For some time I wrote about a potential reversal in junior potash miners as demand continues to rise for a secure supply of fertilizer to boost yields on crops. Recently, we have witnessed a major increase of investments from India and China to become shareholders in junior miners.
BHP Billiton Ltd. (
NYSE: BHP,
Stock Forum) and K+S were set to start building new potash mines. Then all of a sudden out of nowhere, we get suckered punch. We see a threat by the Russian cartel to breakup and flood the market with cheap potash. The short positions exponentially increase and we see banks publish reports calling the end to the potash sector.
This may be an irrational panic in potash stocks that may provide a buying opportunity to long term, contrarian investors. OAO Uralkali, announced last month that they will boost production to full capacity in an attempt to break away from the cartel. Uralkali could put pressure on pricing and gain some market share in the short term, but negotiations should be short lived as both sides will not destroy each other.
The major potash miners such as
Potash Corp (
TSX: POT,
Stock Forum) and
Mosaic Co. (
NYSE: MOS,
Stock Forum) were sold off as investors believed this could impact profits and margins with a major gap lower. Many of the junior miners were hit incredibly hard as panic selling and capitulation hit the sector.
However, smart money may be adding to their positions and the gap may begin to be closed to the upside. Remember these large potash producers have cash flow and an impressive dividend.
Uralkali’s attempted move to undercut its competitors may be a negotiating tactic or an attempt to prevent other miners from constructing a project. Remember this is a duopoly and they will do whatever they can to prevent additional players from entering the fray.
I am very careful of planted stories in the media and the shorts who profit on fears from the masses. We must take a long term and contrarian approach as the herd runs for the exit in this sector which is crucial to the future food supply of emerging nations.
To sell based on Uralkali may be exactly the wrong time to panic and may actually signal a bottom as investors rush to the exit. Analysts across the board cut their ratings on the potash sector and one bank went as far as expecting a major exit by investors. However, we may see just the opposite, major buying could come back into this sector.
In my opinion, one statement from one company is not enough to jump ship. Although this has created uncertainty and ammunition for the shorts, we expected a counter-move by Belarus and the North Americans.
So short term we may have an oversupply where we should see demand increase. This supply dump could be setting us up for a potential shortfall as production is cutback, demand increases over the next 3-5 years and as inflation threatens to rear its ugly head.
The move by the Russian to break away from Belarus may actually be a contrarian buying opportunity. Since Uralkali, the Russian potash producer undercut the market and increased production to record levels, Asian and Brazilian demand jumped.
The price has surprisingly stayed above $300 despite the dump of supply and the prediction of sub $300 pricing by some analysts. This may be signaling the smart money doesn’t believe this supply dump by the Russians will be long lived or that there is major pent up demand that will soak up cheap supply.
Belarus has responded to the Russian breakup by arresting key employees of Uralkali as they believe they are trying to corner the Chinese market and what the company has done is criminal. Some of Uralkali’s North American competitors such as Potash Corp, Agrium and Mosaic are not concerned at all about the dispute between the former Soviet producers.
They believe it is just their negotiating style and the price will stay firm as demand increases. Prices for some of the major North American producers have fallen significantly and this could provide opportunity to those who believe in the long term viability of potash as it is unlikely for Russia and Belarus not to come to an agreement. This uncertainty may provide an opportunity to long term value investors.
It is important to note that for a few months now I highlighted
Passport Potash Inc. (
TSX: V.PPI,
Stock Forum) as a critical player for the United States and my only junior potash recommendation. There is a method to my madness.
Passport Potash is critical as a potential domestic supplier to the U.S. which is the largest importer of potash with over ninety percent coming from abroad. Passport Potash could be one of the lowest cost producers because it is a shallow deposit and a rail line runs right through the property.
Passport Potash may have a significant geographic advantage over others. Even if Uralkali cuts prices it will have little to no impact on the American Heartland which is a long way from Russia. Transportation costs are high compared to the product costs in potash.
Passport Potash was down much less than its peers and the majors after this recent development in the potash sector. This news from Uralkali may actually strengthen Passport’s position with domestic end-users who can not afford to transport cheap Russian potash and need a secure supply of domestic potash.
Remember Passport Potash was not scheduled to come into production for another three or four years. A decline in the potash price may hurt current higher cost producers and developers and may actually benefit lower cost and strategic assets like Passport’s.
There may be a major cutback in production in the short term which could eventually sow the seeds of a supply shortfall in potash as the global economy grows over the long term. Higher cost juniors could be hurt and may need to mothball their projects.
This article was also published in Gold Stock Trades.
https://goldstocktrades.com/blog/2013/09/10/could-we-be-witnessing-the-bottom-in-potash-stocks/.