Richard Kelertas: Potash Prices Headed to $750?
Source: George Mack of
The Energy Report
With rising global demand for food comes escalating cash flows
that enable farmers to purchase additional fertilizers to further
boost yields. Dundee Securities Senior Analyst Richard Kelertas
follows junior potash explorers that have been red hot for much
of the past six months. In this exclusive interview with
The Energy Report,
Richard shares some names that he believes could develop into
bumper-crop multiples for investors.
: Agrium Inc. Aguia Resources Ltd.
Intrepid Potash, Inc. Karnalyte Resources Inc.
Passport Potash Inc.
PotashCorp The Mosaic Company
The Energy Report:
Are we at the beginning of a global bull market in food,
Yes. We believe the upward price pressure started after the
economic crisis in 2009, and it could remain a substantial bull
market until stocks:use ratios (carryover:total use) in most
major food stocks-grains, corn, soy beans-can be brought back up
to 10-year averages. Currently, the ratios are well below those
averages. There doesn't seem to be any reprieve in sight, unless
we have two to three years of bumper harvests in all grains
around the world.
Rising food prices usually mean increased demand for fertilizer,
but that hasn't necessarily been the case this time around. Do
you believe the share prices of potash equities have exceeded
potential growth rates?
No, not at all. In retrospect, 2009 was a tough year for a lot of
fertilizer producers. Farmers had to delay applications, even
though they started to see crop shortages followed by slowly
rising crop prices. We didn't really see fertilizer-price
recovery until 2010. Around March/April, or mid 2010, we started
to see a pickup in fertilizer stock prices. It was slow at first
and, in some cases, it has been muted; but at the beginning of
2011, it started to surge dramatically. Now it's come off again
on the expectation that all commodity prices, including that of
oil, will come off as the global economy slows down (especially
in China). But our view is that this is just temporary, and that
these stock prices don't really reflect anywhere near the
fertilizer prices we are looking at in 18-24 months. So, these
current stock prices are only reflecting mid-cycle, but nothing
near peak, prices.
What is the real driver for fertilizer stocks? China, India?
It's global, definitely global. China kick-started the demand
increase by buying corn on a large scale, but it suffered a
significant drought in the southern part of the country. That was
followed by several crop failures, droughts, weather-you name
it-throughout the world in different locations. However, the main
driver, going 5-10 years out, is population growth and the
increase of the middle class' diet requirements. That's the big
What about phosphates versus potash? Will phosphates catch up in
the foreseeable future?
Yes, eventually. Not much phosphate supply is coming out over the
next 18 months, so it's going to catch up. There's no doubt about
What about global potash and phosphates prices? They are not
consistent across the world. Do you see them evening out in
Well, it all depends. You could look at history and assume that
they will, but governments' export/import restrictions can have a
dramatic effect on regional prices. So, it all depends. I suspect
that small regional differences will start to coincide at some
point. Prices are lower in China, India, Indonesia and the United
States. In another six to nine months, we could see increases in
Is there an arbitrage opportunity for investors there?
Oh, yes, but not really in stock prices. You'd have to play the
futures markets and the actual commodity.
Do you have a price forecast for potash? And, will we ever see
No, we won't see $1,000/ton. I don't expect the type of hoarding
experienced back in 2007 and 2008 will happen again to the same
degree. We certainly will get speculation; but, typically, the
amount of cash that's available, the lending requirements and
margin calls are more stringent than they were three years ago.
You will probably see one-half of the speculative run-up in
potash that we saw back in 2007. This time it is coming from
actual supply/demand dynamics, not speculative investors gobbling
up contracts. So, $1,000/ton?-I'll never say never, but I think
the next peak we'll see is probably more in the $700-$750/ton
Do you have a timeframe for that?
Yes, about 24 months.
How do you start your due-diligence process on something like a
Well, there are two different types of companies-the junior
exploration plays, which are predevelopment, and the established
producers. The established producers are companies like
Agrium Inc. (
PotashCorp (TSX:POT; NYSE:POT)
The Mosaic Company (
Intrepid Potash, Inc. (
. The due diligence you have to do on those is pretty basic, and
a lot of information is available from published sources on the
Internet. So, the amount of research is directly related to the
amount of information available-and there's really not much you
can't find. We sit down with management to go through the
numbers, and then tour one or two of the operations. We consider
the overall picture on different types of fertilizers to
determine if this stock is positioned well and rank it next to
For junior developers, which are either in pre-exploration or
exploration phase, it's more difficult. We spend a lot of time
with the management team, going onsite, talking to the geologist
and making sure the resource is there. We also ensure that there
are no outside risks-no native land claims or land lease
difficulties. We want to make sure a company can secure land and
exploration leases over a contiguous area, so it will be smooth
sailing when drilling starts.
After that, it depends on how well the company is financed,
the quality of its management team and the level of its
compliance and its experience in the field. Finally, you have to
ask: "What are the barriers to entry for these particular
players?" It could be country, infrastructure or any of a whole
list of risks. The amount of due diligence you do on the smaller
companies is a lot more than you would do on the larger ones.
Do you like to see smaller companies being managed, especially in
the field, by people who have come from larger companies?
No, not necessarily. It depends on their experience level. They
may have worked and been successful at smaller companies in the
past. A lot of the guys who work for larger companies haven't had
to go through the exploration phase-they've just gone through the
production phase. So, the smaller companies don't really need an
expert in production quite yet-they need exploration experts.
That's where the difference lies.
Do you consider these junior exploration companies you're
following value stories or growth stories?
Well, it's a combination; but sometimes you don't have the value
yet. Some might be growth stories only because they haven't yet
established the resource. Even if a company hasn't started
drilling yet, we look at the historical holes done 15-20 years
ago. And if it shows some good concentrations of potassium
, we're happy to follow it along and look at the company as a
growth story even though the value hasn't been established.
How long do you typically follow a company before you initiate
Well, I spend a lot of time with management and going through the
numbers. So, we probably spend two to three months with a company
before we initiate coverage.
Where are you finding your desired characteristics now?
Right now, the ones that we spend a lot of time on are
Allana Potash (TSX.V:AAA)
Karnalyte Resources Inc. (TSX:KRN)
. These two companies have tremendous potential for resource
expansion, as they've done drilling on only a fraction of their
properties. Allana is in Ethiopia, and Karnalyte is in
Another one that we're looking at is
Passport Potash Inc. (TSX.V:PPI, OTCQX:PPRTF)
in Arizona near Holbrook. It has a lot of potential based on
exploration work conducted there about 25 years ago. Passport's
management team has done a lot of advance work, and drilling is
just starting now. But the history indicates, to us, that there
will be some fairly large deposits.
We're looking at another one called
Aguia Resources Ltd. (ASX:AGR)
, which is a Brazilian phosphorus and potash play-a combination
play which is fairly unique. We're doing more work on it, but we
think it's going to an interesting value-and-growth story there
The first two you mentioned, Allana and Karnalyte, seem to have a
tremendous sense of urgency. Drilling is faster than
Allana has 105 million tons (Mt.) potassium chloride in the
inferred category. Ultimately, how large could this resource
The company is looking at the first 11 drill holes and some of
the 3-D seismic data, but it has not made anything public yet.
The NI 43-101 will be out in mid May. From our experience, we
believe that we could be looking at 500 million to 1 billion tons
of potash-mineable potash.
Let's just take the low end of that, 500 Mt. of mineable potash.
You've got a target price of $2.50 here, which represents 50%
upside from where Allana is right now. But, at 1 billion tons of
mineable potash, where could that take this stock?
Well, if you put the sensitivity on the
potash, it could take AAA's price well over $10-$12/share quite
easily. It depends on the grade; so, there are a lot of 'ifs.'
That's why we make a sensitivity table, just to get an idea. If
the grade is about 35%, which seems to be the case with the last
four or five drill holes, it could be a 25% average grade. That
would take us north of $10/share.
Well, grades seem to be high, so far, from what I've seen.
Very, very high-and Allana can do open-pit mining.
There are some near-term catalysts; do you believe these
catalysts are priced in or discounted to the stock?
No, not at all. But I would say that many unanswered questions
remain. There are still some risks and issues having to do with
the country, location, infrastructure and things of that nature.
There's also a continuing view that commodity prices,
potentially, have topped off here for the short term. We'll
probably see other commodities pull back; but, essentially, the
farmer is sitting with lots of money in his pocket and is
starting to apply more fertilizer.
Karnalyte was the second company you mentioned, I noted that it
was up just 2% over the last three months while Allana was up
79%. Does that give an investor something of a relative-value
play here in Karnalyte?
Yes; but, you also have to remember that Karnalyte surged from
$8-$13 very quickly after its IPO. So, it put on a lot of its
capital appreciation early in the process. Right now, the
resource is based on just 7% of its total land holdings. The CEO
thinks that the potash deposit is extremely contiguous, very deep
and very large. So, if you extrapolate to 100% of Karnalyte's
property and add its newly added exploration rights, you'll start
to see the stock catch up.
Ok, you have a $20 target price on Karnalyte. That's an implied
60% upside from where KRN is now.
And, the next catalyst could move it to there?
Well, I don't know if it'll move it to there. It may take a
couple more catalysts to get it there. But that's my 12-month
target, and I have no doubt that KRN will blow through that
What is your target on Passport Potash?
I don't have a target yet. The company hasn't made any resource
information public, at least not to the extent that we can infer
a net asset value (
); but that information will be out shortly. Passport is working
on its NI 43-101 now, which will be ready by June. The company's
drilling as we speak and will release its first drill results in
the next couple of weeks. Then, after two or three holes, we'll
be able to come out with a valuation.
You mentioned Aguia. Is it formally under your coverage?
Not yet. Like Passport, it's an item of interest. We will be
getting drill results from the company over the next couple of
Richard, thank you and best wishes.
Best wishes. Thank you very much.
Richard Kelertas 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 Scotia McLeod, 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
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1) George Mack of
The Energy Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
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. I
personally and/or my family are paid by the following companies:
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