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After a tough five years, the price of agricultural potash is rebounding. Demand for fertilizer is on the rise in China, Brazil and the United States, and mining firms are rushing to find new sources of the pink potassium salts. In this exclusive interview with The Energy Report, Fadi Benjamin, mining analyst with Northern Securities Co., shares his top picks in the junior space and talks about the pros and cons facing entrants in an industry dominated by a handful of seniors.
The Energy Report: Fadi, the International Fertilizer Industry Association is reporting that the fertilizer market is on the mend, with demand for potash rising 3.7% per year. Today, U.S. potash prices are at about $575 per metric ton (mt), compared with $380/mt last year. What caused the upswing?
Fadi Benjamin: Let’s look at what caused the potash crash: Back in 2008–2009, potash prices had risen to almost $1,000/mt, driven by Chinese demand. Crop prices were relatively low at $3.50 corn, $10.25 soy and $4.44 wheat. Farmers around the world retaliated as they could not justify the economics of these high potash prices and low crop prices. Many farmers, particularly in North America, took a “potash holiday.” They stopped applying the mineral to cropland for a couple of years. The holiday was possible because crops do not consume all of the fertilizer immediately, and the remainder stays in the soil as a reserve. But now, all around the globe, the potash content in soils is too low. The demand for potash has returned, and crop prices have significantly increased. We are now in a world of $7.90 spot corn prices, $16.65 spot soy and $8.89 spot wheat. It may take two to three years of aggressive potash application for North American soils to reach 2008 soil levels.
TER: Will the predicted slowdown of growth in China and other developing countries impact the outlook for potash?
FB: Slowdown or not, people need to eat. Population is on the rise in developing countries, including China and India. There is a push to grow more crops, to utilize more of the arable land, to improve yields and to raise cattle for meat. Agriculture requires potash.
TER: Which countries and regions are the largest potash consumers, and which are the largest producers? Is there a regional or global synergy between networks of production and consumption?
FB: Canada and Russia are the two largest potash producers. India, China, Brazil and the United States are the largest consumers. There are synergies in the form of two marketing organizations. One, Canpotex, represents North American producers, and the other, Belarusian Potash Co., represents Russian producers. Russia and Canada are the gorillas in the potash cage. They ship potash around the globe, especially to China, India and Brazil, the areas of greatest need.
TER: Saskatchewan holds about 40% of the world’s known potash reserves. Should investors look first to Canada for potash production? Which countries are delivering the most bang for the potash investor’s buck?
FB: Junior potash miners are quite active in Africa, which is rich in resource commodities. Companies looking for potash in eastern Africa, specifically Ethiopia, include Allana Potash Corp. (AAA:TSX; ALLRF:OTCQX) and Ethiopian Potash Corp. (FED:TSX.V; FED.WT:TSX.V). Companies exploring for potash in western Africa include Elemental Minerals Ltd. (ELM:TSX; ELM:ASX) and MagIndustries Corp. (MAA:TSX). There are a number of explorers in Brazil, including Rio Verde Minerals Development Corp. (RVD:TSX) and Verde Potash (NPK:TSX). But even in highly developed Saskatchewan investors will find a spectrum of companies, from early-stage developers to those that are fairly advanced and in search of financing to build a mine.
TER: Do you have any names in that space?
FB: Western Potash Corp. (WPX:TSX.V) is the most advanced junior potash company in Saskatchewan. Before Western Potash even had a feasibility study of its Milestone project in hand, it had pushed the bar high enough to attract the interest of a Chinese strategic investor, China BlueChemical Ltd. (CBC:HK:3983).
TER: Your firm, Northern Securities, recently lowered the target price on Western Potash from CA$3.30 to CA$2.30. Why? Are you still bullish on the company?
FB: China Blue withdrew at the last minute, so we lowered the target price. Western Potash had been working with China Blue as a potential partner for at least a year. China Blue did six months of research and due diligence. For reasons that have not been disclosed to Western Potash’s management, the parent company of China Blue did not approve the deal. But we know the Chinese did not find an issue with the project itself, or the negotiations would not have gone so far.
For the rest of this interview, please go to the Energy Report website: http://www.theenergyreport.com/pub/na/13999