“Putin’s Resource Roulette” part III — fertilizer?

By Travis Johnson, Stock Gumshoe, April 20, 2008

OK, I don’t think I’ve ever had to resort to three or four different articles to cover a single teaser ad (at least, not since Stansberry’s “Secret Societies” teaser last Fall), so I hope this third writeup will be the charm for us all, and we’ll not speak again of Andrew Mickey’s Putin-icious masterpiece.

The first two writeups on this are here, by the way: the LNG play and the Nickel miner.

The third one hits the sweet spot for everyone’s favorite investing theme these days: fertilizer companies, and agriculture writ large. You can’t swing a corn stalk without hitting a fertilizer company that has doubled in the past year, so the world is full of investors who are hungry for an investment in this area, but fearful of buying the shares in a company that looks a little bubbly and whose shares have gone up so dramatically — which is why, I suppose, you’re reading this and not just gobbling up shares of Mosaic or Potash Corp of Saskatchewan.

Let’s see if we can avoid wasting too much of your precious time as this fabulous week gets underway …

Mickey says we’re looking for …

“Putin Protection Play #3: Use Putin’s Own Land Against Him! Plunder Russia’s Gold Mine Farms…”

This teaser is preceded by some fearmongering about agriculture (not necessarily untrue fearmongering, to be fair) — all about how acreage goes fallow each year because of overuse, or is lost to development. And Mickey says that in fear of Putin we should all be looking to a particular kind of agricultural investment …

“This game of “Resource Roulette” he’s playing… picking and choosing who gets what, depending on whether they’ll side with him on key issues… could end up leaving the U.S. out in the cold very soon.

“That could mean higher heating bills, gas prices, healthcare premiums and more. There’s not much you can do about that. These are events much too big for you or me to affect.

“But what you can do is make sure your net worth is as large as possible; so when the bad times do hit, your assets are secure and plentiful enough to help you ride it all out.

“And one great way to do this is to actually use one of Putin’s greatest assets and one of the U.S.’s biggest weaknesses to your advantage.

“For years the United States has raped its farmlands, tearing everything they possibly can out of them. Their quality just keeps plummeting every year, and it’s not just a problem here in the U.S.”

Here’s a good Bloomberg article that gives more of the facts on farm investing, including some quotes from Jim Rogers, who remains quite bullish on farmland. There are certainly dozens of other high profile investors and investing pundits who advise buying farmland, too … but I’m getting ahead of myself.

Mickey’s tease is this: “So, with the agricultural sector providing some very healthy profit potential, how about using some of Russia’s most valuable farmland against Vladimir Putin himself?”

Huh?

Here’s more:

“Since 2005, this little-known company has purchased 277,018 hectares of land in three concentrated areas of the country. By the end of 2008, they plan to have 350,000-400,000 hectares under their control in Russia.”

Ah, now this is making a little more sense. And the fertilizer bit …

“The Secret Ingredient Fueling This Company’s Massive Potential…”

This is apparently all about “chernozem,” which is, in Mickey’s words, “black-colored soil that contains very high amounts of humus, up to 15% to be exact. It also contains phosphorus, phosphoric acids and ammonia. All of this adds up to make chernozem very fertile soil that produces huge crop loads for its farmers. The natural elements of chernozem are the exact, same materials farmers all over the world are paying thousands of dollars per ton for, to ensure their fields keep producing.”

He also calls it “chemozem” a couple times, but either that’s a typo or the more common term is Chernozem.

“there are only two ‘Chernozem Belts’ in the world. One is inside the remote Canadian Prairies.”

That would be our old friend, Potash Corp. of Saskatchewan.

“And the other? Well, it’s right smack dab in the middle of this company’s land. That’s right, the over 275,000 hectares of land they own in Russia is just swimming with chernozem. And to think — they only paid $500 a hectare for it, too! Imagine what kind of price that would be going for in the U.S. With the chernozem soil boosting their crop production to untold levels and with their operating costs so low, thanks to Russia’s still-developing agricultural industry, the profits this company is going to see could be gargantuan. “

So … if you’re like me, you’ve heard mention now and then during this bull run for fertilizer that the only other real supply of Potash and similar nutrients that could potentially come online is in Russia … sounds like this is what we’re talking about here, at least to some degree.

It sounds like the company itself is more of an agricultural producer than a fertilizer producer, but you never know — I do remember reading just a couple years ago that much of Russia’s farmland was lying fallow, since the collective farms essentially all shut down for lack of funding, equipment, and labor, and that Russia was considering loosening border controls with China to allow landless Chinese farmers to come in and take over some of their vacant fields, especially off in the far eastern hinterlands. Don’t know if they ever did so, but I can accept that Russia is likely to contain the largest inventory of high quality unfarmed farmland in the world.

So what is this farmland-owning company that Mickey wants us to buy?

Well, a few moments in the Thinkolator, which makes some funny noises when you feed it Cyrilic, and we can determine that this firm is …

Black Earth Farming (BLERF on the pink sheets, also traded in Europe)

This is a company that’s quite new, launched in 2005 to acquire land and begin agricultural production in Russia. They have had a few rights offerings and sold some bonds, and went public in Sweden in December. The shares spiked earlier this year to about $13, but are now trading a bit over $10.

The foundation of the company, essentially, is the relatively new Russian land title law that allows them to privately own their land — so they’ve been officially titled landowners since 2006. I have no idea how tested this law is, or how secure their rights are in Russia, but they are certainly farming and still buying land. The notes on their website about their last two harvests have lots of words like “acceptable” and “considering” and “satisfactory” and have several complaints about weather, none of which connotes the agriboom or the miraculous soil we might expect from Mickey’s teaser, but it is probably fair to note that advanced farming techniques, machinery, and educated farmers are not necessarily in strong supply in rural Russia … agribusiness as an efficient business is a new thing, broadly speaking, so I suspect it will take some time before we mention Black Earth and Archer Daniels Midland in the same sentence.

And agriculture is one business where it’s certainly legit to complain about the weather — I’ve heard similar complaints from the Ukraine, and we definitely know that there have been dramatic droughts and the like that have signfiicantly impacted farming (just look at Australian farming, which has largely missed the last couple years of the agri-boom thanks to a record drought).

From what I can tell this company is focused on building a big agribusiness, they have raised lots of money and they’re investing in equipment (including a grain elevator, which is a big deal), and expanding their acreage under the plow. Do they still use plows? I may have some roots of my own in the Black Earth of Illinois, but I can’t tell you much about farming.

So … are these guys going to be big? Your guess may well be better than mine. One reader who wrote in said that the shares were “hard to buy” on the pink sheets, but it’s probably at least possible if you’re interested (though you could might have to overpay a bit for the convenience of not having to buy in Stockholm). The main shares trade in Sweden as Depository Receipts for about 60 Kroner (Krona? Haven’t been to Sweden in a while) these days, which would be about $10.15 at the moment versus the last trade on the pink sheets of $10.18 … they trade a few hundred thousand shares a day over there versus an average of a couple thousand shares on the pink sheets.

If I were comfortable with Russian land rights and knew something about the infrastructure required, I’d be all over this one — bringing agribusiness to the long-neglected Russian farm, especially these fertile lands in the Southwest, sounds like a no-brainer. But still, Russia makes me nervous when it comes to ownership issues like this, and I don’t know what the future will hold when it comes to soft commodity prices inside Russia (food price controls seem to come along quickly when the populace gets mad about expensive bread), or whether there’s potential for this product to get exported. I’d want to read more, and know more about the folks behind this company, before I invested … but it’s at least interesting.

Oh, and just to pique your interest a little further — the big seed investor in this company was Vostok Nafta … that name might not sound familiar, but I expect the name Lundin will, Vostok Nafta is the Russian Investment vehicle for the Lundin family (and is also publicly traded in Sweden if you’re interested in investigating a broader Russian investment). For more on the legendary Lundins, you can check out some earlier writeups I’ve done on their mining and energy investments.

And that’s about all the Russia I can stand for one week … on to something else next, I’ll be writing to you again before you know it.


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6 Comments on "“Putin’s Resource Roulette” part III — fertilizer?"

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Dividends4Life
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April 21, 2008 5:41 pm

Russia is one of those countries, I never got the warm and fuzzies about investing in. China is another and proof you can make a lot of money without feeling good about it. I guess my biggest concerns are the quality of information to base a decision on and the overall stability of the country. Russia, like China is another sleeping giant. I am sure there will be plenty of money made there.

Best Wishes,
D4L

A. Nony Mouse
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A. Nony Mouse
April 22, 2008 9:52 am

Personally, I prefer Cresud (cresy) in Argentina. Even given Latin America’s history re: free markets. and to be honest, the current President of that country at times seems to be a combination Evita Perone’ and aged-up Britney Spears. On the other hand Bushies buddy Pootie-Poot scares the hell outta me for more reasons than one.

A. Nony Mouse
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A. Nony Mouse
April 22, 2008 12:26 pm

On the other hand Gummie is it not possible that this tease is for the Russian Potash Company URALKALIY? (uraly.pk) It’s the largest supplier of Potash to China…and the current price is in the Intrepid Potash range. Don’t have time right now to do a lot of research …but it is a tempting buy.

Gravity Switch
Admin
11
April 22, 2008 3:19 pm

Hi — don’t dispute that those are both interesting stocks, but even though I mentioned the fertilizer/potash stuff the teaser was more about actual agricultural production, which to me means Black Earth (and it comes close to matching the specific acreage, etc). Thanks for the comments and companies, Mouse.

Gainz
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Gainz
April 22, 2008 9:19 pm

This could very well be Russian Roulette.
Too much speculation for me: Pink sheets, stock price susceptible to manipulation, punp and dump, dry and drought type weather,Russian Mafia,…..

A less adventurous farm/ag play for me is local
fertilizer stocks such as Pot, Mos, Cf and now joining in the fray is the new IPO IPI. These stcks
allow me to sleep easy at night and watch my Gainz
by day.

Gravity Switch
Admin
11
April 23, 2008 10:03 am

Certainly makes sense, Gainz — the US/Canadian fertilizer stocks scare me because the prices are so high, but there is definitely demand and pricing power underlying those share prices. I fear what happens if these stocks return to historical multiples at some point, but I was also fearful last year before most of these shares were anywhere near as high as they are today. Congratulations on some good picks.

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