mentioned in the Financial PostPeter Koven, Financial Post · Wednesday, Feb. 9, 2011It can best be described as a frenzy. Junior potash stocks have gone on a stunning run in the past few weeks as investors have rushed into them to take advantage of rising crop and fertilizer prices.
The numbers are fairly mind-blowing. To take one example, shares of Allana Potash Corp. are up more than 200% since the start of January. Others such as IC Potash Corp., Encanto Potash Corp. and Amazon Mining Holding PLC have gone on spectacular runs as well.
The agriculture sector has been hot since last summer, when grain prices began to leap higher. That renewed concerns about food inflation and shortages.
There was a quick positive response in the shares of senior fertilizer producers, but the juniors got left out of the party. Robert Winslow, an analyst at Wellington West Capital Markets, said they are simply catching up.
"You're seeing a catch-up phase where there's capital flowing into the sector and it's moving down into smaller-cap names," he said.
That said, the money is not being passed around equally.
BMO Capital Markets analyst Joel Jackson pointed to an interesting phenomenon: it seems as if the most speculative, early-stage companies are performing the best.
Advanced junior potash plays have performed well, for the most part.
But the early-stage ones like Passport Potash Inc. and Marifil Mines Ltd. have done even better.
In a bull market, there is always more risk appetite for smaller speculative plays than there is when times are tough. However, the drastic outperformance of these early-stage potash companies suggests that investors also have very high hopes for them, according to Mr. Jackson.
Now they have to deliver. "These companies have released very few data points. Expectations are high that the data points, when they come, will be significantly better than the more advanced projects," Mr. Jackson said. "So there's a lot of expectation built into these names, and there's a risk that there could be disappointment down the road."
The last time junior potash companies went on such a big run was in 2008, when potash prices shot up to record levels above US$700 a tonne. At that time, the junior group in Canada was led by companies like Anglo Potash Ltd., Athabasca Potash Inc. and Potash One Inc. They were all eventually taken over.
Mr. Jackson pointed out that the market values of some of today's early-stage potash juniors are approaching the prices at which more advanced companies like Athabasca Potash were taken out. Leading the way is Allana, which now boasts a market cap of $330-million. It was a penny stock a few weeks ago.
Analysts said that Allana does have advantages over other junior potash plays -- it has a shallow deposit that is easy to reach, and its location (in Ethiopia) is very close to customers in India.
pkoven@nationalpost.com