Ethan Park of Extract Capital could teach a college graduate-level course on the differences between phosphate and potash. Park’s basic advice to The Energy Report: Don’t miss out on making money with these essential commodities just because they smell like, well, fertilizer.
The Energy Report: Investors who follow the metals may not pay much heed to the phosphate space. What are the agricultural and industrial uses for phosphates?
Ethan Park: Phosphate is an essential nutrient required for agriculture. About 80–82% of phosphate is used for fertilizer. Specifically, phosphate is used for root development, flowering, and prevention of diseases and stress. The bag of fertilizer you purchase in your local home improvement store contains phosphate.
There is really no substitute for phosphate. Outside of agriculture, about 20% of the global phosphate supply is used for industrial purposes, such as in ceramics and flame retardants. It is also in detergent and food additives.
TER: How does phosphate occur geologically?
EP: Phosphate occurs in three types of deposits: sedimentary, igneous and guano deposits. The sedimentary deposits are formed from decayed organic matter in ancient seabeds and have a 15-30% phosphate content. Igneous deposits are formed through cooling and solidification of magma. Typically, those deposits have a 5–10% phosphate content. The third type of deposit, guano deposits, occurs when small ocean islands are formed on corals crusted with guano deposits from seabirds.
Sedimentary deposits are generally easier to mine, but they contain higher quantities of heavy metals, such as uranium and cadmium. Igneous deposits are lower grade in situ, but they can be concentrated to much higher levels, up to 39%, compared to 30% for sedimentary deposits. Guano island deposits have no—or very few—contaminants. The mined phosphate-laden rock and guano is concentrated and refined into phosphoric acid and fertilizer, such as monoammonium phosphate (MAP) or diammonium phosphate (DAP).
TER: How has the market been treating phosphate in terms of supply and demand?
EP: The supply-and-demand equation looks good for the juniors. Phosphate is mined on all continents except Antarctica, but it is normally consumed within the continent on which it is produced. Each year, about 180 million tonnes (180 Mmt) of phosphate rock are produced, but only 15% of the volume is exported outside the continent of origin. The largest exporter of phosphate rock is a state-owned company in Morocco called OCP (Office Chérifien des Phosphates). Morocco, Jordan and Peru generate 50% of the export volume.
About 70% of the phosphate fertilizer producers are integrated, meaning that they have secured the whole supply chain all the way to MAP and DAP processing capacity.
Phosphate firms without a captive rock supply are finding it difficult to secure supply.Stonegate Agricom Ltd. (ST:TSX, SNRCF:OTCPK) had to go to Morocco to secure an agreement for rock for its MAP and DAP facility. The Mosaic Co. (MOS:NYSE) purchased CF Industries Holdings Inc.’s (CF:NYSE) phosphate assets in Florida. Mosaic also acquired Vale S.A.’s (VALE:NYSE) Peruvian operations. In the U.S., phosphate is mined in Florida and North Carolina, and lesser amounts are extracted in Utah and Idaho. The grade has been declining generally in Florida, and there are permitting issues there of late.
TER: How are the phosphate stocks performing?
EP: The phosphate juniors have taken a hit along with the market. They absorbed a more unjustified beating after the potash cartel breakup. The price of phosphate has recovered to $500 per tonne for DAP. There was a bit of a drop in H2/13. Before that, DAP had traded at $450–650/tonne since 2010.
TER: What firms do you like in the phosphate mining space?
EP: Two of the most advanced projects among the juniors are held by Arianne Phosphate Inc. (DAN:TSX.V; DRRSF:OTCBB; JE9N:FSE) and Stonegate Agricom Ltd. Arianne has an asset in Quebec with a full feasibility study. It is an igneous deposit, and it is expected to produce a 30% phosphate concentrate at 3 Mmt per year for more than 25 years. Stonegate’s primary asset is the Paris Hills project in Idaho. That project is smaller than Arianne’s, but it is expected to produce 28% phosphate concentrate at just below 1 Mmt per year for 20 years.
TER: Can you talk about the importance of variations in mineral grade?
EP: Arianne’s deposit is an igneous deposit, which means it is lower in grade compared to a sedimentary deposit. But, importantly, an igneous deposit benefits from a much higher concentrate rate than a sedimentary deposit. While igneous deposits only have grades of 5–8%, they can easily be concentrated up to 39%, which is much higher than what sedimentary deposits can be concentrated up to‒generally 29.5%. While the igneous ore grade is lower, the ultimate product is the concentrate. The greater the grade of concentrate, the higher the price. Phosphate is not a general commodity like gold or copper, where everything is standardized. Not all phosphate products are created equally.
Another project out there in the early stages of development is a Latin American operation run by Focus Ventures Ltd. (FCV:TSX.V). Focus Ventures is working in the Bayovar region in Peru. The company’s asset is in the same region as a phosphate mine that is operated by Vale, Mosaic and Mitsui & Co. Ltd. (8031:TYO), which has an ore grade of 28–30% purity. Focus is also operating in the same area as Americas Petrogas Inc.’s (BOE:TSX.V) GrowMax operation. Americas Petrogas has an 80% interest in the potash and phosphate concessions, which are co-owned by India’s IFFCO (Indian Farmers Fertilizer Co-operative Ltd.).