Potash Rush Fires Up

That a fertilizer may become the next gold may seem hard to believe. However, when Canadian company Potash Corp, a fertilizer producer based in Saskatoon, overtook the country's largest chartered banks, tech powerhouses and oil companies last year, the idea did not seem so bizarre anymore.

Potash Corp. became briefly but surely Canada's most valuable company. Its share price soared past $211 in April, on its way to a peak of $246, taking its market capitalization to $67 billion and then beyond – to No. 1 on the Toronto Stock Exchange. Potash Corp. left behind corporations such as the Royal Bank, Research in Motion and EnCana, all of which had led the TSX in market cap in the last couple of years.

Potash's main value lies in being the primary source of potassium, which, along with nitrogen and phosphate, is one of three nutrients absolutely essential for plant growth. And while humankind has managed in the past without cars, Internet or jewels, it has never done without food.

Today potash is one the hottest of commodities. Its demand is virtually unlimited, there is no viable substitute for it and its supply is controlled by a handful of companies in just a few countries. Furthermore, potash is considered key to avoiding a global food crunch, according to international experts such as those gathered at the BMO Capital Markets 2009 Agriculture, Protein and Fertilizer Conference in New York last May.

Three of the few companies that produce potash – Potash Corp. of Saskatchewan, Mosaic Co. and Agrium Inc. – are based in the Canadian Province of Saskatchewan, which holds 75% of the world's potash reserves. These producers jointly market their potash – 10 million tonnes annually – through Canpotex Ltd., an export organization wholly owned by the province's three dominant producers.

Last year, a number of factors converged to increase the value of the entire agri-industry: the record 6.7 billion people that required feeding (growing to an estimated 10 billion by 2050); the fact that the world's most populous countries, China and India, were switching from efficient (although occasionally bland) rice and grain-based diets to feed-intensive animal-protein diets, and the general decline in arable land as farms and cropland were paved over to make way for industry. In essence, this meant that the world needed to produce more food from less land. It also implied an increased demand for nitrogen, phosphorus and potassium – the core components of industrial fertilizers – which can dramatically increase the harvest of everything from wheat to beans.

As a result, producers of all three fertilizer components could be expected to benefit from increased global demand. If that were the whole story, however, it still would not account for the stellar earnings of companies such as Potash Corp. Nor would it account for the fact that, while the price of crops plummeted worldwide in 2009 as the economic recession took hold and intensified, potash producers expect to maintain or even increase their margins this year.

Underlying this optimism is the belief that, while the price of nitrogen and phosphate may – and in fact did – fall as demand decreases, potash prices and margins can be maintained by matching output to demand.

New players

Aware of Canada's highly lucrative potash mining business, a few small but well-financed potash exploration upstarts have made their way to the financial headlines.

In late May, Vancouver-based Western Potash received a major shot in the arm by way of impressive drilling results from its Milestone Property in southern Saskatchewan. The project is located in close proximity to one of the largest solution-extraction (low-cost) potash mines in the world – Mosaic's multi-billion-dollar Belle Plaine Mine – which has been mined for over 40 years and is still going strong.

Western Potash's flagship property also borders the Regina Potash Property, which is being aggressively developed by Brazil-based Vale Inco, the second largest mining company in the world. Vale Inco has not publicized its drill results but they are rumoured to be very impressive.

This is particularly encouraging for Western Potash, which believes it now has evidence of comparable results on its own adjoining property. All this suggests that an expansive, potentially word-class solution-extraction deposit may be in the making – one that straddles both properties.

Western Potash's CEO and Director, Patricio Varas, points out that his company's first drill hole (known as a "well" due to its extremely wide bore) at the Milestone Property intersected 24.5 metres of potash mineralization.

The company plans to drill at least two more deep holes (or wells) to better understand the overall size, grade, thickness and type of potash mineralization hosted by the Milestone Property. In turn, this would form the basis for a resource calculation later this year, assuming that future drilling continues to yield promising results. On this note, the company's seismic survey results are reported to demonstrate the existence of mineralization beneath each of these upcoming drill hole locations.

Robert Winslow, a Toronto-based mining analyst with the investment firm Wellington West Capital Markets Inc., says that if China is interested in shopping around for emerging potash resources in Saskatchewan, then the continuation of such upbeat drill results would certainly give Western Potash "a seat at the table."

About 100 kilometres to the north of the Milestone Property, Potash One is aggressively moving forward with its mandate to build Canada's first new potash mine in over 40 years at its Legacy Project. The company's lofty ambitions recently received a major boost with the arrival of its new chairman, Robert Friedland, in early May.

The mining magnate is best-known as the man behind the epic Voisey's Bay nickel discovery in the remote Labrador region of eastern Canada. His company later sold the deposit to the mining multinational Inco Ltd. (now Vale Inco) for the princely sum of Cdn. $4.3 billion.

Vancouver-based Potash One is looking to raise enough money to conduct a feasibility study and then commercialize the solution-extraction-amenable Legacy deposit. Most experts agree that a mine would cost upwards of Cdn. $1 billion.

In the meantime, demand for potash continues to grow. A report drafted for ministers of the Group of Eight nations early this year, entitled "The Global Challenge: To Reduce Food Emergency," warns that the world faces a permanent food crisis and global instability unless countries act now to feed a surging population by doubling agricultural output.

To avoid the looming food crisis, the world can no longer settle for "anything less than optimal crop yields via the balanced application of potash-based fertilizers," says Bill Doyle, the CEO of Potash Corp. As a result, "long term demand for fertilizers, especially potash, must increase if farmers are going to produce enough food for the world's growing population."

Links and References

Agrium Inc.

Belle Plaine Mine

BMO Capital Markets 2009 Agriculture, Protein and Fertilizer Conference

BNW Business News Wire

Canpotex Ltd.

Chartered Banks

EnCana

Group of Eight

Labrador

Legacy Project

Milestone Area to See Potash Exploration

Milestone Property

Mosaic

New Boom in Agriculture: Changing Diet in Emerging Nations

Newfoundland and Labrador

Nitrogen

Patricio Varas

Potash

Potash Corp

Potash is Key to Avoiding Global Food Crunch, Experts Agree

Potash Legacy Project

Potash Mining

Potash One Inc.

Potash Price Comparison

Potassium

Promoting Saskatchewan Potash to China

Regina Potash Property

Report on World Hunger – G8

Research in Motion

Royal Bank

Saskatchewan

Saskatoon

Toronto Stock Exchange

Vale Inco

Wellington West Capital Markets Inc.

Western Potash Corp.