Jim Letourneau's Blog

Investing, Technology, Travel, Geology, Music, Golf. I think that covers it.

Periodic Table Bingo - KCl (aka potash)

Wow! It seems like only yesterday that the global potash shortage was going to cripple the global food supply. Visions of mass starvations were hinted at by numerous junior potash ventures. The dirty secret about potash is that it is abundant, especially in Saskatchewan. Potash beds stretch across the entire province.  Some are more amenable to solution mining and others require massive shafts, but the potash is there. If a company isn't producing potash today, supply pressures from new projects will put a cap on prices for decades.  

Case in point,  a couple of BMO analysts are trashing BHP's Jansen project. 

Put simply, they think that the economics of Jansen are not attractive. Using a potash price of $450 US a tonne (just below current levels), they projected an internal rate of return (IRR) for Jansen of just 10 per cent. To get to a more reasonable IRR of 12 per cent to 15 per cent, they calculated that a "lofty" long-term price of at least $600 US would be required. (source)

Normally there isn't much upside in negative analyst reports. I'm not sure that 10% is such a bad IRR either. It is not uncommon for mega-projects to float artificially high numbers (which shrewd analysts discount heavily) to get financing and then come in far below projections. For example, If the market wants to finance new potash projects it will put out higher price forecasts (which can be pretty subjective in spite of all the graphs.) 

Is the potential potash crisis already solved by the capital raised to in evaluate and develop new supplies? Is pink gold the next fools gold?  There aren't many empty squares left on the periodic table bingo card. Potash Corp (POT, POT.TO) ran (split adjusted) from $4.53 in 2003 to $82.10 in 2009. Shares have now settled at ~$40 and could bounce, but not with the spring of years past.