May 19, 2009


Most investors have heard of potash and/or witnessed the magnificent run it had during the first leg of the commodity bull market. You’re thinking I’m highlighting the great company right? Well you guessed wrong, although I think this company is still a great buy despite the recent run-up, but buying on pullbacks would be prudent. Instead I’m highlighting a company most everyone has never heard of before: MIGAO! I consider this mini-Chinese potash run out of Canada. This company is virtually completely overlooked by the market making it an ideal time accumulate shares. First it is important to understand the underlying asset that is produced via operations, in addition to forecasting the future demand.

1) WHAT IS POTASH? Broadly speaking it is a very important fertilizer used in the agriculture industry. Some attributes include improving water retention, crop protection, maximizing the yield of a harvest, etc. Potash mines are located primarily in Canada (The largest being located in Saskatchewan), Potash being the largest producer. Other large companies are making attempts are BHP Billiton as this Australian based company realized the future importance of this product. It’s not like BHP doesn’t have enough on their plate as it is, but like great company, takes advantage of every opportunity should the arise.

2) OK, I KNOW WHAT POTASH IS, SO WHAT? Well as emerging countries industrialize thus increasing the standard of living, the demand for potash will increase as these societies demand safe nutrient rich agriculture product. Despite alternatives for this fertilizer, the market has shown its desire by the high corresponding demand. Potash is not an extremely rare product, but it certainly has a supply constraint which will tighten as the years pass. In short, here is another example of a necessary everyday commodity that has an increasing demand that will outpace the diminishing increasing in supply.

3) MIGAO is a rare example of a small cap potash company with significant growth attributes (capacity set to increase about 75% over the next 14-16 months). Even taking the bear market approach (80% of projected growth is achieved & Potash prices remain 40% below their average price in 2008) they will still earn $1.28 in 2010. The current market price is in the neighborhood of 7.5, thus it will be trading at a meager 5.75 X earnings! This is incredibly cheap even for a company expected to grow in low single digits thereafter. Migao, however, will grow about 15% (CAGR) for the foreseeable future. My guess is an eventual bid from the bigger players seeking growth. In conclusion, this is a 2 or 3 Billion dollar company masquerading as a 350 million dollar small cap.

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