Value Microcaps Food, Agriculture and Soft Commodities

[kipp440]

KCL mention here:

http://network.nationalpost.com/np/blogs/tradingdesk/archive/2008/04/17/role-of-potash-as-strategic-resource-could-push-china-to-make-acquisitions.aspx

Role of Potash as strategic resource could push China to make acquisitions
Posted: April 17, 2008, 10:10 AM by Jonathan Ratner
Economy, Market Call
Demand for potash and other nutrients has got its own dose of Miracle-Gro in the past few years as emerging economies boost their protein intake. So if countries like China are snatching up oil and gold assets, what’s to stop them from making acquisitions in the fertilizer market since the supply of these materials appears to be of equal, if not greater, strategic importance?

Wellington West analyst Robert Winslow sums it up perfectly: “After all, potash minerals represent fertilizer, fertilizer represents food, and food represents political stability at a time when food scarcity has become a concern of governments across the globe,” he said in a note.

So it is no surprise that shares of fertilizer producers have been skyrocketing – most notably Potash Corp, which vaulted to third spot in terms of market cap in Canada on Wednesday at more than $62-billion. The gain of nearly 6% to almost $200 per share was primarily the result of the settlement of 2008 potash price negotiations that will see China pay Canadian marketing company Canpotex Ltd. roughly US$575 per tonne, up from around US$175 the previous year. But even without the one-day increase, Potash Corp. shares have been reaching for the sky over the past 18 months.

Canoptex is controlled by Potash Corp., Agrium Inc. and Mosaic Co., but names like Viterra Inc. (formerly Sask. Wheat Pool) and farm equipment distributor Cervus Inc. are only a sampling of the many other companies benefitting from the ag boom. Meanwhile, the possibility that China might purchase potash companies supports Mr. Winslow’s bullishness on junior players in the sector like Athabasca Potash Corp., Anglo Potash Ltd., Potash One Inc. and Western Potash Corp.

As for the price of potash, RBC Capital Markets analyst Fai Lee has a conservative view that there will be no further increases in China and India, so prices will stabilize around US$700 per tonne. However, he did boost his price target for Potash Corp. shares by US$50 to US$300. His 2008 and 2009 earnings per share (EPS) estimates rise from US$7.51 and US$9.52, to US$11.15 and US$15.02, respectively.

But some are far more bullish on spot potash, suggesting it could climb as high as US$1,000 per tonne by the end of 2008. So by putting a realized potash price of US$900 into Mr. Lee’s model, as opposed to US$600 for 2009, the analyst’s 2009 EPS estimate climbs to approximately US$21.

Another important factor for the potash market is the fact that China’s total imports could be more than 3 million tonnes lower in 2008 than the previous year. This could weaken its bargaining power when negotiations roll around next year, which could be considered another factor behind potential acquisitions.


Jonathan Ratner