Make way for rising potash juniors

A $25-million financing cooked up overnight for new junior Potash North Resource (PON-V, PTNHF-O) shows how hungry investors are for up-and-comers moving into the fertilizer business.

Led by Canaccord Capital, the private placement is a “best efforts” deal that will see 10 million units go for $2.50 apiece with a $5-million overallotment option.

Each unit consists of one share and a purchase warrant exercisable for $4 over the next 24 months. The offering should close by July 7.

As a part of the arrangement, Potash One (KCL-V, KCLOF-O) has the right to subscribe for up to 20% of the units sold under the offering — up to another 3 million units for $7.5 million.

Potash North came to be on May 29, when it changed its name from Timer Exploration and completed a two-for-one share split. During its first day of trading as Potash North on June 4, the stock soared more than 650% to $1.55 per share from a mere 20.

On June 3 and June 5, Potash North was granted two neighbouring Saskatchewan potash exploration permits known as KP416 and KP417. The company acquired them from Peninsula Merchant Syndications for $1.95 million in cash and a $1.75-million unsecured convertible debenture. Potash North must also take on Peninsula’s obligation to pay Potash One about $2.6 million in cash.

The properties cover an area of 758 sq. km. About 20 km to the northeast, is Mosaic Co.’s (MOS-N) Esterhazy K1 and K2 underground potash mines, while about 45 km from the southernmost boundary is Potash Corp. of Saskatchewan’s (POT-T, POT-N) Rocanville mine.

Potash North is one of many companies adding potash assets to their portfolios, since the price of potash has skyrocketed in the last year. According to a Scotiabank commodity report by Patricia Mohr, prices climbed to a new record of US$504 in April from US$412.50 per tonne in March — a 180% increase from the previous year.

Canpotex, the overseas marketing agent of Western Canada’s three major fertilizer producers, plans to increase prices to US$725 per tonne (including freight charges) in all Southeast Asian markets in June and will likely eventually boost prices to as high as US$1,000 per tonne.

Traditionally, it’s been the few big producers like Potash Corp. of Saskatchewan and Mosaic making headlines and reaping the benefits of the plentiful commodity, but things are changing.

Analyst Terence Ortslan, who specializes in potash, says he’s not surprised to see so many companies adding potash properties to their rosters.

“I believe this trend has just started,” Ortslan says.

He compares the current state of the potash industry to that of uranium a few years back. There were only a handful of major uranium companies and metals prices were low as well.

“When the market turned, everybody scrambled,” Ortslan says. “Now everybody’s looking for uranium and gold and base metals and so on.”

Ortslan says that until now, it has been very rare to see anyone promoting fertilizer-based companies.

A quick search of the word “potash” on the newswire service Marketwire.com pulled up more than 20 results, with 12 different companies announcing potash-related news during the month of May. The same search for May 2007 pulled up four results, but none of the companies had an interest in fertilizer-based products.

Ortslan says there’s a reason for that:

“We regard potash and phosphate as ‘need’ commodities, not ‘want’ commodities,” Ortslan says.

The world population has more than doubled since 1950 to 6.6 billion people from 2.2 billion, and is projected to grow to 9 billion by 2050. That means we’ll need more food. But the pressure is being felt now because people in populous and emerging countries like China, India and Brazil, have more buying power and are eating more meat.

That’s putting staple crops like corn, wheat and rice, in high demand, lowering inventories and pushing up prices. Corn alone — which is also doing double duty to produce ethanol fuel — consumes about 40% of all potash, nitrogen and phosphorus in the United States.

“Corn is the biggest consumer of potash,” Ortslan says, “And North America produces half the world’s basic food.”

In the current conditions, the potash market is strong — Ortslan compares the current fertilizer prices to gold at US$1,200 per oz. — but the fundamentals are different, he says.

“The indicator for gold is price; the indicator for potash is volume,” he says. “The market needs volume.”

Ortslan says the price of fertilizer does not play a major role in the overall costs for farmers, who are more concerned about availability so they can increase their yields.

The other problem is that fertilizer is a bulk commodity and that infrastructure can be a problem for a smaller company. While a company could build a heap-leach gold operation for under $200 million, Ortslan says, “you cannot do that for phosphate or potash — those things are extremely expensive. An integrated operation would cost up to two billion dollars.”

He says the cost barrier is very high for small companies and that the big producers aren’t looking for extra resources. “They have reserves for the next hundred years.”

Ortslan says the future will see smaller producers and that small exploration companies will end up consolidating their resources.

“It is possible something may be financed but the most likely scenario is that they will have partners come through the food chain.”