It’s one of the most important natural resources in the world.
Without it, food supplies will disappear.
There are no substitutes, recycling is impractical and one country controls over three quarters of global reserves.
Highly-respected investor Jeremy Grantham, of US fund group GMO, has called it “the most important, the most valuable and the most critical” natural resource of all.
Have you ever considered investing in phosphate?
One country dominates the global supply of this vital resource
Phosphorous is a rather reactive element, so it tends to occur as a compound. Phosphates are salts that contain phosphorous and other minerals. Most phosphate is found today as sedimentary rock on dried-up ocean beds, or in shallow water.
It’s important because it’s used in fertiliser. You need three things to make fertiliser – nitrogen, potash and phosphate. The exact quantity of each depends on what you’re growing and where, but you always need all three.
Broadly speaking, nitrogen stimulates growth, potash increases resistance to drought or disease, and phosphates promote root growth and strength – leading to higher crop yields.
Modern agriculture is extremely reliant on phosphates. There are no substitutes and, unless you have plenty of livestock on hand to produce manure, recycling is not practical.
And pressure to increase crop yields is only rising. The global population is growing. Emerging economies’ diets are improving, with more meat being consumed – it takes a lot more grain to raise a cow than to produce a loaf of bread. Meanwhile, arable land per head is shrinking.
So the case for investing in phosphate looks increasingly strong. Global demand is rising at a rate of about 2.4% a year, according to the UN.
North America dominates global potash supply, and East Asia nitrogen. But phosphate depends largely on one country. More than 75% of global phosphate reserves are in Morocco, and the disputed areas of the Western Sahara it controls. Morocco also controls about a third of seaborne trade.
It is the Saudi Arabia of phosphate. Grantham, a man not given to over-statement, calls it “the most important quasi-monopoly in the history of man”.
The good news is that supply is not running out. According to the New Scientist world phosphorous will not run out for another 345 years. The bad news is that, beyond Morocco, it’s getting tricky to find.
Notes Bloomberg: “Phosphate, when used as fertiliser, is the irreplaceable engine powering modern agriculture, and its reserves are in decline almost everywhere except Morocco”.
Canada – for all its abundance of natural resources – has no phosphate. Its only mine – the Kapuskasing Mine – closed down earlier in the year. Meanwhile, the US, once the world’s third-largest phosphate producer, has its own problems.
The largest reserves are found in Florida, Idaho and North Carolina. But their ability to maintain production has been called into question, particularly in Florida, due to rising costs, falling grades, environmental tension and costly permitting processes.
As for Latin America, it is crop rich, but phosphate poor. It produces 11% of the world’s food and consumes 12% of the phosphate supply – but it only produces 2% of said supply.
It all points to an increasing reliance on Morocco for this essential resource. And Grantham seems to think there could be a ticking time bomb there, if food scarcity, food prices and political turmoil in nearby countries grows.
"The only financial publication I could not be without."
John Lang, Director, Tower Hill Associates Ltd.
How to invest in phosphate
So, the way to play all this, is to find phosphate producers (or potential producers) in safe parts of the world. If supplies from Morocco are ever disrupted, these companies could do very well indeed.
The world’s largest producer of finished phosphate products is Mosaic (NYSE: MOS). Mosaic is also in the potash game – and I’m a bit more ambivalent about potash, not least because we are still working through the after-effects of a potash bubble that popped a few years back. Potash Corp (TSX: POT) is the next largest – but the same problem applies.
There are very few pure phosphate plays. New Zealand phosphate company Chatham Rock should soon be listing on Aim in London. But if you’re into risky tiddlers, take a look at Focus Ventures (TSX.V: FCV), which has a market cap of around C$30m. For full disclosure, I own stock in this company myself.
The company’s Mantaro project in Peru looks exciting. It is located on former marine beds – salt flats – near the coasts of the huge Sechura Desert.
The enormous phosphate-producing Bayovar mine, which Brazilian mining giant Vale owns with Mosaic and Mitsui, is 15km to the south-west. Another privately owned mine is even closer, while Hochschild and Mitsubishi have a phosphate project just to the west.
In short, Focus is at the heart of Peruvian phosphate country. Core logging and all test holes drilled to date show phosphate at levels consistent with the large deposits nearby.
With most results now in, the plan is to define a 43-101 compliant resource this year. That will probably be around the 80 million tonne mark at a grade of 12-18%. This will most likely increase when more drilling is eventually done.
Other aspects of the project are attractive. The infrastructure connections are good. The Pan American highway and the road to the port both run through the property. The port is just 40 km away across flat, coastal desert. The terrain is arid and there are no local communities living on the property – so no planning permission problems here.
Also, a Latin American company could be particularly appealing as it can supply ample demand in the region directly. (There is no ‘spot’ market for phosphates by the way; it is sold by contract.)
Focus is listed on the Venture exchange in Canada, so you will need a broker who deals in Canadian stocks. TD Direct is one option. But before you do anything, remember that this is a junior mining company. Only risk money that you can afford to lose.
These stocks are very volatile. In addition, the stock is not at all liquid, so build your stake patiently, or the stock price will spike up and you will end up overpaying.
Our recommended articles for today
The stock market is a great way for companies to raise cash, says David Thornton. But for the real tiddlers, it’s not always the best solution.
The Russian market is cheap for very good reason. But brave investors could be forgiven for being tempted, says Merryn Somerset Webb.
On this day in history
On this day in 1960, Russian mongrels Belka and Strelka became the first dogs to be recovered alive after having been shot into space.