FOS.TO - PhosCan Chemical Corp

[no_free_lunch]

A good writeup appeared on VIC regarding a canadian company called phoscan (you need to sign up for a free/limited account):

 

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/104174

 

This is an incredibly simple story, essentially you have a company trading for about 75% of cash/short-term investments, no debt and a stake on a phosphate mining prospect.  The company finished a feasability study for a canadian phosphate mine (I think it's in Ontario) back in 2008 shortly before the market for phosphate collapsed.  The phosphate price has really never recovered to anywhere close to those levels since.  To their credit, management basically shelved the whole thing and have been in cash conservation mode since. 

 

There has been very slow work on the mine since, mainly related to studies on the rare earth metals contained with the reserves. 

 

I basically view it as a lottery ticket with a very long expiration date.  Their cash burn rate is quite low, it looks like there is a decade plus before they would run out of funds.  At some point, whether due to geopolitical issues, crop failures, etc you could see a spike in phosphate prices and this equity would rise with it.  This last happened in 2011 which triggered the equity up to ~$.88 or 3x current price.

 

For what it's worth, Jeremy Grantham sees a coming shortage of phosphate, albeit the timing is anyone's guess.

 

http://www.businessinsider.com/peak-phosphorus-and-food-production-2012-12?op=1#ixzz2Zba1wSXC

[ItsAValueTrap]

Thanks for posting this.  I don't know why there isn't more interest (on CoBaF) in companies that are pretty easy to analyze!!

 

1- Management seems fine.  The compensation is somewhat on the low side by junior mining standards. 

 

2- The company is buying back shares.  While normally I really like to see this, it may not mean too much since:

a- The shares aren't that liquid.

b- The company will likely raise money in the future.  It will take a huge amount of money to move the project forward and to build a mine.  Right now they won't do it but in the future they might.

 

The repurchases are a good sign though not as good a sign as it would normally be.

[no_free_lunch]

I appreciate the feedback.

 

My take on the buybacks is that they are a relatively small amount but they highlight that management is shareholder friendly.  When you consider that the feasability study on the mine was done in 2008, you have to consider that these guys are incredibly patient.  That is the kind of team I want to be in business with.  I think many other management teams would have just fudged the numbers a bit more to make the mine appear economic at lower prices and done a massively diluted equity raise.

 

Regarding the mine costs, the feasability had 2 options, with 1 option at $900M and the other at $1B.  Obviously, this will be dilutive but the amount of dilution is dependant on phosphate prices at the time.  I haven't spent a lot of time on what this would do to the current equity but I use past prices as a guide.  The stock tripled in 2011 and it was about 8x higher in 2008, all this before the full funds to build the mine were raised.  I just think that the value of the company is the cash + the value of the mine rights discounted by what the mine would be worth and how long until it's built.  Obviously the second part of the equation is quite complex (and I am missing several variables) but based on historical prices it sounds like the mine rights are worth $50-200M when phosphate prices are higher and they are close to building.

 

Just to elaborate on one of my previous points, there is a possibility that if they can co-process the rare earth's that they might be able to make the mine profitable at current phos prices and can cash out even earlier.

[ItsAValueTrap]

Hmm I would put the current value of the deposit at $10-30M.  I believe it's uneconomic at current phosphate prices because the company has come out and said that it is shelving the project.  The PFS (preliminary feasibility study) assumes a long-term price of $650 for DAP... the current spot price is about $438 (a third lower).  I assume that the project is uneconomic right now.  However, it has some option value because phosphate prices may rise one day.  If they do, then the value of the deposit will rapidly jump.

 

If prices rise and they do sell the deposit, I could easily imagine them getting $50-200+M for it.

 

2- I don't think that the market prices for Phoscan should be used to infer what the deposit is worth.  The junior sector in general tends to be inefficient as most of the stocks destroy shareholder value and shouldn't exist in the first place.  The sector as a whole has lost money despite a bull market in commodities.

 

3- The PFS is not accurate because pre-feasibility studies don't have to be that accurate.  And it may be fudged... almost all technical reports are fudged nowadays.  That's the sad state of the Canadian mining industry (which is really more like a form of legalized gambling slash Ponzi scheme).

 

DAP pricing:

http://www.indexmundi.com/commodities/?commodity=dap-fertilizer&months=120

 

Phosphate rock pricing:

http://www.indexmundi.com/commodities/?commodity=rock-phosphate&months=120

[ItsAValueTrap]

Does anybody know which Sprott vehicle owns 20% of PhosCan?  I'm thinking that another way of playing this is by buying companies that are buying the Phoscans of the world.  I already have a big position in Altius Minerals (and a position in Northfield Capital).

 

Sprott Resource Corp (SCP) is buying back shares.

http://www.canadianinsider.com/node/7?menu_tickersearch=scp

 

In terms of management, I think that Altius is clearly better than Northfield, which is clearly better than Sprott.  (Northfield has structural advantages over Sprott due to lower G&A and smaller size.  Northfield is extremely illiquid.)  I think that the best way to play junior mining is to only own Altius.  Getting interested in Phoscan is mostly because I am bored and am looking to fill my portfolio with small positions just to stay busy.

[ItsAValueTrap]

Some comments on Gordon McKinnon...

 

McKinnon is the CEO of Canadian Orebodies, which sold the phosphate deposit to Phoscan.  McKinnon currently sits on Phoscan's board.

 

At Canadian Orebodies (CO), I haven't been particularly impressed with the way he has run the company.

a- CO pays for shills...    http://www.canadianorebodies.com/s/NewsReleases.asp?ReportID=525744    This is unethical...

b- They issued a press release highlighting that fact.  This is just stupid...

c- They went ahead with a drill campaign when they should have spent the money on metallurgical testing instead.  Their deposit has low grades and some serious metallurgical issues (the technical report talks about this, though the report is promotional).

 

2- Northfield owns shares of Canadian Orebodies, so I am skeptical about Northfield's investment strategy.  Both of their offices are on the same floor of the same office building (this is just coincidence?  I don't know; but everybody knows each other).

 

In general, Northfield's strategy has a lot to do with playing the promotional brokerage game.  Northfield's CEO is also the CEO of White Pine Resources (and formerly the CEO of Guyana Goldfields), which are companies that hopped onto the junior mining gravy train.  You sell shares, the brokers will pump your stock, hopefully your stock goes up even higher so you can raise even more capital, etc. etc.

To be fair, Northfield did finance companies that turned into real mines.  FNX mining (now taken over) and Gold Eagle (taken over by Goldcorp) are examples of successes.  So there is real economic activity going on.

 

Altius has to create value to make money, has more of a value investing approach, and has less exposure to the greater fool investing game.  Ironically, Altius technically hasn't yet been involved in any deposit that turned into a mine (other than the Voisey's Bay royalty; none of the royalty money funded the mine).

[no_free_lunch]

Stock was up 22% today on no news.  PotashCorp apparently is shutting one of their phosphate mines so perhaps the market is thinking that somehow indicates a stronger market?  Less supply, higher prices.  It is certainly interesting to watch.