Potash Party on Wall Street

The potash boom has not been lost on investors who have bid up the shares of Potash Corporation of Saskatchewan (POT-NYSE). The bull case is well known, making the recent public debut of Intrepid Potash Inc. (IPI-NYSE) a layup for the company, their bankers and the funds who were allocated a piece of the IPO's pie.

The speculative juices are certainly flowing, and investors are willing to take a flyer on anything potash related. It is a party and traders are hitting the dance floor:

What's a potash permit worth? About $38-million, judging by the stunning share price increase posted by Potash North Resource Corp. Wednesday.

The junior miner, which was previously a shell company called Timer Explorations Inc., saw its stock climb 670 per cent on the TSX Venture Exchange in its debut as a potash play after disclosing it had won an exploration permit from the Saskatchewan Mines Branch....Potash North doesn't have reserves or even a resource estimate for how much of the mineral used to make fertilizer might be contained in the permitted 91,000-acre land package.

The site is east of Regina near the Manitoba border and just 20 kilometres from a pair of potash mines operated by Mosaic Group Inc. Its few drill holes are historical, mostly from oil and gas explorers.

Still, by the end of trading yesterday, the new potash play could boast a market value of about $41-million. Globe and Mail

Saskatchewan has not seen a new potash mine built in over 40 years, and for good reason. The economics did not support it, given the prohibitive costs:

Industry experts estimate it will take a minimum of five years for a new mine to be built at a cost of at least $2.5-billion.

You certainly have to take these estimates with a grain of salt, but it is clear there are daunting barriers to entry in the business, a fact that was not lost on investors who attended Intrepid Potash’s recent road show.

The IPO marked the top of the move in the stocks of both Potash Corp of Saskatchewan and Mosaic Co. (MOS-NYSE), but the animal spirits are returning after the textbook correction that followed Intrepid’s IPO.

The North American-based potash producers were not the only ones to see spirited trading at the end of April; the thinly traded stocks of Russian potash producers have been volatile as well:

.....that day, April 23, URKA’s share price hit its historic high of $12.40; this represented a market capitalization of $26.3 billion. Since then, with virtually no news to speak of, and negligible trading volumes, the charts show that Uralkali’s share price has been extremely volatile, seesawing down and upwards by up to 17% in value on the day.

Chief executive Vladislav Baumgertner explained the share price increase as the direct result of the commodity price growth, itself driven by the underlying global supply-demand balance, and the relative attractiveness of potash to commodity investment funds. “These price increases,” Baumgertner said on April 23, “are driven by the continuous growth of global demand, historically low inventory levels and unprecedented tightening of the supply for the remainder of 2008 after the agreements reached by the Company in China and India.” Dances With Bears

With the stocks again testing their 52-week highs, investors are seeking explanations for the re-test. What gives?  There is a Merrill Lynch potash conference today. Ans looking to the agriculture markets makes sense, but might not satisfy ardent stock sleuths:

Another catalyst for higher corn prices is that some farmers are replanting some of their corn crop in the U.S., which is at or near record replanting. Replanting can often lead to crop loss because it is planted late, and then potentially exposed to a hot and dry summer. Replanting does generate additional revs for fertilizer cos, but not that much. That’s because farmers use ~135 lbs of nitrogen per acre when they initially condition their soil to plant, but if farmers find the need to replant due to adverse weather, they only use ~5 lbs of fertilizer in the soil.

The primary reason that the report is positive for fertilizer cos is because the direction we are heading, in the current ag environment, is lower inventories of corn, likely loss of yields during the growing season (due to replanting, and if summer weather is hot and/or dry) and higher corn planting due in the 2008/09 season due to rotation and higher corn prices. Briefing

If you are looking for a reason the stocks are ramping today, the deal in Canada is as good as any, but investors playing the names might want to recognize who they are in bed with, or betting against.

The gamesmanship in the potash market by shady Canadian’s and shadowy Russian’s make the energy markets look relatively mundane by comparison, and someone is eventually going to get skinned alive here.

Edge-less investors who are trading these stocks might want to arm themselves with a hammer and sickle; although that might be akin to taking a knife to a gunfight.

Of course, charts don’t lie, and might be the only thing you can trust when it comes to potash stocks.
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Tiny miner swept up by potash frenzy
Globe and Mail

May 23rd
Steadying the Potash Roller Coaster
Dances with Bears
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The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Positions

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