With the upcoming northern hemisphere growing season still months away, phosphate investors have turned their eyes to financial markets to begin taking cues on next season’s planting.
The impending US fiscal cliff — a series of tax increases and spending cuts set to kick in January 1 — has caught the attention of most investors of late and phosphate markets have not been immune.
After a turbulent year of rising crop prices and falling phosphate prices, investors are turning to agriculture — including fertilizers — as a potential long-term bet for steady value inflation.
Thomas Meyer of Seeking Alpha highlighted the attraction of agriculture industries like fertilizers in the face of potential US government debt defaults or expanding government fiscal policy.
High levels of inflation and a weakening dollar would mean that “these items [food] become more expensive in real dollar costs,” Meyer stated.
While its uncertain as to whether this logic has taken hold in financial markets, shares of the world’s largest phosphate producer, Mosaic (NYSE:MOS), traded up about 6 percent in the five days after Goldman Sachs announced it has become an “aggressive buyer” of the stock, Reuters reported.
“MOS now satisfies our “Rule of 3″ cyclical framework that gives us confidence to be aggressive buyers at current levels. We see 25% upside to our $68 12-month price target, which implies MOS trades at 7.5x CY2013 EV/EBITDA.”
Short-term, not long-term, concerns for phosphate
The December World Agricultural Supply and Demand Estimates (WASDE) produced by the US Department of Agriculture show that such fiscal cliff concerns have had little impact; key crops like corn, soybeans and wheat showed little deviation in response to the event.
Instead, investment research firm Morningstar stated this week that phosphate markets do not face significant risk of failing to meet market demand in the short or medium term; however, the long term is very uncertain due in great part to the control held by Morocco.
Associate director Adam Fleck and equity analyst Jeffrey Stafford identified five different risks to the global agriculture markets, noting that the abundance of fertilizers — phosphate in particular — is a key area of concern over a three-to-five-year period, but not likely before then.
“While we have many decades’ worth of potash and phosphate in the ground, production capacity expansions need to keep pace with demand growth to prevent fertilizer prices from skyrocketing,” the Morningstar news piece states.
“If Morocco were unable to increase production to meet the needs of a growing global population, the phosphate market could get very tight in the long run and lead to runaway prices.”
Reuters reported that Russian fertilizer firm Phosagro is considering a $400 to $500 million Eurobond issue in the first quarter of 2013. The world’s second-largest phosphate producer may hold off on the bond issuing, however, if it decides to go ahead with a secondary public offering first.
Phosagro issued its initial public offering back in 2011, posting phosphate-based fertilizer product sales of US$3.028 billion in the same year.
Junior company news
Eagle Star Minerals (TSXV:EGE) announced last month that it intercepted a 5-meter interval averaging 22 percent P2O5 phosphate during its recent drilling campaign at its Bomfim Agro Mineral project in the southern portion of the Brazilian state of Tocantins. The interval remains open at depth.
“Typically this type of quality ore and grade is not commonly found in large volume within Brazil, yet based on what we can see it appears that we have indeed uncovered something of considerable mass especially since the thickness of the package remains open at depth,” CEO Eran Friedlander said in a statement.
The company followed these findings with the announcement this week that it has acquired exploration rights to an additional 59,654 hectares in close proximity to its Bomfim Agro Mineral project, located 10 km from MBAC Fertilizer’s (TSX:MBC) Itafós mine.
Eagle Star’s Bomfim project now includes 28 permits across 90,577 hectares in land to develop, equal to the amount MBAC holds. The Bomfim project is also close to MBAC’s beneficiation plant, which is currently under construction and has the capacity to produce 500,000 Mt per year of industry-grade phosphate.
Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company or commodity mentioned in this article.