* Rally among potash juniors maybe premature, overdone
* Decisions on Jansen, other projects could hurt juniors
By Euan Rocha
TORONTO, Dec 12 The rush of mergers in the
potash sector this year has lifted shares of Canadian-listed
explorers, but the rally may say more about wishful thinking of
investors than fundamentals of the fertilizer trade.
With major expansions by established producers underway and
some big new projects waiting in the wings, junior miners may
never fetch the hot bids envisioned by the speculators who have
run their share prices up this year.
BHP Billiton's (BHP.AX) ill-fated $39 billion bid for
Potash Corp (POT.TO), coupled with the buyout of juniors
Athabasca Potash and Potash One KCL.TO, have whetted investor
interest in producers of the crop nutrient.
Shares of explorers Western Potash WPX.V, IC Potash
ICP.V, Amazon Mining (AMZ.V), Allana Potash AAA.V, Encanto
Potash (EPO.V) and Passport Potash PPI.V have all risen by
about 100 percent or more during 2010.
While some juniors may become targets, most are still a
long way from attracting bids. Few have advanced projects far
enough or mitigated risks to the point of wooing buyers.
Most don't come close to falling into Potash One's
category. Salman Partners analyst Jaret Anderson points out its
Legacy project had a feasibility study and environmental
permits in place before the company attracted a $430 million
bid from Germany's K+S AG SDFG.DE last month.
"None of the other projects have these sorts of advantages,
not to say that they can't get there, but it's just going to
take some time," Anderson said.
Within Canada, Western Potash Corp's Milestone project in
Saskatchewan is one of the most advanced greenfield projects
owned by a junior, albeit 12 to 18 months behind Legacy.
Anderson believes potash exploration companies with viable
projects won't face capital constraints any time soon, as
investors are willing to throw financing at projects in the
development stage for now. But this could change.
"It is quite unlikely that all of these projects are going
to get developed in the next five years," Anderson said. "There
are going to be some winners and there are going to be some
In addition to the potash exploration companies listed on
the TSX there are dozens of privately held greenfield potash
projects across the world. Many of these are at the same stage,
if not ahead of rival projects owned by public companies,
making them competing targets for acquisition.
"It would be a mistake to assume that the entire selection
of potential greenfield potash mines are just the ones listed
on the TSX. I think some investors lose sight of that," said
BMO analyst Joel Jackson, who described the run-up in shares of
juniors as speculative buying.
"It's just people playing the 'me too, who's next'
strategy. There is also some retail and institutional rotation
out of Potash One into other stocks," he added.
Many potential buyers have already placed their bets. BHP
Billiton, Vale (VALE5.SA) and K+S already own many projects.
Potash Corp, the world's largest producer, and Mosaic Co
(MOS.N) are expanding existing operations, while potash buyers
in India and China are looking to places like Kazakhstan and
"There are only so many dancing partners out there," said
Jackson. "You aren't going to have five, or 10 new greenfield
mines. That would be absurd."
MagIndustries MAA.TO owns the Mengo potash project in the
Republic of Congo, one of the more advanced greenfield
projects. Yet the company has twice been unable to finalize a
partnership deal and its shares are down 40 percent this year.
That said, some observers expect one or two more buyouts of
juniors before deals begin to dry up.
"It makes a lot of sense for K+S to acquire Potash One and
I believe they are not yet finished," said Scotia Capital
analyst Ben Isaacson. "I don't think they are here for one
mine. I think they are here to build world-scale capacity."
While BHP has withdrawn its bid for Potash Corp, its
pending decision on its Jansen potash project in Saskatchewan
could have huge ramifications for the prospects of juniors.
The mine, expected to produce 8 million tonnes of the crop
nutrient a year, would become the world's largest potash mine.
"If Jansen is developed it causes a huge overhang for the
juniors. All of a sudden you are now going to be competing with
the largest mining company on the planet and a company that has
a very, very low cost of capital," said Isaacson. Juniors would
run into a wall trying to finance their projects, he said.
With BHP poised to make a decision on Jansen in 2011 and
Vale expected to make a decision on its 3 million tonne potash
project in Saskatchewan in 2012, time may be running out for
juniors looking to attract buyout offers.
Fundamental Research analyst Siddharth Rajeev is bullish on
potash as a commodity, but more cautious on some of the potash
"We think advanced stage companies have much better
prospects of getting acquired," he said. "While on those (with)
early-stage projects, the run-up is slightly overdone."
(Reporting by Euan Rocha; Editing by Frank McGurty)