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Pitfalls waiting for potash, phosphate
Robin Bromby From: The Australian December 15, 2010 10:19AM Increase Text Size Decrease Text Size Print Email Share Add to Digg Add to del.icio.us Add to Facebook Add to Kwoff Add to Myspace Add to Newsvine What are these? FOOD is so much on the mind at Christmas - but don't forget about minerals it needs.

Yes, fertiliser stands to be one of the key markets in 2011 and 2012 - and that means potash and phosphate.

Pure Speculation has been bullish about those minerals, and continues to be so. But that doesnt mean the road ahead is free of speed bumps. Theres always the danger of a bubble; many projects wont prove to be as good as theyre hyped; and there are always the known and unknown unknowns in any market.

And our general bullishness also does not mean we wont air counter opinions.

We ran out of space in the Monday print edition so the item on phosphate was rather truncated. However, the publication yesterday of the latest World Agronomy Report from ABN AMRO and Virtual Metals allows a chance to make amends. Among farming inputs, fertiliser will command the most attention in 2011, the report says.

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China is about to emerge as a net importer of urea and diammonium phosphate (DAP) as it curbs its exports of those products in order meet domestic needs. New production capacity, especially in Morocco from 2013, will help dampen down prices for DAP in the long term but, more immediately, prices should climb in 2011. Present US farm-gate prices for DAP of $US606 a short tonne could jump as high as $US800 by this time next year.

We expect fertiliser prices will rise by between 15 and 20 per cent during 2011 and will be set for further advances the following year, says the report.

That, of course, will not be much help to the bulk of the Australian companies, as production for most is still a long way off. But the long term picture must be positive: with declining areas of arable land around the world, fast growing populations in the developing countries, and demand for better quality food from the new middle classes of Asia, fertiliser is the key to making surviving arable land produce even more per hectare.

So, apart from the companies we mentioned on Monday, we saw an announcement from Superior Resources reporting that drilling had intersected a thick horizon of moderate grade phosphate at its Wills project near Dajarra, the town that was once one of the worlds great railway stations for loading cattle for coastal markets. Seventeen of the drill holes returned assays of between 1.7 per cent and 18.3 per cent phosphate. No high grade phosphate was intersected. The area is now considered to be adequately tested, the announcement said. The company now seems to be pinning its hopes on a new area it has under application.

But Aguia Resources seems to have had better luck at its Mata Corda project in Brazil. Sampling has produced assays up to phosphate grades of 28.4 per cent. This company plans to produce with the Brazilian fertiliser market in mind. That country imports much of its fertiliser, and selling domestically reduces the transport costs and logistics problems of shipping abroad.

We are also still waiting for Phosphate Australia to find its development partner for the big phosphate project in the Northern Territory, a process which has been in train for much of 2010. In the meantime, the company has bought a manganese project in Western Australia. Its most recent quarterly report also noted that POZ had lodged applications for ground prospective for nickel and uranium. One wonders whether this diversification is an acknowledgement that the phosphate road is going to be a long and winding one.

Maenwhile, Bloomberg reports that K+S AG, Europes biggest potash producer, has lifted prices for the crop nutrient for a fourth time this year on sustained demand from farmers. K+S is raising prices for muriate of potash, or MOP, the most common source of fertilizer potassium, by 18 euros a tonne to 335 euros for customers in Europe.

K+S is also now in the process of buying Canadas Potash One Inc. to secure new reserves as demand for potash picks up and capacity at the Kassel, Germany-based is dwindling and factories running close to full speed, the agency added.

At the same time, a Reuters report quotes analysts warning investors not to expect every potash project to be a success story.

Salman Partners analyst Jaret Anderson believes potash exploration companies with viable projects won't face capital constraints as investors are willing to throw financing at projects in the development stage for now. But this could change, the report said. In addition to the potash exploration companies listed on the Toronto stock exchange, there were dozens of privately held greenfield potash projects across the world. Many of these are at the same stage, if not ahead of rival projects owned by public companies, making them competing targets for acquisition.

Another analyst quoted by Reuters, Joel Jackson of BMO, said this: "It would be a mistake to assume that the entire selection of potential greenfield potash mines are just the ones listed on the TSX. I think some investors lose sight of that."

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The writer implies no investment recommendation and this report contains material that is speculative in nature. Investors should seek professional investment advice. The writer does not own shares in any company mentioned.