Robert Winslow: Potash Stocks Grow with Agriculture
Source: George Mack of
The Energy Report
Planet Earth is in the midst of a food bull market.
Wellington West Capital Markets Managing Director Robert Winslow
follows small-cap agricultural stocks that can give investors
both diversification and leverage to achieve double-digit
percentage growth. In this exclusive interview with
The Energy Report
, Robert shares some small-cap names where investors can
plant capital and reap vigorous rewards.
The Energy Report:
We know that a growing population is a long-term driver of
fertilizer, but what has driven the potash market so dramatically
higher over the last six months?
Well, it's interesting and it's pretty simple. The key driver for
all these Ag equities is rising grain prices-whether it's potash,
phosphate, agricultural equipment manufacturers or any companies
in the Ag space. These equities generally benefit when grain
prices are rising.
It's a function of farm income-the grain complex drives farm
income, which drives farm expenditures. We called the bottom of
the grains back in July 2010. As the grains have come off the
bottom, the obvious expectation of farmers is that they're going
to make more money and they feel a little bit better. The result
is that they'll spend a little bit more money perhaps on seed,
fertilizer, tractors, storage bins-you name it. So, it's all
driven by what the grains do.
The potash stocks have had a good run over the last six
I would actually suggest it's more like the last three or four
months. Even though the grains really bottomed last summer, it
took some time for the fertilizer stocks to move. When I say "the
fertilizer stocks," I'm talking about the smaller-cap equities
primarily; that's our focus area. And I think one of the big
drivers of the move in the equities was that rising grain and
food prices got picked up by the media. If you go back to
December 2010, we started to see reports in leading magazines,
newspapers and on TV suggesting that, based on UN data, food
prices had gone back to 2008 levels. Once that kind of news gets
picked up on the front page of newspapers, it does tend to drive
When the media picks up on it, retail investors come in. Is that
what you're saying?
Well, I think it does bring retail investors in, but not
exclusively. There are also a lot of institutional
investors-sophisticated investors-who are looking for the next
cycle and, indeed, Ag equities are cyclical. You always want to
be looking for cyclicals that are at or near a bottom or coming
off a bottom; that's when you buy them. Then you want to sell
them when they get toward the top. Ag was a sector wherein the
fundamentals-the grain prices and supply/demand situation-were
teeing up nicely and coming off a bottom, but the equities
Does potash lag grains or other Ag crops?
We've run correlations between our coverage universe of equities
and the grains, and the short answer is no. I cover 15 equities
in the Ag sector and when you run a correlation between those
equities and the three major grains and oil seeds (i.e., corn,
wheat and soybeans), it's almost a 90% correlation. So, really
it's difficult to find a leader or laggard in there. They
basically move together and are driven by the expectation of what
the farmers will do. When I say "grains" are going up and farmers
will spend more money, they won't actually spend the money until
they've got it in their coveralls, so to speak; but, the
investment community recognizes farmer enthusiasm and improving
expectations. So, the grains and the equities move very closely
to each other.
The potash producers now have pricing power. But is this across
the board to all the fertilizers-phosphates and others?
Generally speaking, yes. Again, it's a function of higher grain
prices. It's interesting; we saw this back in '08 when corn
approached $8 a bushel. A lot of the major fertilizer companies
were talking about $1,000/ton potash; in fact, some transactions
were done at spot prices, which were around $1,000. There wasn't
a lot of volume there, so, arguably, it wasn't a good indicator
Depending on what part of the world you're in, potash pricing
is $400-$500 per ton. And there's still some flexibility for
those prices to stay there or go a little higher because it's not
becoming a burden to the farmer. I would suggest that there's
room to go on potash pricing still. I would say the same with
phosphate because we've got pretty tight supply and demand
dynamics for those fertilizers. But, I don't think that we're
talking $1,000 potash again anytime soon.
With the strength potash stocks have demonstrated, do you expect
them to take a break?
Yes, a lot of them already have taken a break. Again, coming back
to the grain prices, we feel there is more risk to the downside
than the upside. The grains have come off a little bit and the
equities accordingly. So, yeah these sorts of breathers are
healthy. I think it's important to recognize, however, that when
we talk about risk to the downside versus upside, we are talking
about the current cycle; we still have a bullish view for a
secular uptrend in Ag commodities.
Where can investors get an advantage?
Well, interestingly enough,
Allana Potash (TSX.V:AAA)
put out a press release recently and announced another strategic
investor. It's the International Finance Corporation (IFC), which
is a member of the World Bank. IFC is putting $10 million into
Allana; obviously, the company has done due diligence and likes
what it sees there. Allana is developing the Dallol Potash
project in Ethiopia, and we're quite keen on it because it's got
some interesting advantages versus some of the other junior
potash plays. Apparently, IFC has done its homework and has a
view similar to ours.
What does IFC's investment mean for the company?
It's an interesting development for Allana because it provides
credibility. In other words, it's not just an analyst saying it's
a good project-it's a sophisticated investor saying it's a good
project. And, it also helps mitigate finance risk. All of these
junior fertilizer companies have to raise a tremendous amount of
capital; for example, we believe Allana has to raise somewhere in
the neighborhood of $800-$900 million (all in) for the total
project. So, you want to be able to secure financing over time to
make sure that it gets built.
When someone like the IFC steps up and puts $10 million of
equity into a company, it's got some skin in the game and,
arguably, will be around when it's time to raise more equity
and/or debt capital. So, we think a development like this is a
positive and, on the back of that development, raised our target
on Allana nominally to $2.25 from $2.15. But, we do have a strong
buy rating on that stock. Frankly, it's one of those stocks that
could double or triple over the next two or three years as this
theme plays out.
Could that IFC investment have any negative implications, in
terms of a potential takeover?
I would say no. I think that, at the end of the day, IFC wants to
help facilitate this project to help stimulate the Ethiopian
economy. And if the company is taken out, it definitely would be
by a bigger and better-capitalized company that should be able to
ensure the project gets built. I think it'd be a win/win
situation if there was to be a takeout.
Your $2.25 target price has an implied +40% upside from here.
Yes. It doesn't seem all that compelling but we had a $1.00
target on AAA when it was $0.40. This company is one that's gone
very far, very fast and was due for a pullback.
In a note, you compared Allana to the German fertilizer company
K+S Aktiengesellschaft 's (Fkft:SDFG.F)
acquisition of Potash One Inc. for CAD$434, I believe.
Right. The interesting thing was that the Potash One multiple was
estimated at 0.45 of the enterprise value (
) to net asset value (
). But that was before grain and food prices had risen so much.
It was closer to the bottom of the current cycle. As I said,
these stocks are cyclical and I feel that we're closer to the top
of the current upcycle here.
Sounds like that $10 million investment from IFC really derisked
It helps for sure; it definitely helps. There's a long way to go
yet-a lot of capital to be raised; but when you've got a partner
like that working with you, that's impressive. That's well
Allana's market cap is in the $265M range, which is high enough
for mutual funds to buy the stock. You recommended AAA when it
was a penny stock. Congratulations on that call, by the way.
You've seen Allana go from a level at which mutual funds couldn't
buy it to where they can now. Is that where the next leg up is
coming from-more institutional investors coming in?
Well, that's a part of it; but I think the biggest part will come
over time as the company meets and fulfills its milestones. Then,
as you pointed out, when the market cap gets through certain
thresholds, you can bring a new list of investors into the mix. A
number that's often used here in Canada that many fund managers
look at is CAD$100M market cap. When a stock gets through that
level, they can start to look at it.
You rate Allana a Strong Buy. Are there any other strong plays
that you can mention?
Yes. Another one that we follow is
IC Potash Corp. (TSX.V:ICP; OTCQX:ICPTF)
. It's looking to develop an operation to produce
sulfate of potash
in New Mexico in the U.S. Now, the company is working to confirm
that the polyhalite-to-SOP conversion process can be done. About
50 years ago, Potash Company of America, which was acquired by
PotashCorp (TSX:POT; NYSE:POT)
in 1993, did some work on converting polyhalite to SOP that
showed it could be done. Now, IC Potash is going back and
duplicating those tests and getting favorable results.
It's early days yet and some pilot test work needs to be done,
but it looks like the conversion operation will work-making it
the lowest-cost (or among the lowest) SOP production in the
world. It could be in the bottom 10% on the cost curve, and
that's one of the reasons we like that project. Anytime a company
can get costs that low, I'm intrigued; so, that stock is coming
along nicely. It, too, has come off in the last three or four
weeks and is not immune to the selloff in the space-but, that's
one stock we like a lot.
I see that IC Potash raised $20M in equity, recently. Is that
enough to derisk the project?
Well, it goes a fair way to derisking it. Again, the company will
likely be looking at spending $600-$700 million. We estimate this
recent capital raise will get IC Potash through its
prefeasibility study (
) and into 2012. So, the company has at least a year's worth of
capital to complete the milestones it plans. Then, it would have
to come back to market at some point.
You rate ICP a strong buy with an implied 75% upside from
That's right, $2.50 target. We use 12-month targets.
Is there a phosphate opportunity that you like?
MBAC Fertilizer Corp. (
is developing a phosphate project in Brazil. We like this one
because, from a transport-cost perspective, it's advantaged
logistically. Brazil is a large Ag-based, or Ag-centric, economy
and about 25% of its GDP is driven by this sector. The country
has a tremendous amount of arable land that can be expanded to
help feed the world and also has an enormous amount of fresh
water. So, it's got the fresh water and the land. We think
agriculture will drive that economy for years and years to come.
So, that's the macro view and the overlay on why we like
Now keeping that growth in mind, consider that Brazil imports
half of its phosphate and 90% of its potash. So, the country is
beholden to imports for its fertilizer even though it's an
Ag-centric economy. MBAC's phosphate deposit in the Cerrado is
next door to the growing region that's like the Brazilian
breadbasket. With this project, the company is looking at mining
phosphate ore and converting it to single super phosphate (
)-a type of phosphate fertilizer that has sulfur in it. In phase
one, MBAC is looking to bring on 500,000 tons of production by
summer 2012; so, we're less than 18 months away from that. There
also are prospects for phases two and three (in other words, not
just 500,000 tons), but it could go up to 1.5 million tons (Mt.)
of single super phosphate or other phosphate fertilizers over the
next five years or so.
We estimate MBAC has a transportation advantage in the
neighborhood of $60-$90/ton because, right now, the brunt of the
phosphate rock that comes into Brazil comes from Morocco. Once
it's on vessel in Morocco, it has to cross the ocean, land on the
coast of Brazil and be offloaded and import duties will be paid.
After the material is put on a truck or rail, it must be
transported all the way up to the Cerrado. That whole
transportation-and-logistics situation costs a tremendous amount.
MBAC can eliminate that cost because it has this deposit right in
the Cerrado. So, we think that advantage is competitive and
sustainable. We expect MBAC to drive significant economics with
this project. We're looking at about $65 million of EBITDA for
phase one, and we believe that can grow to north of $200M of
EBITDA with phases two and three.
With that transportation advantage, it wouldn't take a lot of
capital to double.
Well that's the other thing. Unlike a lot of these junior stocks
we talk about, the financing (on phase one) is largely done. MBAC
recently raised a little over $40 million of equity and now has
about $90 million of cash on the balance sheet. Now, the
company's securing debt facilities with IFC and the local banks
in Brazil. So, we're looking at the company just dotting the "Is"
and crossing the "Ts" on these agreements. It has a bit of due
diligence to do but it's very close to being done. We've got a $6
target on the stock. It's trading at around $3 now. We believe
MBC could be a $15-$20 stock inside four or five years.
I've enjoyed meeting with you. Thank you for your time.
Thanks very much.
Wellington West Capital Markets
, Robert Winslow had served as an equity analyst at Orion
Securities and before that he was a strategy consultant in the
Toronto and Brussels offices of Bain & Co. Robert was also
employed at Caterpillar Inc. where he was a senior engineer. He
earned his MS degree in engineering from Texas A&M
University and his MBA from Cornell University.
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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:
3) Robert Winslow: I personally and/or my family own shares of
the following companies mentioned in this interview: Allana
Potash and MBAC Fertilizer Corp. I personally and/or my family am
paid by the following companies mentioned in this interview:
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