, who have become more insistent in refusing the market prices set by the major potash marketing organizations such as CANPOTEX. The market has misread China’s reluctance to sign import contracts as diminishing demand for potash; however, the Chinese government itself has weakened that argument by investing in Uralkali, purchasing a two-year bond, a move that if anything suggests an overall confidence in potash. There is no backing away from the trend toward adopting a more scientific approach to agriculture. Such an approach is needed to confront the enormous population challenges and food production increases. If organic fertilizers had once been encouraged in developing countries because of their lower cost, their low productivity no longer makes these viable. In the medium and long term, meanwhile, the emerging potash plays should benefit from the ‘cartel’ pricing battle, especially those that will overcome the costs associated with the high capex costs need to get a mine from exploration to production.

The newly emerging potash and phosphate plays such as Potash Minerals (ASX: POK), Aguia Resources Limited (ASX: AGR), Allana Potash Corp (TSX. AAA and OTCQX. AAA), IC Potash (TSX: ICP), U3O8 Corp (TSX: UWE) will have opportunities thanks to changing developing market economics. Having already noted the demand from India and China, one of the real ‘sleeper’ markets has been Brazil, which has plans to significantly increase agricultural production. Brazil is also seeing one of the fastest (if not the fastest) rises of middle income levels in the world, which will inevitably alter diet patterns toward richer foods. Aguia announced that its project in Brazil is progressing on schedule and its share price showed a significant gain in percentage terms (25.93%), positioning itself as the best performer for the period under evaluation. Typically, the potash majors extract their product from hard-rock deposits (such has been the case for Potash Corp in Saskatchewan or Uralkali in Belarus/Russia); however, Allana Potash Corp (TO: AAA) uses a solution mining approach in an area unfamiliar to most investors.

Shares of Allana Potash suffered a 10% loss over the course of the month in both the Toronto and Frankfurt exchanges; the loss is not indicative of any company performance issues as its project is proceeding on target and on schedule toward a production date of 2014. The management team of the Company believes the salar properties in the Danakil are of the type that can offer the lowest-cost production costs to extract potash, encouraged by the fact that similar types of projects, such as Intrepid Potash in Utah, have been very successful. Any initial uncertainty owing to a leadership succession in Ethiopia has faded as the new prime minister has continued to lead the country in the investment and business friendly direction adopted by former president Meles Zenawi.

The markets during month of November have also been very volatile in view of the US presidential election, ‘fiscal cliffs’ and continued European economic woes; as if these concerns were not enough, continued uncertainty in the Middle East has caused high volatility in oil and commodity prices. The overall valuations for the Potash and Phosphate sponsors showed a drop of 11.34% from the beginning to the end of November (November 1 – November 30). The valuations suffered from the lower, year over year, Q3 sales results reported by such potash majors as Potash Corp, K&S and Agrium; however, the prices of soybeans, corn and wheat – all mineral fertilizer intensive crops-rose in November, which should translate to higher prices. The month of December has started out in a promising way as China has published favorable economic statistics, indicating that its economy has grown in the past seven months. This should help sustain or even boost current commodity prices.

Aguia (ASX: AGR). Aguia announced that its project in Brazil is progressing on schedule and took in a 12.5% gain. In general the share prices of potash juniors remained very stable in the week from November 5 to November 9 reflected in an overall share price change for our sponsors was -3.39%. To add perspective, the Dow Jones index dropped about 4% over the past three week period and Agrium, which announced its earnings in this period, suffered a 9.55% loss for the week. Potash Corporation started to recover after its – expected – lower sales announcement, yet it too lost about 2.2%.  Two North American plays, both slated for solution mining and high Sulfate of Potash (SOP – higher value than the more common muriate of potash MOP), Potash Minerals and IC Potash saw similar share price variations over November recording losses of 12.33% and 5.19% respectively.

These shares suffered from general market volatility as both projects are proceeding on schedule. U3O8, saw a big loss in Frankfurt trading and Toronto trading (-39.39% and -41.18% respectively), not surprising given the continuing fears in European markets and uncertainties in regions where U3O8 is active, such as Argentina, which is undergoing another period of politically driven economic uncertainty. Montero Mining & Exploration (TSX.V: MON) is a new addition to this Potash & Phosphate report, is running four phosphate exploration projects in South Africa, along with rare earth (REE) projects in South Africa, Tanzania and Canada. The company’s share price dropped by 8.57% in November; given the mix of interests and the volatility in the rare earth market, the loss, though minimal, is not surprising.

Overall, the potash market for the juniors as reflected by our sponsors remains stable, driven by continued demand but shaken by forces eager to change the sales dynamics. These changes will affect the majors but ultimately benefit the emerging plays that are independent of such price setting mechanisms as CANPOTEX.


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