Potash and Phosphate Weekly:
the Market Rules are changing in Favor of the Junior Plays
Posted on November 12, 2012 by Alessandro Bruno
In a week marked by the US presidential election and the start of the Communist Party Congress in China (see here) the potash and phosphate worlds were marked by political considerations and resource nationalism in particular. It was revealed that China’s main state-owned energy companies, CNOOC and Sinopec, asked the Canadian government about investing in Canadian potash. There is no word of the Harper government approving such a deal; however, it shows that China is trying to find ways to sideline the cartel-like CANPOTEX marketing structure, which sets process for North America’s potash majors. Meanwhile, Potash Corp. got its own taste of resource nationalism as the Israeli government made it quite clear it would not be entertaining any bids to buy Israel Chemicals (ICL), the world’s eleventh largest potash producer. Potash Corp has been seeking a deal with ICL in order to be better able to match Chinese and Indian customers, who have become a little too wily in their challenge to the current pricing structure. Indeed, another North American potash giant (and CANPOTEX member), Agrium has also encountered a struggle in its recent dealings with Chinese and Indian buyers.
The more positive notes concern markets in South East Asia, such as Indonesia and Brazil, which continue to be strong and hold promise for growth. In this regard, the continuing concerns over low economic growth rates – indicated also by a lack of enthusiasm after the US election –should not be spreading to the potash market. The double edged climactic sword of drought and hurricanes in North America has prompted lower crop projections and an extension of the agricultural cycle, leading to higher crop prices. This is good news for the mineral fertilizer market given the resulting higher farming industry incomes. Moreover, the trend toward more mineral fertilizer use in developing countries is expected to continue. The expansion of fertilizer requirements in developing countries continues to be the main driver for potash and phosphate demand accounting for the optimism among emerging players, even if the main players such as Potash Corporation, Mosaic or Uralkali in Russia may encounter either sluggish growth or even a retraction in view of the Chinese and Indian buyers’ attempts to alter the rules of the market, even if North American sales conditions are good.
The junior potash and phosphate players that will be able to accumulate the necessary funds to address the high capex costs, a risk incurred by all junior mining companies, will reap rewards. The major industry players will increasingly have to adapt to a new market framework and the juniors that can move up quickly from exploration to production will be the main beneficiaries of the changing game. Countries such as Brazil, planning a massive agricultural expansion, driven by food and biofuel (see here), are offering opportunities for emerging players such as 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%.
Allana Potash, one of the most promising emerging plays with a project in Ethiopia endured the single biggest loss of the week at 12.7%. Allana’s project is actually proceeding on schedule and based on conversation with company management, we can confirm that infrastructure developments are proceeding and that the project has access to all the water it needs to achieve the planned solution mining. Allana’s neighbors cannot claim as much and they include such giants as Yara International. Allana’s loss may be explained as a ‘reflected’ risk from a potash project in neighboring – but much different – Eritrea, where observers and investors are growing weary of excessive government participation in the South Boulder potash project; they fear nationalization.
The second largest loss for the week, (-7.14%) Potash Minerals Ltd., was largely due to general losses in the North American markets as that project is also proceeding on schedule in expectation of the receipt of permits to develop the project on federal land, where management expects to yield the best resource. A similar loss (-7.35% in Frankfurt and 0% in NYSE) was endured by IC Potash, which is also developing a solution mining project in the Southwestern United States , while U3O8 remained rather stable in North America. IC Potash and U3O8, meanwhile, saw their biggest losses in Frankfurt; this is not surprising given the continuing fears in European markets. 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.