The global financial crisis is crimping growth across many sectors, but the fertilizer industry is not one of them. Simply, it is not as vulnerable as metals to the declining demand from sluggish economies in China and the euro zone. Resting at the core of the ever-growing demand for food production, fertilizer is seeing healthy investments from major miners looking to capitalize on the growing industry. Mining stalwarts Vale (NYSE: VALE) and Anglo American plc (Pinksheets: AAUKY) have recently committed to spending $18.9 billion over the next five years on fertilizer projects in Brazil. Anglo American, a company that was contemplating selling its South American potash assets in 2009, has reversed course to now have the goal of doubling its potash output in the Brazil by 2017. B&A Mineracao SA, a mining venture headed by billionaire Andre Esteves and former Vale executives, has been snapping-up chunks of smaller companies, such as MBAC Fertilizer Corp. (TSX: MBC) and Rio Verde Minerals Development Corp. (TSX: RVD), that are developing potash projects in Brazil.
With hundreds of millions of arable farmland and government mandates to bolster fertilizer output, South America has quickly emerged as the global sweet spot for miners looking to expand fertilizer mining operations.
Increasing fertilizer output in Brazil, the largest producer of coffee and sugar in the world, is a top priority as the country’s dependency on imports has spiraled out of control. Brazil currently is shipping-in more than 90 percent of the potash it uses and 75 percent of its nitrogen-based fertilizers supplies. In addition to its dominance in coffee and sugar production, Brazil is the world’s number two producer of soybeans and expected to take the number one spot from the U.S. next year. The result of the growth is the country’s fertilizer consumption expanding nearly 5 percent from January through August as compared to the year prior period.
To that end, it’s clear why miners and investors are matriculating to South America for the fertilizer business.
While the aforementioned companies have garnered attention for their fertilizer initiatives, an overlooked junior with significant upside because of its solid position in South America is Pan American Fertilizer Corp. (CNSX: PAF). The Vancouver-based company is focused on the extraction of a specific type of fertilizer called calcium sulphate (also called “Agricultural Gypsum”) currently in Argentina. Calcium sulphate plays a vital role in establishing and maintaining good chemical balance in soil, water and plants; specifically correcting soil damage and replenishing nutrients, ultimately increasing the yield from crops. When dissolved in water, it becomes calcium ions (Ca2+) and sulphate-sulphur ions (SO42-), two critical ions providing nutrients for plants.
Pan American skims past the radar of most investors because it trades on the Canadian National Stock Exchange, but an opportunity presents itself in a more liquid manner through its merger with Pacific Potash Corp. (TSX-Venture: PP)( OCTQX: PPOTF) that was announced in August. In the transaction, which is anticipated to close in November, Pan American will acquire 100% of the issued and outstanding common shares of Pacific Potash.
Pacific Potash's permits are located along the Alberta-Saskatchewan border, 45 kilometers west of Western Canada’s first Potash Mine near Unity, Saskatchewan, home to one of the most prolific potash deposits in the world. There are currently 10 operating mines in Saskatchewan that comprise 90 percent of Canada’s potash production and 30 percent of global potash production annually. While that offers plenty of headroom for growth by itself, an additional value proposition is Pacific’s option to acquire an 80 percent interest in Western Potash Corp.’s (TSX: WPX) Amazonas Basin claims in Brazil. Pacific’s claims cover 805,834 hectares, or about 3,100 square miles, in the Basin.
Pacific Potash is in good company in the Amazonas Basin. The company’s property is surrounded by projects being developed by Petrobras (NYSE: PZE) and Brazil Potash, a miner that raised $85 million in June to develop its nearby potash property. Cumulatively, Brazil Potash, MBAC, Rio Verde and Verde Potash plc (TSX: NPK) have raised $158 million in 2012 to fund potash exploration in Brazil.
This fits nicely with Pan America’s operations in South America. Already producing, Pan American’s property in Argentina consists of 1,206 hectares, located in a major area of soybean production just of Buenos Aires, second most-populated area in South America. Although not National Instrument 43-101 compliant yet, it is believed that the property holds between 30 million and 50 million tonnes of calcium sulfate. At an average price of $100 per tonne, that puts the asset at around $3 billion on the low end.
A true turnkey operation, Pan American has equipment on site that has an extraction capacity of 40 tons of calcium sulfate per hour. From the earth to bag for use is a simple process utilizing no chemicals as calcium sulfate is 100-percent natural; meaning that there is zero environmental impact in mining the product. The shallow, open pit mining only requires extraction and crushing, which keeps costs low for Pan American.
Sales began in August of 2011 and the company projects that will extract 100,000 tons in 2013, 150,000 tons in 2014, and 250,000 tons in 2015. The anticipated sales price for the calcium sulphate is between $75 and $150 per ton, equating to $7.5 million to $15 million in revenue next year for Pan American and up to $37.5 million in 2015.
Currently, Pan American is selling into the local markets of Argentina, Brazil, Bolivia, Paraguay, and Uruguay. The company has a Letter of Intent in place to acquire the fertilizer distribution division of Mamasu, a diversified Argentine company in the agriculture industry. In business since 1953, Mamasu’s 2011 fertilizer sales totaled 50,000 tons with a target of up to 250,000 tons for 2013.
On October 9, the company said that it entered into a non-binding letter of intent with Agro Industrial Campos Nuevos S.A. Under the terms of the LOI, Pan American will sell Agro Industrial between 30,000 and 50,000 tonnes of calcium sulfate over a 12 month period at a mutually agreed price per ton. This one deal alone puts Pan American on track for its target of 100,000 tons in 2013. Additional agreements could force their hand to boost production.
Pan American has publicly stated that they are seeking a move to the TSX-Venture exchange which should greatly increase liquidity and exposure in the near term. As it presently stands, shares are only trading at 25 cents, creating a market capitalization of about $10.5 million. This seems to position the company as heavily undervalued given the fact that it is generating revenue and has such a valuable Argentine asset in its portfolio. As far as Pacific Potash, which will shortly become part of surviving entity of the merger Pan American, shares are floundering around 13 cents when the transaction puts a value more in the area of 22 cents per share on it. Upon completion of the merger, Pan American will be an even stronger, revenue-generating company that should see significant share appreciation as it continues to broaden its footprint as a true player in the potash industry.
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