commentry on potash

I have followed ELM for about 2 years. This is my first post on here. I am happy to hold. XS.

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TER: Another area that is generating quite a bit of excitement because of the growing need for food is the potash business, which produces fertilizer. Can you give us a little background on what's going on there?

CA: Most people probably don't realize that the fertilizer used to grow the food they eat does not come from animal manure; it is mined. There is a complex of three minerals-nitrogen, potassium (potash) and phosphorus-that makes up the bulk of fertilizers used around the world. Potash, in particular, is interesting from a supply/demand perspective because, in terms of production, it is the rarest of the three. It is also bulk mined and, thus, is mined and priced by the ton. The commercially viable and producing deposits are extremely deep-1,000 meters underground. So, consider that this bulk-mined commodity has to be brought up from the depths by the ton and shipped by the train carload. It is a very capital intensive mining development enterprise compared to developing your average gold mine. When you talk about developing a potash mine, we're talking about $3B-$4B, whereas you can often develop an open-pit gold mine for roughly $100M-$200M.

What is even more intriguing is that the world's potash supplies are highly concentrated. You only have commercially viable potash deposits in 12 countries being produced by 13 companies, resulting in 80% of this bulky product being exported for use in some 160 countries. So, you have very constrained supply amidst broad global demand.

On the demand side of the equation, China and India have huge populations, in case you didn't know. This requires them to tax their arable land very heavily, hence creating a large and growing demand for potash. China is planting much of its arable land three times a year to meet rising food demand. That kind of activity strips the land bare of the nutrients it needs, requiring heavy use of fertilizers such as potash. This dynamic is playing out across Asia as its population increases, urbanization continues, the middle-class grows, and incomes rise. One last piece of that puzzle is the geography of potash supplies. Potash production is dominated by Saskatchewan Canada; Russia; and Belarus. Belarus is right next door to its dominant and overbearing neighbor, Russia. A vast majority of the world's available potash comes from those sources alone. Think about the geopolitical consequences of Russia and Canada controlling this critical agricultural fertilizer. It makes for a very interesting story.

To make a long story longer, demand is rising dramatically, led by Asia, and potash is an irreplaceable fertilizer. There is no substitute. The majority of the world's potash is controlled by two countries, and supplies, although voluminous underground, are costly to mine and distribute. As a result, demand is rapidly outstripping supply, leading to a dramatic rise in potash prices over the last few years. This creates an opportunity to explore for and develop supplies that are both geographically diversified and located at shallower depths, making them cheaper to mine.

TER: Well, if Canada ever goes Communist, we're in trouble.

CA: That's right. And, just to add a little to the drama, because Belarus is in very deep economic trouble at the moment, Russia has taken a huge interest in a state-owned potash company, Belaruskali. In order to secure financing, Belarus has had to put up that company as collateral. So, Russia now has its teeth in the Belarus supply as well. The price peaked in 2008 just before the global financial crisis at something like $1,000/ton, where over the recent decade it had been $50-$200/ton. It has fallen back down to $400-$500/ton. That price level now makes certain locations or mines possible that weren't possible at lower prices. The higher prices are driving potash exploration.

TER: Do you have any closing thoughts you'd like to leave with us?

CA: During a down market, we always encourage investors to remember that to profit in the high-risk, high-reward exploration space we have to buy low and sell high. Therefore, down markets are our best friends. It allows us to purchase well-researched high-quality companies at steeply discounted prices and this greatly reduces our risk. Further, we believe uranium and potash are critical natural resources where demand is rising faster than the ability of miners to supply it. Therefore, these are good sectors in which to deploy capital at current prices. Of course, this should be done with speculative capital only and no leverage so that you have the staying power to wait for the trend to catch up.

On the supply front, all mining is capital intensive. It takes a long time, in terms of years, and a lot of expertise in the face of extraordinary risk before a deposit can be found, defined, developed and brought into production. We believe that the demand part of this current equation is sustainable because of the structural demographic changes happening in Asia to drive prices higher.

Despite current market turmoil, the trends driving higher prices are here to stay, making this a lucrative space. We don't want investors to lose sight of that when they are thinking about short-term market volatility. So, the trick is to not be afraid but to buy good quality companies when they're cheap, like now. Then we hold on for the ride because eventually market turmoil gives way to underlying fundamental supply and demand dynamics.

TER: We greatly appreciate your insight.

CA: Thanks for having me.

Carlos Andres is the managing editor and chief analyst of the Frontier Research Report, a natural resource-oriented monthly investment newsletter focused on high-risk, high-reward junior exploration companies in emerging and frontier markets. Mr. Andres applies a potent mix of world-class expertise and lengthy experience in identifying countries and companies where "perceived" risk is much higher than "actual" risk, providing opportunities to profit significantly on the difference. Mr. Andres has been a natural resource analyst and investor for over 15 years.
Article published courtesy of The Energy Report - www.theenergyreport.com