Thread by @DownunderValue

Food security and fertilizers are back in the media again for all the wrong reasons. Farmers on tik-tok say the world is about to end, and fertilizer prices are going bananas. So what’s the play on the ASX?

Let’s take a deep dive. 👇

1. Food security as a megatrend is driven by population and wealth increases with limited resources.

I look to invest in:
1⃣Owning primary factors of production (food, water)
2⃣Owning low-cost food producers
3⃣Ag Tech companies, or
4⃣Commodity inputs like Fertilizers

2. Fertilizers are the primary nutrients that spur plant growth necessary for crop production and livestock (e.g. feed and hay).

There are three chemical compounds each with their own market:
🌱Nitrogen
🌿Phoshporous
🌳Potasium

3. Fertilizers are not as widely produced as some folks think. Low-cost producers dominate the four primary products used in agriculture:
🥇China is #1 for urea (nitrogen)
🥇China is #1 for MAP (Phosphorous)
🥇Canada is #1 for MOP/SOP (Potash)
🥇China is #1 for NPK (all three)

4. China’s recent ban on fertilizer exports – due to food and energy price inflation – has rocked global markets.

Most of their production is for domestic use, but it still has flow on effects. bloomberg.com/news/articles/…

5. Urea prices have been impacted the most.

They have gone past prices from 2007 / peak oil. Some pundits are expecting shortages in February, which will have flow on effects to agriculture, transport (ad blue), etc.

6. High prices cure high prices.

Last time this happened there was a formal ACCC investigation into prices. By the time the report came out, prices were back to long term average. accc.gov.au/system/files/A…

7. Australia is a net importer of fertilizer.

For agricultural stocks, the main concern will be ensuring supply and increasing input costs. For retailers, there will be ongoing food price inflation.

8. The key is owning low-cost producers.

Fertilizers at peak (?) prices aren't "extreme opportunities". They're cyclicals, not compounders. 👀

Compare with iron ore - the billions are made by low cost producers while prices are set at the margin.

9. Incitec Pivot $IPL $IPL.AX is Australia's largest fertilizer supplier (42% of the market, Wesfarmers $WES $WES.AX has 18%, and then "others" for the remaining).

Incitec are the #1 exporter. They export MAP from Queensland.

10. Incitec is mainly an explosives company.

Dyno explosives category is 55% of revenue, fertilizers have grown with commodity prices for 32% to 45% in 12months.

11. Incitec is not a low-cost producer.

They have shuttered capacity (urea at Gibson) due to high gas prices. Long term ROIC is terrible. Any trade would be short-term cyclical, and maybe too late.

@berthon_jones knows what he is on about👇

12. Australia’s push is in potash.

Sulphate of Potash (SOP) is superior to Muriate of Potash (MOP) as it doesn’t include chloride / salt. It’s only 10% of the volume of MOP, but it trades at a premium which continues to grow over time.

13. Australia positioned as a low-cost SOP option.

Mannheim furnaces produce potash sulfate from potash chloride, and is probably the ‘marginal cost producer’. China is cheap for domestic use but has high transport costs for export. So need produce below those costs.

14. Salt Lake Potash $So4 $SO4.AX was meant to be Australia’s first SO producer.

Lake Way was 50% commissioned, offtake agreements were in place, debt financed with Sequoia & $CBA & others, future growth was identified, and more. Everything you would want.

15. Salt Lake was a $400m company.

In 2021 the CFO resigned, the CEO resigned, production forecasts were halved, and a failed cap raising resulted in KPMG being called in for administration.

Now worth $0.
stockhead.com.au/resources/aust…

16. Special thanks to @OutsideCapital_ who talked me down from the bridge when I considered investing in SO4 in early 2021.

I am not a mining expert. He is. He understand the operational risks.

Which brings us to the next bridge he's talking me down from..

17. Kalium Lakes $KLL $KLL.AX is Australia’s first SOP producer.

They are 98% complete; CAPEX of $280m vs MC of $180 and EV of $320m; and their AISC cost is US$268/t (FOB, including royalties). This isn't necessarily a low-cost mine b/c of road the road transport costs.

18. Project commissioning has been a challenge.

And I’m no expert on German centrifuges, but it seems that’s important. So much so, these delays have led to another $50m cap raise in October and the share price is at all time lows. Kalium remains a high-risk play to mind.

19. Danakali $DNK $DNK.AX has a 50% joint venture with ENAMCO (Eriteriean National Mining Corporation) for Colluli mine.

🚨12 years in the making, the last project update was in June with “end 2022 target” for production. 🚨

20. Colluli mine has an average mine gate cost of US$165/t, but total cash cost is US$258/t when royalties for EMANCO are included.

NPV is US$900m, but using KLL assumptions would be ~$800m. Seems there is still a lot of risks, and the numbers are very generous.

21. Agrimin $AMN $AMN.AX has a Tier 1 SOP project in WA in it’s early stage (pre FID).

Arguably, this could be the best asset on the market at the moment for scale and cost. But it’s too early and risky for me. One needs to expect a lot of delays and capital raisings.

22. BHP $BHP $BHP.AX is a long-term play, albeit diluted with iron ore and other commodities.

BHP is investing US$5.7bn in Canada for a 4.35mtpa MOP mine with 100yr life. This represents 5% of the global market, but won’t be online until 2030s. Interesting.

23. Overall, I’m bullish on fertilizers and Australian SOP. Prices will likely trend up, but new production will flatten the peak.

Right now international companies like K+S $SDF.DE Yara $YAR.OL and Nutrien $NTR.TO are best positioned to benefit from today's peak prices.

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This will be my last deep dive for 2021, back again for weekly posts in 2022.🎄

Questions and feedback always welcome. DYOR.

Disclaimer, I have no position in mentioned stocks.