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Potash's poor cousin, phosphate, offers rich opportunities

If you like the long-term outlook for potash, you've just got to be a fan of another key fertilizer ingredient: phosphate.

Investment maestro Jeremy Grantham has a fond spot in his heart for it. There's even a lively debate over whether we should be worried about "peak phosphate," the idea that much of the easily and cheaply mined ore containing the compound has been extracted, leaving the world vulnerable to long-term shortfalls in a critical plant nutrient.

How important is phosphate? Every living thing needs it at the cellular level. If farmers don't have it, crops will be stunted. Without plentiful supplies, the wheels will come off modern agriculture, with its bountiful harvests and ability to feed a teeming planet.

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There are no substitutes for phosphate and there isn't any practical way of recycling the compound. Farmers could maintain phosphate levels in soil if they have access to manure, but that isn't practical for most growers without livestock, except perhaps for small-time operators on the organic fringe.

Adding to the rich tapestry of bullish details is that nearly 75 per cent of world reserves are located in just one country: Morocco and the disputed territory it is occupying in the western Sahara.

Just as Saudi Arabia does with oil, Morocco acts as the swing producer of phosphate, adjusting its output to stabilize the market at relatively high prices. Its domination creates concerns about security of supply.

Other countries with major reserves are in North Africa and the Middle East, including Algeria, Syria, and Jordan, where most investors quite sensibly fear to tread.

So taking a position in phosphate is a potentially brilliant, long-term investment concept, with one glaring problem: There are hardly any direct ways to play the compound.

The big, integrated fertilizer producers, such as Potash Corp. of Saskatchewan Inc. and Agrium Inc., offer some exposure. But their phosphate production is embedded in sprawling companies where the upside is diluted by the potentially less promising outlooks for their large sales of potash and nitrogen. Of the majors, Mosaic Co. offers the best exposure.

The big companies have been struggling to maintain production, another negative. In the U.S., output has been on a down slope for the past two decades. In Canada, Agrium announced last year that it was shutting its nearly depleted open pit mine near Kapuskasing, Ont., replacing the output with supplies from Morocco.

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That leaves the juniors, of which there are slim pickings. Unlike gold, where there are thousands of development stage companies to choose from, phosphate exploration is in its earlier days. Last month, Paradigm Capital put out a list of all the juniors in the world with exposure to phosphate deposits. The list contained only 16 names, since shortened by one, when Toronto listed Rio Verde Minerals, with assets in Brazil, was acquired by B&A Minercao SA.

"It's still a very young category in the resource space," observes Spencer Churchill, Paradigm's fertilizer analyst.

Given the few juniors and the scarcity value of phosphate deposits outside of Morocco, investors should expect further acquisitions. "We will see more takeouts, for sure," comments Mr. Churchill.

Of the juniors, a handful trade in Canada. They're speculative and high risk, but represent some of the few pure-play exposures.

The furthest along is MBAC Fertilizer, which is putting the finishing touches on a phosphate mine in Brazil. Its largest shareholder, with a 10 per cent stake, is B&A Mineracao, a company set up by former Vale CEO Roger Agnelli.

It's really the only company with anything approaching a decent market capitalization, at $236-million.

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At the development stage is Stonegate Agricom, which has deposits in the U.S. and Peru. Earlier this month, it announced it had received a permit from Idaho to mine in the state. Stonecap Securities rates it a "buy," saying the company's output "will be of interest" to many of the larger fertilizer producers in North America keen to replace their own dwindling reserves or Moroccan purchases. Stonegate's major shareholder is Sprott Resources Corp., with a 32.5-per-cent interest.

Two companies are trying to develop assets in Canada: Arianne Resources, with a deposit in northern Quebec and Phoscan Chemical, with a deposit in northern Ontario.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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