“Potash Riches: Why a 1,295% Gain Is Ahead for this Company’s Stock” (Mitchell Clark)

Checking out a recent teaser from Micro-Cap Reporter

By Travis Johnson, Stock Gumshoe, June 10, 2014

That’s a grabby headline, right? Gives me a chance to remind you that no, I’m not touting these stocks or pitching these ideas — I’m just sharing the answers to the compelling teaser pitches that are sent our way by the newsletter marketers.

So no, I don’t necessarily think a 1,295% gain is ahead. But Mitchell Clark does. Myron Martin wrote about this teaser pitch back in March for the Irregulars, throwing in some of his favorite potash ideas, but free readers and others have asked about it too so I decided to give it the Gumshoe treatment today.

Clark edits Micro-Cap Reporter for the folks at Lombardi, and the Lombardi newsletters very frequently use teaser pitches in their marketing that are clearly old (sometimes years old) and just getting rehashed — this one is a few months old, but is still in heavy circulation if the questions pouring into Gumshoe HQ are any indication.

And yes, it’s all about potash. Which you have almost certainly heard of — it was arguably the world’s first industrial chemical product, made from ashes and used for bleaching yarn and making soap, but is now primarily used as a fertilizer, a source of potassium, and mined as potassium salt from ancient underground sea beds. Potash got a lot of attention from investors starting about ten years ago, when ethanol and rising protein consumption started to drive corn prices up and took fertilizer prices along for the ride… a ride that was particularly fun for investors in the major North American producers Agrium (AGU), Mosaic (MOS) and Potash Corp. (POT) because the combination of their Canadian export cartel (called Canpotex) and the larger Belarusian/Russian cartel kept production controlled, letting prices spike dramatically right before the financial crisis (prices went from something like $200-900/ton in 2008).

The Eurasian side of the cartel collapsed last year, when Belaruskali and Uralkali effectively dissolved their “partnership” and Uralkali started boosting production, which helped bring prices down last Summer, a ramp down in prices that has kept moving slowly downward for months. Potash is right now in the neighborhood of $290/tonne and seems to still be drifting down, though pricing is not exactly transparent — much of the price is set by the huge importers like India and China and the large contracts they sign with Canpotex or Uralkali (which is the world’s biggest single producer). There’s been an on-again, off-again series of speculations about whether the Belarus/Russian cartel will officially re-form and set pricing together, with most commenters agreeing that logic dictates they should re-tie those knots… but that logic might not be the only driver, particularly if Uralkali wants to drive production higher and get a larger market share. There was an interesting article just this week about the new head of Uralkali that provides some perspective, and he says he wants to be a “responsible market player” … but whether that means prices will drift further down or gradually climb back up to $400-500 or do something dramatically unexpected, I don’t know.

The biggest driver for potash prices is clearly soft commodity prices — when corn prices (for example) are high, there’s both more incentive to plant more corn and to maximize yields from already planted acreage, both of which require more fertilizer. Nitrogen prices have been down recently as well in the US, largely because of low natural gas prices, and phosphate prices have followed a very similar chart to potash, so while there are individual moves related to supply in each commodity, and related to relative pricing (there’s some switching among different nutrients by farmers, but growing requires nitrogen (major input cost natural gas), potassium (major input coast mined potash) and phosphorous (major input cost mined phosphate, which is also controlled by a limited number of major producers), so in the long term you’d expect potash and phosphate prices to be driven by similar demand waves from agriculture and nitrogen to fluctuate more based on energy prices. But really, it’s all about corn (and wheat and soybean) prices, which spiked because of ethanol and biofuels and because of the emerging middle class protein-eaters. If those prices climb again in a sustained fashion (not just because of one bad harvest), then fertilizer prices will be almost guaranteed to rise.

So that’s where I’m coming from as far as an understanding of the potash basics. What is Clark pitching? Here’s a bit from his spiel just so we’re clear on how excited he says he is about it:

“‘I Haven’t Seen a Set-Up This Good in Five Years!’

“Unfairly Punished Stock Could Pop 1,295%

“Collapse of a Government-Sanctioned Cartel could turn every $2,500 invested into more money most people make working one year full-time in America!

“One of the world’s largest, most powerful cartels has just been put down.

“And the resulting aftermath has caused some of the most volatile price swings in the history of the industry…

“More importantly, it has opened the doors for some truly remarkable gains…with minimal effort.

Then blah blah blah about how fortunes are made at the bottom, how bounce-backs make you rich, and his take on the dissolution of the Belaruskali cartel. A bit more from Clark:

“Shortly after the declaration that Russia was out of the cartel and would be selling potash on its own, the Belarus government retaliated…by arresting the CEO of Russia’s largest potash company on allegations of ‘abuse of power.’

“Now the entire potash industry is in shambles.

“The price of potash has fallen nearly 25%, as demand for potash has been cut back with prices falling so fast.

“In short, buyers are waiting to see a floor that gives them a great opportunity to buy in bulk.

“Across the board, potash producers and exporters have seen their stock prices slide as the stability of potash prices disappears.

“Most investors in potash companies either pulled back or pulled out altogether.

“Therein lies the beauty for the investors who like to strike while the iron is hot.

“If you can find a fundamentally solid company…in the midst of a market-wide meltdown…the opportunity could be immense…”

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So that’s the idea — the potash meltdown is presenting a buying opportunity, and he has a “fundamentally solid” company in mind to suggest to you. There’s nothing un-solid about the huge tradeable North American players Mosaic (MOS), Potash Corp (POT) and Agrium (AGU), though they are arguably expensive if potash prices fail to recover, but they are all quite huge… so it’s likely he’s not touting one of those big fellas.

Who, then, is our secret stock?

“Like most potash companies, this stock got hammered when the cartel collapsed.

“In only six days, the company’s share price dropped 40%.

“But as stability is returning to potash prices, the price of this stock has started to rise again….

“Not only does this stock have room to shoot up on a rebound, but it could go even higher than before.

“This stock could shoot up 362% just on pure momentum—taking it all the way back to its original price after its IPO.”

OK, so that’s one little pile of clues. Any more? Just these two key tidbits:

“Right now, the company’s market cap is under $2 billion….

“… around the time the cartel came apart, Koch Industries—the firm owned by billionaire brothers Charles and David Koch—took a serious position in this company.”

A reader wrote in with a solution to this one, and the Thinkolator can confirm that he was right on (good job, Woody), as was Myron a few months ago — this is Intrepid Potash (IPI)

Which is indeed a substantial holding of Koch industries — they own just under 7% of the stock, and built that position largely in the Summer and of last year. The big spike in their holdings was during the third quarter, which is also when the cartel news dropped the shares from roughly $19 to $12, so presumably that drop was the reason they bought a much larger chunk (they owned some previous to that, too). The stock has largely bounced up and down between $14-17 for the last nine months or so, probably as much because of sentiment about future potash prices driven by re-cartel-ization talk as for any other reason, and the Koch have not changed their position in the last couple of reported quarters.

Intrepid produces potash in Utah and New Mexico, so they’re the only big pure play US producer — the vast majority of North American potash comes from the Saskatchewan potash mines — and they get a bit of a freight advantage over their Canadian competitors. They say they supply roughly 1.5% of world demand for potassium-related fertilizers, and more than 9% of US demand… so they are small compared to the big guys but they’re not really a small company. The market cap is around $1.25 billion at the moment, it would have been up between $1.5-2 billion at their highs of the last year.

And if they return to near their IPO price, as is teased, that would be a huge gain — they went public right near the potash peak in 2008, and traded hands right away at near $50 before spiking up to almost $70… and then falling, as potash prices fell and the market crash hit full stride, to below $20. The price has generally traded in direct sympathy with AGU, MOS and POT (meaning it has moved largely because of changing potash prices and sentiment), but has been far more volatile — AGU has been much steadier than MOS and POT because it has other businesses and is less reliant on potash prices, but MOS and POT would have been substantially better investments over the past five years of rising and falling potash prices.

But that’s really only because IPI has fallen much harder when potash pricing sentiment has collapsed — the stock did indeed fall 40% last July when POT and MOS fell only about 20%. So if potash prices do recover strongly at some point, there’s every chance that IPI’s volatility could help on the upside as well. That’s not necessarily going to happen, IPI also underperformed POT and MOS in 2010 and 2011 when the potash price was bouncing from $300-500 before it resumed its decline starting in the Summer of 2012, but I haven’t checked into the details at all — IPI is also much younger and growing production, so their relative weakness then could have been specific to their performance or to start-up costs of their operations, which include both mining and solar evaporation production plants, or to other factors I’m unaware of.

Intrepid is not necessarily directly comparable to the other big bulk potash producers, because their costs are a little different and their geographic location a little bit more desirable (close to big customers), and they are a bit more differentiated (animal feed and industrial customers instead of just agriculture), but those differences will probably pale in comparison with changing potash prices when it comes to influencing the share price in the short term. Their costs are generally higher than at the bulk miners in Saskatchewan, since their mines are smaller, but they offset some of that by incurring lower freight costs and some by also producing a portion of their potassium products through less expensive solar evaporation (solar evaporation, using brine to dissolve remaining potash from old mines and then pumping up and evaporating the water away at the surface costs about half as much as mining, but production is far lower so the impact is not dramatic).

And… well, that’s about all I know about Intrepid. They have a pretty good Investor Presentation up on their website if you want to get a snapshot of the potash world as they see it, and some more detail on their production, their capital investments, and their prospects. The short version is, yes, they are more purely “potash” and smaller than the big name fertilizer companies, and that means they should be expected (all else being equal) to be more levered to rising potash prices in the future. Or falling prices. There is some differentiation in their products, location and their operations and cost-cutting initiatives, but don’t let that take your mind away from the fact that they are simply a pure play potash producer: Potash prices up = good, potash prices down = bad.

So go forth, researchify on your own, and come back to the class with your report — do you want Intrepid Potash in your portfolio? Think it will climb by 1,295%? Or even 250% to reach its 2008 IPO price? Or do you expect potash to return to pre-2007 prices in the $150/tonne range and clobber all the producers? Some mix of all those possibilities? Or do you prefer the junior names that Myron likes to chew on? Let us know with a comment below.

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June 10, 2014 4:54 pm

well USA potash is a blip compared to the global players. we recently bought a new potash miner that is developing a huge complex in another place full of potash, Ethiopia. The problem is that besides having to educate farmers there about fertilizer (a new one for them) you also need to build a railroad and a port to export the potash to other African countries desperate to produce more food.
Luckily Allana (AAA in Toronto) is getting finance from the markets, from Israel Chemicals, operator of the Dead Sea Works (in which for now Potash of Saskatchewan owns a stake, and therefore the ability to control prices on behalf of the legal Canpotex cartel), and the International Finance Corp., the private equity side of the World Bank do-gooders.
By the way POT also owns stakes in Jordan Chemicals which mines potash from the other side of the Dead Sea and Soquimich, the Chilean potash producer, all to control prices.) Canpotex is legal because it got a waiver from the Sherman Anti-Trust Act because US farmers need the Canadian potash, possibly an indication of how marginal any US producer is.
While I don’t expect the Russian and Belarus Kali companies to rejoin the cartel, I do think potash prices have probably hit bottom and by the time Allana is built and producing at relatively low costs (high percentage potash also susceptible to being purified in ponds, but much more efficiently) I expect the price will have crept up.
So why settle for a mere 1295% gain? AAA will rise 1299% according to my forecasts!!

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Guy Knight
Guy Knight
June 10, 2014 6:07 pm
Reply to  vivianlewis

Yes, things are lining up well for Allana. The Ethiopian government really is supporting the project, and partnering with a current potash producer and marketer in the form of Israel Chemicals is a huge bonus. If Allana becomes a producer, and it seems like they will, their stock will be worth multiples of what it is trading for now. I own it and expect it to do well. It’s certainly worth looking at.

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Anthony Durbin
June 10, 2014 5:23 pm

As coordinator for Irish Rock Minerals l am presently working with colleagues to provide the agriculture and. horticulture business with a mineral fertiliser that comprises essential slow release nutrients to promote better plant growth and crop yield.
The product, not unlike potash – is ancient seabed rock that we grind to a multi nutrient spreadable powder that provides soil with a superior conditioner to potash,urea NPK and other fertilisers.
When applied according to tested soil conditions, the nutrients remain active for more than three years.
IRM is approved as an organic fertiliser and has been tested by agriculture research stations that c!early show IRM to be an outstanding and well balanced fertiliser for all growing conditions that potash alone cannot provide.
Geological surveys indicate our reseserves exceed 90 million tonnes and SGS tests show the product is of consistent quality at all levels up to a depth a test depth of 30 metres from ground level.
So there we have it – a very good alternative to potash.

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June 11, 2014 12:23 am
Reply to  Anthony Durbin

Anthony: Is your product similar to Azomite?

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June 10, 2014 6:50 pm