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Fertilize Your Portfolio

By John Persinos on October 30, 2012

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Consumers in emerging markets are clamoring for the “good life” that’s on conspicuous display in developed countries, driving greater consumption of grains, meat and processed foods. This burgeoning middle class is straining the productive capacities of farmers, who seek new methods to feed the world’s increasingly ambitious appetites.

North America and Asia-Pacific are the top two consumers of fertilizer in the world, together accounting for more than 60 percent of demand. The growth of fertilizer demand is especially high in the BRIC nations (Brazil, Russia, India and China), fueled by rising incomes and per capita meat consumption.

As the world population grows by about 75 million per year, mainly in countries such as China and India, the demand for food increases. Emerging market populations with growing incomes are mimicking their Western counterparts by embracing a more caloric diet based on meat. Livestock consumes 10 times the fertilizer used to produce its feed.

Underscoring the imperative for more grain were severe drought conditions this past summer throughout the Midwestern corn belt of the United States, most likely the result of inexorable climate change. The US Department of Agriculture estimates that US corn and soybean production this year will fall 13 percent and 12 percent, respectively.

Farmers desperately need to boost crop yields; the companies that help make this goal possible will greatly benefit. Chief among these yield-boosting products is potash, the generic name for various mined and manufactured salts that contain potassium fertilizers in water-soluble form. Approximately 95 percent of the potash produced worldwide is used as agricultural fertilizer, with no viable substitute.

The US Department of the Interior’s 2012 Mineral Commodity Summary projects that world potash consumption will increase 4 percent annually during the next five years, as lifestyles improve and the global economy eventually recovers.

US farms are on track to produce considerably smaller crops this year, but the consequent surge in agricultural commodity prices will more than compensate for volume losses, keeping US farm incomes afloat. As farmers prepare for another planting season, they possess the financial wherewithal to purchase the equipment and fertilizer they need.

Betting on American Supply

According to the Fertilizer Institute, potash is produced in only 12 countries in the world. Potash deposits are particularly abundant in Canada, accounting for about 40 percent of the world’s entire trade in the fertilizer. However, potash consumption is virtually universal and farmers yearn for alternative sources of supply. That’s especially true for American farmers, who tend to manage large-scale operations that are particularly well-suited to potash application.

Over 80 percent of the world’s potash production is exported; the US relies on foreign production for over 85 percent of its potash demand. The US currently has only limited potash development, but its push for greater potash self-sufficiency could prove a boon for investors.

Speculative investors should consider small-cap potash producers that are tapping into newly discovered potash fields in the US. A recent survey completed by the state of Arizona estimated that up to 2.58 billion tons of potash lie buried within the state’s Holbrook Basin, located in Navajo county. Considering that total US potash production reached only 1.1 billion tons in 2011, the Holbrook Basin could help America become competitive in world potash production.

Significant producers of potash with mines in the Holbrook Basin include two Denver-based companies, Intrepid Potash (NYSE: IPI) and Prospect Global Resources (NASDAQ: PGRX), and Dallas-based HNZ Potash LLC, an affiliate of Hunt Oil. However, another Holbrook-oriented mining company provides greater upside potential, for those willing to shoulder more risk.

Passport Potash (TSXV: PPI, OTCQX: PPRTF), based in Vancouver, is a fledgling natural resource company, focusing on the exploration, acquisition, and development of potash properties in the basin.

With a market cap of $34 million, Passport Potash holds a 100 interest in a rich potash field that covers 125,000 plus acres in the basin. The location, geology, accessibility, and availability of inexpensive local labor at the Holbrook deposits all pose significant positives for Passport Potash. Moreover, the company owns its acreage outright, with no royalty payment burdens. The ore deposits also are relatively shallow, requiring lower infrastructure expenditures.

There are several advantages to investing in potash mining within the US. Distributors to US-based end users of domestically produced potash can avoid the higher costs of importing foreign products, making the price more competitive.

In addition, companies with operations in Arizona such as Passport Potash can sell directly to California farmers, making the company’s potash cheaper and more convenient. And the close proximity of West Coast ports makes it easier and cheaper for the company to ship its potash to fertilizer-hungry buyers throughout the world, especially along Pacific Rim trade routes.

Recent developments underscore the growing success of Passport Potash’s Holbrook efforts.

The company on August 2 entered into an agreement with HNZ Potash to jointly explore and develop 21 basin parcels in which Passport holds Arizona State Land Department exploration permits. Under the terms of the joint exploration agreement, HNZ agreed to pay Passport 50 percent of costs in return for a 50 percent interest in the permit property.

Passport Potash’s drilling program revealed on September 27 that the Holbrook Basin contains vastly more and higher quality resource ore for potash production than initially thought.

Finally, on October 14, the company signed a deal with the basin’s indigenous Hopi Indians that allows the firm to conduct operations on their tribal land and should eventually lead to a joint exploration and mining agreement on these highly coveted, potash-rich tracts. The company also holds $2 million in cash, which is sufficient to fund working capital and capital expenditures for the rest of the year.

What do you think of this article? Please post your feedback in the “comments” section below!

John Persinos is managing director of Investing Daily and Personal Finance.

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Stock Talk

  1. avatar
    william c. stasch Reply January 9, 2013 at 2:57 PM EST

    John your article was an assett to my portfolio. Thanks

  2. avatar
    LMG Reply November 10, 2012 at 9:30 AM EST

    The potash industry must see growth in the future. I live in the middle of the Saskatchewan Postash area. The Potash industry is rapidly expanding.
    BHP Billiton is currently constructing what they are claiming the world’s largest potash mine, Mosaic is building an expansion. K+S Potash is currently building a new mine North of Moose Jaw, Agrium is expaning its’ mine west of Saskatoon Sask.
    Agriculture commodity prices play a big part in the price and sales of potash. If commodity prices are high, then farmers will purchase potash fertilizer to maximize production. If commodity prices are low then they reduce purchases and only apply potash to high value crop to maximize their production.
    There was an announcement in the media early this month that Mosaic is laying off a huge part of its work force. They have huge stock piles of potash that isn’t moving yet. Sales havn’t developed yet, Not sure why . However this may help margins, When ever producers delay purchase of a fertilizer product either nitrogen , phosphate or potash, the demand is the spring planting season puts huge presure on the logistics of getting such a large quanitiy of product to the end user in such a short period of time. This then increases the cost price with with increase margins and profitability.
    Good article and yet the potash industry is in growth mode. will be interesting to see how it plays out.

  3. John Persinos
    John Persinos Reply November 4, 2012 at 4:06 PM EST

    Walter — Thank you for reading my article and commenting on it. The most comprehensive way to answer your question is to provide you with this “cross-border tax guide.” Click here: http://www.canadianedge.com/442/cross-border-tax-guide.html

  4. avatar
    Walter Walker Reply November 3, 2012 at 1:10 PM EST

    Would there be Canada taxes? Would Taxes and profits vary between Passport Potash and HNZ potash ? Walt Walker

  5. avatar
    irene selden Reply November 3, 2012 at 9:41 AM EST

    Being that the world continues to eat, and potash is a neccessary ingredient in fertilization for maximum growth, I hold 2-3 companies in the production of fertilizer and was surprised to see this informative article on potash. I will look further into the possible purchase of this stock. New, young company, with growth in perspective. thanks!

    • John Persinos
      John Persinos Reply November 3, 2012 at 10:10 AM EST

      Irene — Thanks for your positive feedback to my article about Passport Potash. The fact that you already hold companies in the production of fertilizer adds credibility to your views. I also find the company interesting. It’s an entrepreneurial outfit with a lot of potential. The long-term global demand for potash is an important trend worth watching. Please continue providing comments to our articles on Investing Daily; we value reader interaction.

  6. avatar
    Abraham Bruck Reply November 1, 2012 at 3:26 PM EST

    In the email, the last line read:

    “For an aggressive play on long-term potash demand, buy Passport Potash up to 3.”

    Up to “3” what? Dollars? It’s at $0.21 now … How long do you think it will take to get to $3? or did you mean 30 cents?

    Thanx!

  7. John Persinos
    John Persinos Reply October 30, 2012 at 2:12 PM EST

    Bill — There are vast deposits of potash buried beneath the American West. I think this fact is an under-reported economic opportunity for the US. Investors are wise to get in on the action ahead of the crowd. As I point out in my article, little-noticed small-cap mining plays offer the greatest upside potential.

  8. avatar
    Bill Carey Reply October 30, 2012 at 2:07 PM EST

    Thanks for this comprehensive report linking world crop yield and potash production. The Holbrook Basin would appear to be another opportunity for the U.S. to develop a robust domestic industry with significant export potential.

  9. John Persinos
    John Persinos Reply October 30, 2012 at 1:02 PM EST

    Thanks for the positive feedback, Matt. We continually strive for a rewarding customer experience; I encourage you to foster interactivity with our web site. Your comments are valuable and helpful to us. I think this particular article of mine uncovers an investment opportunity that’s flying under the radar. Glad you find it useful. Potash demand will be a big story in coming years.

  10. avatar
    Matthew Soergel Reply October 30, 2012 at 12:29 PM EST

    Great piece. Very informative and well-written.

    • avatar
      Vincent. V Reply October 30, 2012 at 2:22 PM EST

      John, nice article. Having looked at the emerging juniors, (passport included) I have continued to invest in a UK junior Sirius Minerals who are looking to develop a greenfield site in a National Park in the UK with local support as well as political support for the project to go ahead.

      They have discovered the world’s largest highest grade of polyhalite currently 1.3bn tonnes inferred N43-101 with updates due to move this to measured/indicated over the next month or so.

      The main reason for my continuing investment rather than diversification into other juniors is not just down to resource measurements, but moreover due to the fact that no other junior comes near when it comes to the quality and track record of the Board of Directors and Senior Management.

      Vincent.

      • John Persinos
        John Persinos Reply October 30, 2012 at 2:43 PM EST

        Vincent — Fascinating. Thanks for your investment insights. I’ll keep them in mind!