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Nov 30
Monday
Agriculture, Stocks

Phosphate Rock, Phosphate Companies - Investing in Agriculture

Agriculture: Phosphate Rock

Reasons to invest in Agriculture:

  • Population growth - unlike other commodities, food demand is not cyclical
  • Inflation will push prices up
  • No one wants to be a farmer these days (you know anyone in school who became a farmer? In our day job we sometimes travel to rural country towns - whenever we have the opportunity to meet farmers, they always complain of two things:
  1. They want to retire but cannot because they need someone to take over their farms and all their kids are not interested
  2. They cannot recall the last time they prospered from sustained high prices
  • Bad weather (drought) & disease seem to be on the rise (is this a manifestation of global warming?)
  • Soft commodity have not had a secular bull run for decades

We have been looking for ways to invest in agriculture - so far we feel the best exposure is through Agriculture indices such as the Rogers Agriculture Index - though to have maximal leverage one should invest in the companies themselves. The problem is we are not smart enough to pick the winners. Management risks, bad weather, disease may result in poor returns despite picking the right industry to invest in.

Looking at the hard commodity bull market, it appears that it does not matter as far as management risks are concern since most if not all commodity explorers went through the roof during the boom. Investors were indiscriminately putting money in - the penny stocks went up few folds. Will soft commodities undergo the same secular bull market? The variables in the soft commodity equation is quite different to hard commodities - weather, disease, government intervention to control food prices (more unpredictable forces at play).

A good sector to invest in are supporting sectors of agriculture. For example, during the hard commodity rally, drilling companies went through the roof. Providers of goods and services to a bullish sector will prosper from the flow of capital into the sector. When it comes to agriculture, we feel that this is the best sector to invest in when it comes to investing in individual stocks.

Agribusiness:

1. Fertilisers

2. Seeds

3. Banking and Financial Services

We will be focusing on Fertilisers in this post, in particular Phosphate Rock and Phosphate exploration and producing companies.

Fundamentals of Phosphate Rock

Phosphate rock refers to rock with high concentration of phosphate minerals. It is the major resource mined to produce phosphate fertilisers for the agriculture sector. Phosphorous also is used in animal feed supplements, food preservatives, anti-corrosion agents, cosmetics, fungicides, ceramics, water treatment and metallurgy. There is no substitute for phosphate.

Phosphate Rock Prices from 2000-2009

Phosphate prices went through the roof during the bull run in 2007-2008, hitting $430/mt at its peak. Unlike other commodities, phosphate rock prices and in particular phosphate rock companies have not recovered significantly and are currently flying under the radar (refer to figure 2)

Phosphate Rock Prices Chart: 2000-2009
Phosphate Rock Prices Chart: 2000-2009

Phosphate Rock Price Chart Post Global Financial Crisis 2009
Phosphate Rock Price Chart Post Global Financial Crisis 2009

Phosphate Rock World Supply and Demand
Phosphate Rock World Supply and Demand

Note: Metric tonnes = 1 tonne. “Mt” is not the same as metric tonnes. 1 Mt is 1 million metric tonnes.

Click below to buy the CRB 2009 Handbook to obtain complete data on Phosphorus Rocks

—————————————————– Phosphate Rock in Australia Australia’s commercial resources of phosphate are in north west Qld at Phosphate Hill, 140 km south east of Mount Isa and on the Territory of Christmas Island in the Indian Ocean. Phosphate Hill is a world-class rock phosphate resource which is close to the surface and easy to access and mine (owned by Incitec Pivot, IPL.AX). Christmas Island is a source of quality rock phosphate of which approximately 0.7 Mtpa is exported to the Asia-Pacific region with products used widely in the palm oil sector of the region. Sales of higher-grade rock phosphate are made to Australian manufacturers of MAP fertiliser. Estimated that total world resources are 18,000 Mt. Australia’s EDR of phosphate rock comprises less than 1% of the world’s resources. China and Morocco hold about 36% and 32% respectively followed by South Africa with 8% and the USA with 6%. World production totalled 157 Mt in 2007, with China producing 35 Mt, the USA 29.7 Mt and Morocco 28 Mt. USGS estimates that in 2007 Australia produced 2.2 Mt. Australia Phosphate Resource

Excluding Christmas Island resources, EDR of phosphate rock is 81.6 Mt. There is no publicly available information on phosphate rock resources for Christmas Island. All EDR is sedimentary phosphate rock (phosphorites) from Phosphate Hill, QLD, which has an average grade of about 24% P2O5. All EDR is accessible for mining and account for 100% JORC Code reserves. About 93% of Australia’s demonstrated resources occur in the Georgina Basin in QLD and are classified as paramarginal totalling 911.6 Mt. The bulk of Australia’s inferred phosphate resources are in phosphorites in the Georgina Basin, and are estimated to be 1150.1 Mt. These resources are distributed between QLD and the NT. Phosphate Rock Production in Australia

Although synonymous with commodities, Australia is underweight in Phosphate production. There are only two main locations for the production of phosphate rock; Phosphate Hill and Christmas Island. Several small operations near Bendleby, SA are mainly used in domestic industrial applications. Based on USGS figures, Australia produced 2.2 Mt in 2007 (<1/10 of Morocco’s 27 Mt in 2007), excluding Christmas Island production. The Queensland Department of Mines and Energy estimates that Incitec Pivot’s production from Phosphate Hill in 2005-06 amounted to 2.083 Mt of phosphate rock. Phosphate Resources Ltd exported 0.656 Mt of phosphate rock and 0.069 Mt of phosphate dust from Christmas Island during 2005-06. The total production in 2005-06 is estimated to be 2.808 Mt.

Australian Phosphate Rock Companies

Phosphate rock prices rose strongly during 2007 from around US$50 per tonne to US$200 per tonne. The rise in price is due to the increasing global demand for fertiliser for food production and for biofuel crops as well as to tighter phosphate rock supplies from Middle East and North Africa. Phosphate Rock Producers in Australia 1. Incitec Pivot (IPL.AX)

  • market cap: $4.5 bil
  • cash:
  • debt: $1.46 bil (debt/EBITDA = 1.97)
  • PE 12.5
  • Note: We believe IPL overpaid for Dyno Nobel (anyone who acquired anything pre-crisis would have overpaid). Latest presentation included a write down of $480 mil of good will in Dyno Nobel).

Incitec Pivot Historical Share Price
Incitec Pivot Historical Share Price
Phosphate Rock Explorer in Australia 1. Legend International Holdings Inc. (LGDI.OB)

  • market cap: $207 mil USD (226 m shares outstanding)
  • cash $76 million; no debt
  • Asset: Georgina Basin, main focus is the development of the Lady Annie and Lady Jane deposits north west of Mount Isa, QLD. A feasibility study in 1974 indicated mining, beneficiation and pipeline transport of concentrated slurry to the Gulf of Carpentaria was feasible. The company plans to transport 4-5 Mt of phosphate rock slurry via a 300 km pipeline to a port facility in Gulf of Carpentaria and export to the Asian market. A pre-feasibility study is planned to start in early 2008, with mining scheduled to commence in the forth quarter of 2009.
  • Resources: JORC Resource by end of 2009 (news report seem to suggest they are “working towards 1 billion tonnes”-if this was the case then it would not be far off MAK)
  • Strength:
  1. Management: Joseph Gutnick’s track record is excellent - shrewd entrepreneur and operator.
  2. IFFCO (India’s agriculture fund) owns 15% of LGDI and has directors on the board; Soros Fund owns 10% of LGDI.

2. Minemakers Ltd (MAK.AX)

Minemakers Historical Share Price 2009
Minemakers Historical Share Price 2009

  • market cap: $80 mil USD (224 mil shares outstanding; at 0.91 exchange rate); 50 mil listed options expiring May 2010 strike price of 75c; 18.1 private options (management owns 12.5% of company)
  • cash: $44 million; no debt
  • Asset: Georgina Basin, Wonarah phosphate rock project.
  • Resources (JORC compliant):
  1. Australia 1105 Mt @ 18.8% P2O5
  2. Namibia 765 Mt @ 18.8% P2O5
  3. Peru: pending
  • Note: Minemaker will need to raise capital to develop an open pit mine in Wonarah ~ $130 mil USD (we believe they will try to boost the share price up before this occurs).
3. Phosphate Australia Limited (POZ.AX)
Phosphate Australia (POZ.AX) Share price
Phosphate Australia (POZ.AX) Share price
  • market cap: $26 mil
  • cash: $7 mil; no debt
  • Resource: 56 Mt
  • Asset: large tenements adjacent to MAK - very prospective.
  • Note: very speculative - they are light years away from production. Not for the risk adverse investors.

Phosphate Tenements in Australia
Phosphate Tenements in Australia
Our Strategy We will be investing 10k in phosphate rock. We will diversify as follows: 1. MAK : 45% - this is a long term investment. With >1 billion tonnes in JORC compliant resource, its market capitalisation is only half of LDGI. We are not sure if the grades and tenements in Legend International Holdings are comparable to Minemakers, but believe that when LGDI lists on the ASX in March 2010, investors will realise that MAK is undervalued compared to Legend. 2. IPL : 35% - one of the few Phosphate rock producers in Australia. There are so few producers around - if phosphate prices were to rally, those who wish to invest in phosphate rock would have very limited choices. 3. LGDI : 20% - having IFFCO and Soros as major investors will no doubt be value money cannot buy.

How to Invest in Phosphate Rock?

1. Phosphate Rock and Fertiliser Companies

Unlike other commodities, phosphate rock futures and options contracts are not widely available to retail investors. We have also not found a Phosphate rock-specific ETF. Which leaves the only option for us to ride the upside in the coming agriculture bull market by investing in fertiliser/phosphate rock by investing in specific companies. The companies listed above are companies that we have an interest in, and have researched on. The risks of investing in companies, obviously, include management risks and production risks. As you know, what is bad for production, is good for the price of the commodity. So a global crisis in production of phosphate rock and fertiliser (for whatever reason), would be bad for the stock investor, but good for those who have position in phosphate futures. The upside however, if one were to pick the right company, is multiple folds of investing in the spot price itself. Gold spot price, for example, have doubled from $700 to $1375 in less than 2 years, but some Gold producers have quadrupled in share price - and are likely to outperform spot gold. The way we play the phosphate rock story, is to invest in stocks. Our top picks are the abovementioned companies. In general, fund managers pick the biggest global blue chip company to invest in.


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9 Responses to “ Phosphate Rock, Phosphate Companies - Investing in Agriculture ”
  1. Phosphate and nitrogen have compelling arguments to rise into 2010. Not so sure about potash. Many farmers like myself will continue to run down potash banks as our non US denominated prices are still yet to reflect the correction in global wholesale prices from US$1000/t down to around US$450/t. And many farmers like myself now also know where to get our hedges set to protect ourselves from fertilizer price inflation. I paid for my fertilizer in 2009 based on profits taken out of IPL and MAK at the end of 2008 …

  2. Thanks for writing in Nuffield, it is great having first hand insight into the business of agriculture. My knowledge is limited to what I read - and often there are so many conflicting sources it is hard to form an informed opinion. For eg I have seen a few articles on oversupply of phosphate rock, and that Australia will not be competitive (compared to Morocco) due to higher costs. I know MAKs cost of production is about $150, which makes it uneconomical at the moment. I will buy more MAK though since its market cap is half of Legend (for same resource).

    I am very interested in investing in agriculture - in more ways than just buying stocks and etfs. Been checking out farm land, but not sure if its a realistic investment for a non-farmer such as myself. I note you are in the business of nuts - any thoughts on Select Harvest (almond) and/or Webster (or anything else agriculture?)

  3. Leonard Halstead

    Jan 12, 2010
    Reply

    I find it incredible that Nauru is not mentioned once in the production of phosphate. Nauru was Australia’s largest phosphate producer until the late 1990s. Nauru’s phosphate had always been considered the highest grade phosphate in the world. Australia reduced importation of phosphate from Nauru to just a trickle in  the year 2000 onwards. Nauru is now starting to export its phosphate to Australia again. With the secondary mining at deeper levels,  even better grade phosphate  with significantly less calcium content has been reported.

    I was wondering why this article has not mentioned Nauru at all. Is it because its production is not significantly large enough to mentioned or am I speculating when I think that Australia wouldn’t want to  release a report that will reveal it is exporting much lesser grade phosphate overseas while acquiring  a much higher grade of phosphate at a very significantly lower price?

  4. hey leonard thanks for the tip. Interesting stuff. Didnt know about Nauru until now. Any stocks we can profit from Nauru’s high grade phosphate?

  5. http://en.wikipedia.org/wiki/Geography_of_Nauru

    very interesting ! its just an island full of phosphate.


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