The following are notes taken from this long format video, same title as above.
During the past year India has faced a significant shortage in supply of fertilizers. International prices have increased sharply, thus putting upward pressure on domestic prices. The government has been increasing subsidies to help farmers meet these higher costs.
Between January 2021 and January 2022 the percentage change in price has been dramatic:
- Urea 213%
- DAP 128%
- Ammonia 295%
- MoP 93%
- Phosphoric Acid 93%
- Sulphur 153%
What might we expect in the months ahead?
In 2021, Indian imports from China were 35% of total Urea supply and 37% of total DAP supply. China has banned the exportation of all fertilizers til at least June 2022.
Russia is restricting the export of fertilizers until at least June.
Belarus is one of the biggest exporters of MoP (muriate of Potash) to India. No new supply agreements between Belarus and India have been made since December.
While Canadian producers such as Nutrien (NTR, TSX) have promised to increase production they’re not capable of matching the volume of production of Belarus.
Over and above this trend toward nationalizing fertilizer supplies, Natural Gas is an important input and higher Natural Gas prices are putting upward pressure on fertilizer.
Unfortunately this is becoming a “Perfect Storm”:
- Meagre capital investment over the prior decade
- Resource/fertilizer hoarding
- Green policies disincentivizing energy (ie. Natural Gas) filter down to higher food prices
Fertilizers are an essential commodity and fertilizers are fast becoming a national security issue. India is taking immediate action by increasing subsidies to farmers, angling to secure long-term supplies, and allocating capital toward building new fertilizer plants.
Karnalyte (KRN, TSX)
86 cents | Market Cap $36 million
Fertilizer itself is in short supply.
Publicly traded fertilizer stocks are in even shorter supply. Aside from the big dogs like Nutrien and Mosaic (MOS, NYSE), there’s literally only a handful of other fertilizer stocks to choose from.
Karnalyte, unlike the others, has a strategic equity partner/financier in Gujarat State Fertilizers & Chemicals (GSFC, BO). They own 38% of all KRN shares outstanding, and Gujarat‘s biggest purchase ($40 million or so) was made at $8.15 per share. Gujarat’s commitments to Karnalyte and its Wynyard Potash (plus Magnesium) project also extend to a minimum 56% off-take agreement.
Furthermore, back in 2016 Gujarat outlined the terms of what could have been a $700 million lending package to finance Phase I of the project, or 625,000 tonnes per year of high-grade granular Potash.
Given the serious commitments made thus far and India’s unfolding fertilizer crisis it would seem some sort of renewed (new) lending facility from Gujarat (and perhaps a 2nd lender) would be a near certainty. This would cause a dramatic and positive price rerating for KRN. Last time such news was announced, in a less bullish environment, KRN spiked to $4 per share.
Do you desire any more reasons to remain patient (and/or continue buying) KRN?
Here’s my best guess on how the sequence of events should play out:
- Updated technical report and economics
- New CEO announcement
- Financing package for Wynyard Phase I would follow?
- Spinout Nitrogen project?
Regarding Karnalyte retaining Wood Canada Ltd. and Brad Straub of ProMine Project Management to update the technical report and economics, Interim CEO Danielle Favreau said the following: “We are excited to take this important step as we further our efforts to attract investment partners to help us take the Wynyard Potash Project forward. We believe the Wynyard Project has significant strategic value given its environmental advantages including no surface tailings, shorter construction lead time due to the prior completion of technical pre-work and permitting, a strategic partner with commitment of a minimum 56% off-take, and a high quality product in a desirable granular form with many possibilities for further upgrade.”
I can appreciate how some might look at KRN, its recent price appreciation, and feel they’ve missed the boat – that would be small thinking in my view.
Karnalyte continues to be valued at just 1% of NPV.
KRN shares are levered to Potash (plus Magnesium and Nitrogen) via 150 million tonnes of Proven and Probable reserves. Not including any worth for the other commodities 1 ton of Potash in-ground sells for 24 cents given Karnalyte’s $36 million market cap (or 0.0003 its above ground selling price, I used $800 per ton).
That would be equivalent to paying 57 cents per ounce of Gold in-ground (proven and probable).
The chart’s looking good on a short-term and long-term basis. Volume has slowed to a trickle indicating this recent pullback is nearly finished – great chance to get in the game if you’ve been on the sidelines, and/or add to existing position. After breaking above a multi-year consolidation band and resistance KRN has really only been rallying (going up) for 2 months.
Given the macro picture and fundamentals for fertilizer could this bullish phase for KRN stop after only 2 months, after being in a bearish technical pattern since 2012?
Hmm… 2 months bullish versus 10 years bearish?
Probably not.
Karnalyte’s recent rise is but a blip on the long-term chart.