Barry FitzGerald: The world is getting hungrier. Here are two potash plays that can move the needle where BHP can’t
Hands up who is buying BHP for its fertiliser exposure following its recent go-ahead for its US$10 billion Jansen potash (potassium chloride) project deep beneath Saskatchewan’s prairie land in Canada?
No takers? No surprise there.
Jansen’s go-ahead is BHP’s way to play one of the mega-trends out there – the need-to-feed-the-world thematic.
Potash demand is underpinned by the need to increase global fertilisation rates to improve crop yields in response to population growth, improving diets in the most populous nations, pressure on arable land, and pressure on water supplies.
While it has been busy existing energy coal and oil, potash is one of the ‘’future facing’’ commodities BHP has identified as a 100-year business opportunity.
Having said all that, iron ore and copper dominate BHP’s earnings so much that there is next to no leverage in BHP’s share price to the potash thematic, and there won’t be until Jansen hits its straps in the early 2030s.
So Garimpeiro reckons investors looking for greater leverage to the feed-the-world thematic, and potash in particular, could find more joy amongst the muriate of potash (MOP) juniors on the ASX (as distinct from the band of juniors developing sulphate of potash projects in WA, a 7mtpa market compared with the 70mtpa MOP industry BHP is focused on).
Apart from anything else, they are worth a look at going in to 2022 as potash prices have more doubled in response to supply constraints and crop prices surging in the global COVID economic bounce back.
Prices for potash and other fertilisers are currently well above what BHP and others reckon the long-term price will be but hey, the same could be said about the battery metals which dominated investor thinking in the junior sector during 2021.
For its long-term planning purposes, BHP assumed potash demand growth of 1-3% and an ex-Vancouver average price of $US341 from 2027-2037. Assume a first quartile cost of production, and it is looking at a 70% margin business.
The same macro setting is buoying the two potash juniors Garimpeiro is taking a look at today for leverage to the MOP potash thematic – Spanish project developer Highfield (ASX:HFR), and the German project developer South Harz (ASX:SHP).
HIGHFIELD (ASX:HFR): Trading at 58c for a market cap of $211m. It is developing the Muga potash project near Pamplona in northern Spain.
It has to be said that developing Muga has been the plan since Highfield acquired the advanced project back in July 2012.
There has been nine Running of Bulls in the meantime without much action on the ground at Muga. But that changed in July when the project finally received its mining concession from the national and regional governments.
Pending the final approval, Highfield had been busy getting ready for a development by completing detailed engineering, and by ordering up materials and equipment.
A recently released updated feasibility study for a 30-year project pointed to annual earnings of US$450m for a two phase 1mpta project, with the first phase to produce 500,000tpa potash – and salt for road de-icing – from Muga’s shallow potash beds by conventional mining methods.
Financing the project was never the issue in the hold-up. The issue was the long wait for the mining concession. Now Highfield has it in its back pocket, the plan is to have the financing package in place by the March quarter next year.
Foster Stockbroking likes the Muga story. It placed a $1.56 price target on Highfield in a recent research note.
Owen Hegarty’s private equity fund EMR Capital is cheering Highfield on. It has been there since day one and holds 27% of the stock. So too is billionaire Kerry Stokes, with his 39% owned BCI Minerals, a salt and SOP developer in WA, becoming a 7% shareholder.
SOUTH HARZ (ASX:SHP): Was trading at 13.5c for a market cap $58m before going into a trading halt ahead of a placement. Funds from the placement will allow the company to get on with confirming drilling at its Ohmgebirge project in Germany.
Considered by some to be the most undervalued potash play in the world, the company is leveraging off a potash production history of more than 100 years and a massive resource base in the Harz region.
A project in the heart of Europe won’t have the transport challenge BHP has in Canada. Its managing director (Dr) Chris Gilchrist has built and operated big potash projects in Europe and Africa.
One to watch as the sheer scale of the resource is proven as it could quickly become a takeover target for other big name miners looking to follow BHP into the potash space.