“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…”