Richard Kelertas: Potash Demand High Through
Source: JT Long of
The Energy Report
Fed by rising food prices and increased fertilizer demand,
potash juniors and producers could ride high for the next
two-and-a-half years, says Richard Kelertas, a senior analyst at
Dundee Securities. In this exclusive interview with
The Energy Report,
he separates the promising prospects from the companies that may
not be able to get up to speed before global demand is
: AGRIUM INC. -
- CF INDUSTRIES HOLDINGS INC. - ENCANTO POTASH CORP. -
ETHIOPIAN POTASH CORP - IC POTASH CORP. - KARNALYTE RESOURCES INC.
PASSPORT POTASH INC.
- POTASHCORP - TERRA NITROGEN CORP.
The Energy Report:
In your July fertilizer forecast, you pointed to a 0.9% food price
index increase and a 3.4% meat price index increase. Those higher
crop prices along with new potash price increases recently pushed
through domestically and internationally make your prediction last
seem even more realistic. When might that occur and what countries
are the main drivers for this?
A peak could come anywhere from 18-24 months from now. Our
thoughts are as follows: We are seeing very tight potash markets.
The Chinese have been asking for more. The Indians have now settled
a contract for significantly higher than what they wanted to pay.
Farmers have been pressuring the government to make sure there is
plenty of fertilizer-especially potash and urea-in the fields, but
they also want to make sure it's at a half-decent price.
The supply is now getting out to the fields, but the price has
gone up simply because there is a bit of a monopoly, with the major
producers represented by Canpotex Ltd. Our view is that the price
pressure will continue for the next 12-24 months. No major new
capacity additions-brownfield or greenfield-are planned for the
next two to three years. Really, the new capacity doesn't kick in
until 2014-2015. So 2011, 2012 and 2013 are going to be very tight
markets. That's on the fertilizer side.
On the food side, we have stock:use ratios that are very low.
Crop prices are starting to recover although the second economic
crisis we are going through now may cause those prices to ease off
a little bit. Some crop harvests are going to be low throughout the
world. The stocks of various staples will be tight for the next one
to two years. So we think this is a perfect storm for fertilizer
prices to continue to run up. It won't reach the level of the last
run up in 2008-2009, but it is certainly a very buoyant
What impact do short-term stock fluctuations and economic
challenges have on both food prices and fertilizer
As you've seen in the past, it has had a short-term impact.
If the fundamentals were weak to begin with-meaning crop stocks
were high, harvests were very, very good throughout the world and
inventories of nutrients were either at their 5-10 year averages or
above-then you saw a significant downturn in nutrient and crop
pricing along with usage. Farmers back off if crop prices aren't
high enough because they won't get enough per-acre to justify
putting in more nutrients. Plus, the bounce back in 2009-2010 and
the beginning of 2011 was because of both strong fundamentals for
fertilizers and crops and a tremendous amount of stimulus from
governments that were pumped into the market. It remains to be seen
whether governments still have those arrows in their quivers. I
would suspect that this is going to be a little more drawn out.
Several governments are near crisis situations. The European
Central Bank has said it will buy Spanish and Italian bonds; that
will certainly help for the time being. The real question is: Are
international consumers going to back off on buying feedstuff for
cattle, poultry and their own diets? Will the middle class
throughout the world continue to demand better nutrition? If that's
the case, even with an economic crisis, you will still see crop
prices hold up fairly well. If everyone goes into a cocoon and cuts
back on everything, then we could see prices fall back and the
recovery will be that much longer. So it does have an impact. In
this particular case, we think it is going to be short lived. We
think it is going to be a couple of months where everyone steps
back and commodity prices generally step back along with that.
Nutrients and fertilizers are like any other commodity. They react
to the individual fear factors going on in world markets.
You mentioned some new capacity that might be coming on in
2015. Where is that and what companies are going to be behind
PotashCorp (TSX:POT; NYSE:POT; Not Rated*)
Agrium Inc. (NYSE:AGU; Buy Rated)
have some new plants. Those are brownfields. We also have the
possibility of a couple of larger mines.
Allana Potash (TSX.V:AAA; OTCQX:ALLRF; Buy
, for instance, may have its open-pit mine in Ethiopia up and
running in early 2014. You will probably see only 300-500 thousand
tons of potash come out of that operation in 2014, and it probably
won't be fully ramped up for 1 million tons (Mts.) until 2015-2016.
We may have some more brownfield projects, but if they are deep
shaft, those are going to take a heck of a long time. So, the most
we are going to see is probably 2-3 Mts. with some brownfield plant
expansions coming on by 2014-2015. Allana, which would probably be
the first greenfield operation to come on-line, could be producing
by sometime in 2014.
Are fertilizer company stock prices going up along with food
No, they haven't. Q211 results for most of the major
players-The Mosaic Co. (NYSE:MOS; Not Rated), PotashCorp and
Agrium-showed a bit of a perk up, but just as some real traction
was starting to develop again, the debt ceiling issue put a stop to
all upward momentum. Then on Friday, we had the debt downgrade.
That is going to put us on ice for the time being. Stock prices for
all commodities will be off. If the U.S. dollar weakens enough,
which we think it probably will over the next several weeks, then
you may get a pickup in commodity prices as international buyers
find it cheaper to come into the marketplace and any commodity
priced in U.S. dollars tends to perk up. The light at the end of
the tunnel could be negotiations with the European banks and U.S
tax and spending reform.
Let's talk about what companies are going to be in a good
position to capitalize on global demand when stock prices do come
There will be, we believe, another run up going into
2012-2013 on stock prices. A prevailing fear factor will position
well-established producers as the first ones to benefit when the
market recovers. So Agrium, Potash, Mosaic-those are the key ones
CF Industries Holdings Inc. (NYSE:CF; Not
Terra Nitrogen Corp. (NYSE:TNH; Not Rated)
. Those are the companies that have been around, have established
solid earnings growth, have upped their guidance for 2011-2012 and
have the volume and the staying power in this particular market.
They have clean balance sheets, are well run and have some new
capacity in brownfield tonnage coming into 2013-2014. So they are
in good shape. Those are the ones we think will recover
The juniors will follow if there is a sustained market recovery.
That includes Allana, PotashCorp,
Karnalyte Resources Inc. (TSX:KRN; Not Rated)
Passport Potash Inc. (TSX.V:PPI, OTCQX:PPRTF;
Watchlist Buy Rated)
IC Potash Corp. (TSX.V:ICP; OTCQX:ICPTF; Not
. We could see
Ethiopian Potash (TSX.V:FED TSX.V:FED.WT; Not
Encanto Potash Corp. (TSX.V:EPO; Not Rated)
move as well. It all depends, however, on how far along these
companies are in their development and the results of either
updated resource reports or first-time NI 43-101s.
These things will all depend on how strong the potash market has
remained even though the stock market has fallen off. So in the
next three to six months, if the economy is actually in the dumps
and all these potash prices have come off, then these juniors will
basically go nowhere. Farmers are a pretty fickle bunch. If they
smell that there is going to be any weakness in the overall economy
or in crop prices and their returns, they will step back. And they
can step back fairly quickly.
If, on the other hand, potash prices hold up at the $474.90/ton
price recently signed by the Indians, then you are going to see
these juniors perk up. As it stands right now, the fundamentals are
still extremely strong-they haven't deteriorated at all. Demand is
high worldwide for crops, the stock:use ratios are very low and
farmers have lots of money in their pockets. They are feeling
pretty good about the next harvest. This is important because right
now they are making decisions about the spring plant for next year.
We expect crop prices to be very good and that application rates
will actually be higher in 2012 because farmers are planting more
and trying to bring back drought and floodplain areas with extra
fertilizer applications where nutrients have been washed out of the
You mentioned some of the catalysts that would be necessary
for the junior stocks to start appreciating. Do you want to go
through a few of those, starting with Allana?
We expect Allana to go ahead with its plan to get an open-pit
operation in Ethiopia up and running by 2014. Additionally, Allana
could be a takeover target for the Indian government, which is
still bristling about signing a higher-priced contract for 2011 and
2012 delivery. Along with the Chinese government, the Indians have
been very active in Ethiopia, delivering foodstuffs to drought
victims and committing $300 million to a major railway
infrastructure project. They may be looking to sign either
long-term contracts or purchase a producer or an up-and-coming
junior to deliver 2-3 Mts./year reliably. That makes a lot of sense
long term. So, it is quite possible that someone like Allana or
Ethiopian Potash-although it doesn't even have drills in the ground
yet-may have several suitors come calling. That is one
We also believe Allana is talking to several banks to act as a
project finance lead bank. When that is announced and the market
sees that Allana is serious about going forward with production
plans in 2014, we think that will perk up the stock. That is
catalyst number two.
Catalyst number three will be the updated resource report coming
out toward the end of the year and the bankable feasibility report
coming out in February or March of 2012. That will show quite
clearly the low open pit mining and extraction costs predicted. We
believe it will be the lowest-cost operation and the first to
production in the world. Once that becomes clear, it will be a
catalyst for the stock price. So we have three events coming up in
addition to the extra drilling in the Danakil Depression deposit.
Those will be smaller catalysts that continue to show 25%+
potassium chloride (
) at very shallow depths and significant thicknesses.
Another one you mentioned was Karnalyte?
It is a solution-mine potential operation in Saskatchewan so
you don't have any of the country or transportation risks that you
might have in Ethiopia. Investors who want to stick close to home
during an uncertain market might like Karnalyte. It is a
contiguous, large-scale deposit. There could be anywhere from 2-3
Bts. of potash there. The company has come out with its NI 43-101
and an updated resource report will be out at the end of the year.
It believes it can get up to 3 Mts. in the next five years quite
easily. This would be a solution mine with high capital costs to
start up, but it is not a deep-shaft mine, which is five to six
times the cost. It will be very low extraction costs, $100-$120/ton
delivered to British Columbia seaports. The added benefit here is
the extent of the magnesium-oxide deposits along with the KCl.
Magnesium oxide is used for many applications, including as liners
for arc furnaces in steel manufacturing. Manufacturers are willing
to pay more for secure, zero-boron content magnesium oxide. That is
another revenue stream that has not been factored in by the
markets. The company has hired a specialist in magnesium oxide
extraction and end-use processing to capitalize on that
opportunity. It will issue a report in the next six months on the
conclusions. That could be the catalyst that drives Karnalyte to
Very impressive. How about Passport Potash?
Passport is coming out with its NI 43-101 in September, so
that will be the first catalyst. It is not as great a deposit as
Allana or Karnalyte, but it is located right smack dab in the
middle of Arizona with all the infrastructure in place-road, rail,
power and water; it has everything there. There are no
environmental issues to deal with and all state, federal and local
governments, including the Native American community, are on the
company's side. They all want this thing to be developed. The area
is economically depressed and this project will employ 300-400
full- and part-time workers. So the catalyst here is the NI 43-101,
that is number one. Number two is that the deposit could be big,
although with not as high a KCl content as Karnalyte and extraction
costs may be a little bit higher as well. To get the concentration
of KCl that it needs to produce a good, modern organic product, it
is probably going to have to extract more slurry than some of the
other producers. However, this deposit could be 2-2.5 Bts. and
there are other interested parties. A large oil company just to the
south of Passport Potash's concessions is looking to diversify its
product mix. So it is quite possible that we could see Passport
Potash have a suitor or two come calling.
Interesting. IC Potash?
IC Potash has a very interesting story. It is a little bit
further behind everyone else in terms of getting its project up and
running. We will probably have more information for you in the next
The last one you mentioned was Encanto?
Encanto is, again, in Saskatchewan. It has all the native
groups on its side. It has a substantial resource, but will come
online later than some of the others. We don't expect it to be up
and running until 2015-2016. It is a solution mine with a good
management team and a fairly contiguous deposit. We wouldn't rank
it at the top of our list. Allana is No. 1, Karnalyte No. 2,
Passport No. 3. Encanto is in the middle third of the juniors we
Anything else that our readers should be watching out for in
the potash space in the next six months?
I think you will find that there is going to be a race to get
things up and running as quickly as possible. The savvy investor
should get into the space now. By 2015-2016, you will have a lot of
projects, and if any of these juniors come online, which two or
three of them certainly will, you are going to have enough potash
coming on market to supply all demand through 2017-2018. That could
lead to a pullback in these stocks from 2014-2015. So you have
two-and-a-half years of good market returns coming. To take
advantage of that window, get involved with potash players that are
established-Agrium, PotashCorp. or Mosaic, and Agrium is our
favorite of those three. But also play the select juniors that have
a good chance of getting up-and-running with a better-than-even
chance of getting linked up in a large offtake agreement or having
a suitor come calling. Those would be Allana, Karnalyte and
Thank you so much for your time today. It has been very
*Dundee Securities rating
has 25 years experience as a research analyst covering the
forest products sector. He has been one of the top-ranked
analysts in the sector over the years consistently, and was most
recently ranked No. 1 by Brendan Woods. Richard has worked for a
number of well-known brokerage firms, including ScotiaMcLeod,
Deutsche Morgan Grenfell, UBS Warburg, and Desjardins Securities.
He has a bachelor's degree in forestry and a master's degree in
forestry and economics from the University of Toronto. Richard is
also a Registered Professional Forester.
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1) JT Long of
The Energy Report
conducted this interview. She personally and/or her family
own shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are sponsors
The Energy Report:
Passport Potash and Allana Potash.
3) Richard Kelertas: I personally and/or my family own shares of
the following companies mentioned in this interview: Allana Potash
Corp. I personally and/or my family are paid by the following
4) Dundee Securities Ltd. has provided investment banking services
to companies under coverage mentioned in this interview in the past
12 months: Allana Potash Corp. and Karnalyte Resources Inc.
5) Dundee Securities Ltd. and its affiliates, in the aggregate,
beneficially own 1% or more of a class of equity securities issued
by, companies under coverage and mentioned in this interview: None.
All disclosures and disclaimers are available on the Internet
. Please refer to formal published research reports for all
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and Dundee Securities Ltd. The policy of Dundee Securities Ltd.
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