Coverage begins: Potash Ridge (PRK.T) may bring the sexy back to fertilizer

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NEW COVERAGE ALERT:

Company: Potash Ridge (PRK.T)

Website: PotashRidge.com

Sector: Potash

Avg volume: 517k traded per day ($124k)

Shares out: 126 million

Last three months: $0.285 down to $0.24

Nutshell (from their website):

Potash Ridge is a near term producer of premium fertilizer with world class development assets in Utah and Quebec. Potash Ridge is a Canadian based exploration and development company with a unique opportunity to develop a mine and processing facility to produce Sulphate of Potash (SOP). SOP is a premium priced, low-chloride potash fertilizer.

Potash Ridge has a highly qualified and proven management team in place with significant financial, project management and operation experience and the ability to take projects into production.

Nutshell (in our opinion):

Potash was a favourite of the local investor set for a long time, until a few years ago, when competing global interests started bringing prices down, putting a few big local players into financial peril. Potash Ridge, however, isn’t your average hinky fertilizer deal; these guys are focused on Sulphate of Potash (SOP), of which there isn’t much around, and what little there is gets a big premium in revenues. SOP currently sells for 3x the price of traditional Muriate of Potash (MOP), which is the Wal-Mart standard stuff most farmers use – because they can get it. SOP, on the other hand, is undersupplied by about 30%. The world needs more.

PRK has more. Just needs to get at it.

Investor Presentation:

Why should you care?

Because SOP.

Look, MOP is a trash business. There’s more than enough out there to sate demand, the product does its job but not in an efficient way, and it costs more to produce. It’s the Wonder Bread of fertilizer components. If there’s nothing else on the bodega shelf, you’ve just gotta go with it. But you don’t have to like it.

SOP beats MOP and NOP in yield quality, photosynthesis quality, resistance to drought, frost, and disease, it ups the plant’s ability to absorb phosphorous and iron, it has a low salinity index, it’s more environmentally friendly, reduces leaching of calcium and potassium in sandy soils, slows storage deterioration, improves, colour, smell, taste.. and it qualifies as organic. I could go on.

SOP is clearly just better and, for some crops, it’s the only real option. Unlike MOP, SOP products don’t contain chloride, which a lot of fruits, vegetables and nuts just can’t deal with, and for crops susceptible to salinity, MOP hurts as much as it helps.

So if you’re growing tree nuts, as an example (cashews, almonds, etc), it’s SOP or nothing.

In fact, if you’ve got 1500 parts per million of chloride in your soil, your yield of mangoes, apricots, beans, and peaches drops from 100% to just 20%. That’s 4/5 less on your harvest, and turns a profit into a terrible loss.

So why isn’t everyone just using SOP? Because there’s around 7m tonnes per year of SOP produced currently, while global demand sits at 10m tonnes. The US produces just 400k tonnes of that, by the way.

So SOP is much needed, but there’s not enough of it around, and Potash Ridge has two projects that are near term producers of the stuff, located in good old North America.

The first is in Quebec, where they plan for production in the first half of 2018 with potential for $14m per year in average annual cash flow. The second is in Utah, with the potential for some 6 times the production levels and the likelihood of being the US’ lowest cost producer. Average annual cash flow? Potential to hit $100m per year.

There’s other aspects to those projects that bring them even more around into sweet deals, but those are for another time.

Long term trends:

I don’t know about you, but my fridge is full of almond milk right now, partly due to folks in the house with allergies but also due in part to ongoing concerns about better health. Our home is nut-filled, and nut-derivative-filled, but the major beef folks have with the cashew and almond business is, it uses too much water. Hey, did we mention SOP helps with that?

It helps with that. Walnuts, cashews, macadamias, almonds are on fire in terms of sales in the market place these days, and with allergies, vegetarianism, veganism and overall health benefits pushing more people their way, the need for SOP is going to keep ramping up.

The downside:

PRK’s share structure is a little floppy, at 126 million shares out. A recent financing in the shape of a convertible debenture was an attempt to raise money without further dilution, so clearly this is at the forefront of the board’s thinking. Nobody wants to see a rollback, but it probably wouldn’t hurt.

Back in December 2012, the company was raising big money at $1 per share, so there’s obviously some stigma attached to a company that has slid that far down the market cap scale since. That said, any company in the resource space in December of 2012 has seen market caps bleed out a little until recently.

Potash isn’t sexy as a business right now, at least with traditional resource investors, but the increasingly new investor base of millennials, who have cut their teeth on tech and cannabis plays, rate food security as a big interest. Feeding the world and making money doing it is attractive to that growing crowd and will likely become moreso over time.

Value:

At various points over 2016, the stock touched $0.40, but for the most part it’s held up around $0.25, so while PRK is down overall, you’d have been hard pressed to pick it up for a cheaper price than you’re getting right now.

Our take:

This is a great entry point, if you want to get into a big board stock that has shown long legs through tough times and is coming out of that with something the world wants – and needs. We’d like to see continuing progress in getting those properties production ready, and there’ll obviously need to be some money raised eventually (or JV partners brought in) to make that happen. A $3m raise in January sets the company up nicely for further work in 2017 and gives it plentiful runway.

— Chris Parry

FULL DISCLOSURE: Potash Ridge is an Equity.Guru marketing client.

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