It has been a rough 3 months since our Potash Junior picks descended with the overall market. With it went sentiment towards all Commodity based equities, with the old winners becoming the biggest losers. Oil, Natural Gas, Coal, Base Metals, and even the precious metals experienced steep declines, while the only two commodities which remained buoyed were Potash Fertilizer, and Steel. Alas, when panic sets in, and the margin calls cometh, both Institutional Investor and Retail Investor alike revert back to the most basic of instincts; fight or flight. What we have witnessed is nothing short of a flight from everything. The "throw the baby out with the bathwater" approach to investing - a philosophy I never subscribe to. Through this recent round of "market cleansing", we must look at the positives, namely, it has given us more transparency as to what value commodities actually have when the speculative hedge funds bail out. What we’ve witnessed is Oil moving back up over one hundred and climbing; Gold moving back to the 900 range with sights set on the old short lived 1000 mark; Potash prices remaining flat - flush up against all-time-highs (and set to move up again as demand increases later this year and agricultural commodities have started to move back up), and steel prices continuing. While Natural gas is entering a historical period of strength, Coal closely follows (while Metallurgical coal follows steel demand). If you study this in detail, it becomes apparent that even without the hedge/Institutional support these commodities have enjoyed in the past, their relative strength remains, and a move towards and eventually through old highs is inevitable...only this time, the hedgers will be forced to enter their positions at much higher prices than their previous positions! Why? Hedge funds are like manic depressant gamblers in a casino. They are either tremendous bulls, or tremendous bears - no middle ground. They also lack the will and ability to stay on the sidelines for long periods of time. Holding a cash or bond position is simply not a proper hedger's strategy, and they inevitably will move their multi-billion dollar positions into the perceived strongest areas of the market; namely Energy, Agriculture, and Precious metals. Why? Because the fundamentals of supply and demand suggest these are the areas who have fundamentally not broken down in their supply/demand economics, and these provide REAL value as opposed to the US Dollar, whose perceived value is only artificially held up by the growth countries who demand our commodities the most; India, and China.
POTASH JUNIOR PORTFOLIO UPDATE
Earlier this year, I identified a number of Potash Junior companies for our basket based on certain important criteria;
A. Be located in Politically stable, mining friendly regions with Current Potash Production to capitalize on economies of scale
B. Have historical data which suggests the presence of potentially economically feasible deposits
C. Be different; Identify a market need which is currently unfulfilled, and establish a position
D. Have people who have had past success in the Potash Exploration industry
I selected a number of companies who met one or more of the criteria, as I understood that there was no way of telling who the eventual winners would be. Several months has passed, and I now have a clearer picture of the space, and subsequently, are providing an update to our picks:
TEL – Buy – TEL (aka Intercontinental potash Corp) has held up considerably well over the last 3 months. The % loss from its 3 months ago peak is considerably less than its peers. The only pick in our list who have moved to deliver a related Potash product which is both needed in the marketplace, and currently unavailable. Potential to corner the Polyhalite (Potash related mineral) market globally makes this a must have. Low cost exploration program as the target will support the historical 200 hole data. Bottom appears to be in.
