A few weeks back, Braden Maccke, our Second Set of eyes on every company we like, went deep on the world of potash. This is why.
Potash Ridge is gonna light it up. Take it away, Bray.
In the curious MOP – SOP price divergence that has emerged from the collapse of the great potash cartels and the SOP boom, Potash ridge sees their opportunity.
What They’re Up To
The company is built around two assets: An SOP processing plant in Quebec and a deposit of alunite in Utah. The company envisions supplying farms in the Eastern US – tobacco country – with SOP from their Valleyfield Plant in Quebec. There, they’ve secured permits to build a facility that converts delivered MOP to SOP. There are no reserves at the facility, they’re just buying MOP by the trainload and converting it to SOP.
The company tells me that this isn’t something that can be done just anywhere. The hydrochloric acid that is produced as a byproduct can’t just be dumped down the drain, so there has to be a disposal plan before any government will issue a permit.
Potash Ridge recently sourced a taker for the HCL, as well as a supplier for the sulphuric acid that they need as an input in the Manheim Process that they’re planning on using at this facility.
PRK tells me they can have the facility up and selling manufactured SOP to the American market in 12 months time.
The other major asset at PRK is an alunite deposit in Utah. Alunite is a different animal than the Carnalite and Halite that is generally mined to produce MOP, but is rich in potash just the same.
Using the same Manheim process as Valleyfield, the plan is to produce SOP only a short distance away from the enormous California agricultural market. The “Blawn Mountain” project has a fresh pre-feasibility study that gives it 153 million tonnes of reserves, and plans for a versatile production process capable of producing different sizes of SOP to meet different types of market conditions. They figure the capital cost at $458 million, and estimate production at 255,000 tons per year.
Potash Ridge’s Blawn Mountain PFS reports that the SOP being sold by Compass in Utah is going for between $640/t and $675/t. That’s around a 30% premium over the more common MOP that the big potash companies are selling.
The People Involved
I had an extended conversation with Potash Ridge CFO Ross Phillips. He left me with the impression that the people in this deal know their business. Ross is an earnest, genuine mining man who has set up a company to take advantage of a timely price window where a quick ramp-up could create a legacy asset or two to build on. Assuming that this team can execute, the core of the story here is the concept that the SOP – MOP break is representative of a trend brought on by change on the demand side – and that that condition is going to maintain or steepen before the supply side catches up. We’ve written extensively about the ongoing SOP market, and the prospect of the price appreciation trend continuing is strong.
The US imported 114,000t of SOP last year, all of it from China, who appear to be ahead of the curve with respect to potential long term effects of MOP on farmland. With US trade relations trending as they are, it’s easy to imagine political will being behind increased domestic production of a key agricultural commodity.
Politically speaking, The Blawn Mountain project couldn’t be better situated. The state leases that the project sits on are administered by the State of Utah School and Institutional Trust Lands Administration, a state entity that uses natural resources to fund public infrastructure. Utah tends to be business friendly and encourages mineral resource development within state. Potash Ridge investing $458M worth of capex at Blawn Mountain, only to increase the state’s SOP production and export to California wine growers, would suit the state of Utah just fine.
Income from resource royalties takes pressure off income tax payers and property tax payers, and that arrangement has kept Utah fairly politically stable for quite some time.
Brass Tacks and the Upshot
It’s worth remembering that Potash Ridge is a $30M market cap company. $12M of that is cash, so the market says their assets are worth about $18M. That seems cheap for two potential sources of the hottest agricultural commodity in the middle of an intact bull trend, but the market doesn’t give much value to potential, not at first.
Potash Ridge has a plan, and the market dynamics that make the plan valuable figure on hanging around for at least as long as it takes to get Phase 1 (Quebec processing plant) off the ground. The company is projecting CA$17M/y in EBITDA from the Valleyfield plant, and told us that they plan to finance it at the project level.
That means that they’ll be able to limit their equity dilution while they get it up and running.
That also means they’ll be taking on debt or forward selling product which, strategically speaking, sounds like a fine move for a company betting on continued strength in the SOP market. It’s not unlike taking out a mortgage on a condo for which the buyer forecasts appreciation.
There is some language in the latest press release about the sulfuric acid contract about a potential off-take agreement, so expect part of the financing to come from a forward-sale of SOP. That limits upside, but is a fine move at such a time that a company is financing construction.
If they are, in fact, able to finance that Quebec facility without printing too much equity, the revenue and street credit that it’s likely to create could make moving forward on the larger and more ambitious Blawn Mountain project an easier feat. The company told me that they are aiming for total shares outstanding around 200M by the time they’re underway at Blawn and, to pull that off, their next financing is going to have to come at much higher prices.
Phillips made it clear that he intends for Potash Ridge to be a producer, rather than a strategic acquisition target. Realistically, the mining companies that end up becoming acquired at attractive premiums act like producers the whole way through. It’s the ones who look like they’re creating reserves for someone else the whole time who end up taking less than they’re worth. Those CEOs are welcome to a seat at the next EG poker game.
A company that is in good financial shape and inches closer and closer to production is the type of company that ends up being the subject of a bidding war in a hot commodities market.
— Braden Maccke
FULL DISCLOSURE: Potash Ridge is an Equity.Guru marketing client