It's been an exciting couple of years for Canada's top fertilizer stocks.
Let's take a closer look at Canada's top potash stocks, companies poised to benefit from this rising trend.
What are the best fertilizer stocks in Canada right now?
Gensource Potash (TSXV:GSP)
Gensource Potash Corp (TSXV:GSP) is a potash and fertilizer development company with its head office in Saskatoon. Its main assets include Tugaske, Lazlo, and Vanguard projects, all located in Saskatchewan.
The company seeks to operate differently than many of its mining peers. It aims to transform how potash is extracted, produced, and distributed by creating a series of scalable and environmentally sustainable potash production facilities.
The company does this by reducing water usage by 75%, generating power in a greener way, and having no salt tailings.
The company will put these greener solutions to the test when it completes the Tugaske Project, an estimated $471M investment into a facility that can produce 250,000 metric tonnes of potash each year. This project is expected to have just $85 per tonne operating costs, making it one of the lowest-cost mines out there.
Gensource has an agreement with HELM, one of North America's largest chemical companies and fertilizer sellers. This agreement is tied to the retail sale price of potash, which has consistently traded at a higher level than wholesale prices. That translates into more revenue for the company compared to more traditional means.
The big problem with Gensource currently is the company is still in the pre-production stages. Various projects have promise, but Gensource doesn't have the financial might to go up against the big players. This stock could be a massive winner if it all works out. But it's also a penny stock today, and many associate it with a certain amount of risk.
Western Resources (TSX:WRX)
Like Gensource, Western Resources (TSX:WRX) is a potash exploration company with good potential and question marks on execution. The big thing that elevates Western Resources compared to Gensource is its Milestone project is fully financed, and construction is currently underway. Phase 1 commercial production is projected to begin by the summer of 2023.
One thing many astute mining investors look for is fellow shareholders with deep pockets.
The presence of intelligent investors validates projects and, most importantly, is a vote of confidence in current management. Western Resources recently welcomed Appian Capital and Vantage as significant debt and equity holders, respectively. Appian is a London-based investment advisor that only plays in the mining industry, while Vantage is one of Asia's largest energy and resource investors.
Milestone is an exciting project. It has a projected mine life of 40+ years, with production topping off at 300,000 metric tonnes of potash annually. Projected mine costs are $91 per metric tonne, in line with Gensource's Tugaske Project. Add it all together, Milestone could generate $40M annually in cash flow. Not bad for a company with a current market cap of under $100M.
The risks are similar to Gensource. Western Resources is also a penny stock with a big future without any current production to back it up. But Western Resources is cash rich with a couple of big investors' backing. It's in better financial shape.
Verde Agritech (TSE:NPK)
Verde Agritech (TSX:NPK) is an agricultural technology company producing something different from your regular phosphate-based fertilizer. Led by founder and CEO Cristiano Veloso, Verde aims to improve soil biodiversity and crop yield by supplying salt and chloride-free potassium fertilizers to farmers in Brazil, with plans to expand into other countries.
Here's how it works. Kforte, Verde Agritech's main product, works much like a traditional fertilizer but without many nasty side effects.
It also helps pull carbon dioxide out of the air and put it back into the soil. Some of the carbon dioxides get used for the plant's health, while the majority stay underground. Rather than using potash as the main ingredient, Kforte is derived from glauconite, a mineral with a long history of use as a natural fertilizer.
Brazilian farmers love the stuff. Revenue has skyrocketed from $1.3M in 2018 to nearly $75M over the last twelve months. Product sales in tonnes per year have increased from 4,000 to 700,000 in the same time frame. The current mine has more than a billion tonnes of reserves. The company is ramping up a second facility to increase yearly production capability from 600,000 to 3M tonnes per year. A third production facility is planned for 2024.
The company is comfortably profitable, too. Gross margins are north of 75%, with economics slated to improve over time as production increases. The balance sheet is also solid, with only about $15M worth of debt compared to $50M in equity. Analysts believe earnings will also continue to grow steadily in 2023 and 2024.
Ultimately, Verde's success could come down to whether the company can expand to North American markets. Will local farmers see the benefit of this potentially revolutionary product? Or will they stick with the status quo for their crop nutrients?
Nutrien (TSX:NTR) is the obvious choice for anyone looking to add fertilizer stock exposure to their portfolio.
Nutrien was created in early 2018 when Potash Corporation of Saskatchewan combined with Agrium, a marriage between the largest fertilizer producer and the largest retail fertilizer seller. This vertically integrated business model has proven successful, with shares more than doubling since their debut.
The company produces 27 million tonnes of potash fertilizers, making it the world's largest provider of the mineral. It's also the third-largest producer of nitrogen, a key input into fertilizer production. There are plans to increase the production of potash and nitrogen by some 20% by 2027.
The ag retail side of the company is equally impressive. It has more than 2,000 retail locations across North America, South America, and Australia. These retail operations have grown earnings by more than 10% annualized since the two companies combined in 2018.
Nutrien is consistently profitable and has prioritized paying down debt and returning cash to shareholders over the last few years. Shares outstanding have fallen nearly 20% since 2018, and the company's long-term debt is 30% below recent highs. Management remains committed to these initiatives, pledging to continue giving back to shareholders rather than spending its robust free cash flow on acquisitions.
Nutrien shares also have a generous dividend, which should go up over time even if potash prices weaken from here.
Why is there reason to be bullish on fertilizer?
The big event, of course, was Russia invading Ukraine. Russia is one of the world's largest potash producers, a major fertilizer ingredient. As part of their support to the Ukrainians, nations lined up and vowed to stop doing business with all Russian companies, hoping these economic sanctions would influence Putin's next step.
Russia's invasion wasn't the only thing causing potash prices to soar. COVID-19, while causing significant tailwinds in something like the funeral sector, hurt supply chains, causing everything from production delays to transportation snags. Input costs were higher, especially natural gas. This impacted production in Europe, which depended on Russian natural gas.
One of Russia's biggest allies was also hit with sanctions. The United States announced in April 2022 that it would no longer be doing business with Belarus, the world's third-largest potash producer, penalizing it for many sins. This only added to the potash supply shortage.
Add it all together, and potash has had its best performance in years. The commodity was approximately $400 per ton back at the beginning of 2021. A year later, prices were $800 per ton, hitting a high of almost $900 a few months later. It has retreated slightly from those highs, but prices are still elevated.
Naturally, high commodity prices are a boon to potash producers, who benefit from increasing revenue without substantially higher input costs. But yet, something interesting has happened. Shares of major potash producers headed lower in the latter half of 2022, outpacing a slight decline in the commodity.
Fertilizer companies are taking advantage of increased global demand by ramping up production and approving new projects. BHP, the metals giant, announced it was investing north of US$5B in the Jansen project in Saskatchewan.
When fully completed, this mine will be the largest potash mining project on the planet. Other projects are on the go as well. As a result, investors want to buy Canadian stocks that have exposure to the industry.