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Potash Companies are Enfuego
Thursday, June 12, 2008

All things potash have been enfuego as of late as producers, explorers and holding companies have all seen their share prices rise as investors exuberantly bid up shares. We highlighted Potash Corporation of Saskatchewan in our June 2, 2008 article (click here) declaring that the stock was ready to make a move upwards. We also highlighted the much smaller explorers who we have consistently said hold much promise for investors. Potash Corp. has risen by roughly 15% since that article, but the unbelievable and mind boggling returns have come from the explorers.

Potash North (PON- TSX Venture) has had the most impressive run. The company changed its name from Timer Exploration to Potash North after purchasing potash permits from Potash One (KCL-TSX Venture) and announcing a capital raising to fund the company's new exploration efforts. The company rose from C$0.20 to $1.54 on the day it was cleared to resume trading and since the stock has risen to C$4.06. What makes this run even more amazing to us is the fact that the stock has not had a down day since it resumed trading on June 4, 2008. To rise that much that quickly without a down day is simply put: amazing.




It is an impressive chart indeed without a pullback to date, but one is inevitable. Nevertheless this is yet another issue in which investors hoping to get potash exposure can now invest. The issue is also highly liquid, trading in the millions of shares, since it resumed trading last week, affording investors the opportunity to move in and out with relative ease.

 

Another stock which has risen dramatically over the past few trading days is Raytec Metals (RAY- TSX Venture). A stock which was trading at C$0.42 in March and at C$0.80 before the release of their NI 43-101 Resource Calculation on their potash permits in Saskatchewan. Before the company had possessed a large land holding, after the news it became apparent to investors that these lands might hold some economical resources within.

The stock closed on June 11 at C$1.82 but depending on how you look at its peers and their valuations this stock could still be poised to move further ahead. We are working on some calculations for another article as we write, but as we have stated previously this was one of the cheaper stocks on the market and with the recent price action among the other juniors it appears that it still is.




Company's stock rose sharply through its old highs set in the past month after the release of the NI 43-101 on their potash permits in Saskatchewan. This junior also has high liquidity and exposure to uranium and iron ore. If investors ever return to uranium stocks, this could very well prove to be a 'kicker' for the stock.

 

Other juniors have been hot as well. Ringbolt Ventures (RBV- TSX Venture) has nearly doubled and Western Potash (WPX- TSX Venture) has risen by about 80% since its recent IPO. Kilgore Uranium Corp. (TEL- TSX Venture) has risen from C$0.23 to a recent high of C$0.70 due to their purchase of a 50% stake in Intercontinental Potash Corp. Our guess is that this situation will result in International Potash Corp. performing an IPO in the future as Kilgore is organizing its office and organizational duties with its own. Potentially this could result in Kilgore preempting an IPO and doing an acquisition, as has been seen in previous arrangements such as this, but this is all speculation and nothing more at this moment.

Reuters reported earlier that JSC Silvinit is going to sell potash at the price of US$1000/tonne to Brazil with delivery scheduled for the latter part of the year. Bill Doyle, CEO of Potash Corporation of Saskatchewan, stated that he believes that prices can rise further going forward with potentially years of growth ahead for the industry. If food supply begins to tighten further, as appears especially likely with the recent flooding in America's Midwest, farmers around the world may see fit to further invest in fertilizers to increase the yields from their fields to satisfy demand. One thing is certain at this time, and that is that grains should continue higher which has encouraged farmers to spend more on fertilizers in the past few years.

Investors have exuberantly forced up shares of the established producers as well as the juniors. This bodes well for long-term investors as it reinforces the belief that future earnings will be higher. Potash Corp. (POT), The Mosaic Company (MOS- NYSE), and Agrium (AGU- NYSE) have all reached new highs but are still attractively priced based on next year's earnings as well as predictions for earnings in the future. One thing that will be extremely important to pay attention to should share prices begin to rise suddenly and appear overpriced, is who can increase production quickly. Truly the only answer to that is Potash Corp. which has some spare capacity right now and will be the next to open a new mine which will be the first in the area in many decades. This is an important point as long-term the P/E ratio will go down as earnings increase with this rise in the company's production.

We expect some sort of a pullback in the days ahead for the juniors, as share prices may have gotten ahead of themselves but for investors to look at the larger caps for opportunities. The mid-tier explorers have held relatively steady and could be an opportunity for investors to begin nibbling on and make purchases on pullbacks.

We see a long-term bull market here, with pullbacks after major runs like the one witnessed in the past two weeks. These will provide buying opportunities for some to continue to add to their winning positions and those not yet in the market to accumulate starting positions.

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