Feeding the World's Hunger for Phosphorus

Phosphorous is not a metal, and in one of its elemental forms, yellow phosphorous, it is very reactive. Unless it is submerged in water or oil it spontaneously catches fire in air, even at or near room temperature. It was first prepared in the early modern age; its Greek-derived name, which means the "bearer of fire," came about after it was observed glowing in the dark as it slowly burned.

Medieval alchemists had no theory of chemical elements; for example, they thought that "metal" was a property given to one of the "Four Natural Elements" of the ancients, the element "earth."

Medieval alchemists did find that dissolving the vapor from burning phosphorous in water produced a powerful solution of what we now call "acid" (in this case phosphoric acid)that could corrode base metals and dissolve some types of stone. Nineteenth Century research showed that many natural solid materials were in fact "phosphates" created by the ancient reaction of chemical elements with phosphoric acids.

It is unlikely that anyone before the 19th Century would have imagined just how critically important natural deposits of phosphate rock would become to the health and survival of mankind.

In a nightmarish, yet disturbingly plausible, scenario: a nation finds its supply of an essential commodity to be depleted. Without this element, its citizenry's very lives are threatened. Suppliers of this commodity, aware of their influence, opt to band together as a cartel in order to control pricing and distribution of this essential commodity, leaving the rest of the world vulnerable to price and supply shocks.

While this may sound like the situation around oil, or perhaps even fresh water if some projections are to be believed, this same scenario could conceivably play out around an element without which large-scale, productive agricultural activity is all but impossible: phosphorus, the key ingredient in phosphate fertilizers. Just as those who profited most from the 19th Century California Gold Rush were those who supplied the essential tools for mining (picks, shovels, wheelbarrows, rolling stock, canvas and donkeys), so also are those who control the supply of crucial inputs for mass agriculture like phosphate very much poised to profit.

Already, the United States has long since passed the point at which it produces a surplus of this crucial material economically, and is increasingly reliant on imported phosphates in order to remain the breadbasket to the world. This during a time when continued population growth and rising standards of living around the globe will require steady increases in the production of basic crops like corn and wheat to feed both people and livestock.

While phosphorus is relatively abundant in other parts of the world, the political security of this supply is somewhat lacking - indeed, the top exporter, Morocco, recently had to cease production for three months due to civil turmoil. With so much production concentrated in a relatively small part of the world, additional investment is needed to mitigate the risk of supply disruptions by broadening the geographic distribution of the supply base.

Sources

The main source of phosphorus is phosphate rock, which is mined in several locations around the globe. This rock is found in two types of deposits, sedimentary and igneous. The vast majority - some 90% - of deposits are sedimentary, and contain contaminants such as uranium, thorium and cadmium that must be separated during processing. These sedimentary deposits start with a relatively high concentration of phosphate but can only be processed to about 32% end-use concentrate. In contrast, the much rarer and comparatively "cleaner" igneous deposits start with a lower grade in the ground but can be concentrated up to 40%. Because it is easier to separate and treat igneous deposits, it is possible to recover more than 90% of the total phosphate from these sources, while a recovery rate of around 80% of the total is the maximum for sedimentary deposits.

The rock is processed in order to extract the phosphorus values as phosphate,. For agricultural use, there is no known substitute for phosphorous.

In declining order of 2010 mine production, the largest producers of phosphate rock are China, the United States, Morocco, Russia, Tunisia, Jordan, Brazil and Egypt. Neither China nor the US export this material.

Morocco in North Africa, bordering the Mediterranean Sea, already accounts for more than one-third of the world's entire phosphate exports, and has larger reserves than the rest of the world combined. But like Tunisia and Egypt, which border the Mediterranean Sea east of Morocco, and which have seen their governments toppled and businesses and exports slowed, Morocco has experienced considerable civil turmoil recently, including riots specifically targeting phosphorous mining operations. Tunisia, Egypt and Morocco have all seen their phosphate supplies hindered by civil unrest. In the wake of escalating violence in Morocco, including a late April suicide terror bombing in Marrakesh, do we have any guarantee that the long-standing friendship and trade relations between the US and Morocco will continue if the monarchy is overthrown?

In the case of the takeover of the Moroccan government by elements hostile to the US how would we replace our imports of phosphate from Morocco in a world where the production of food has become politicized? Some political analysts in fact attribute the overthrow of the Egyptian, Yemeni and soon, Libyan regimes to unrest over uncontrolled price increases for food in those countries.

Uses

Phosphorus and its most common, oxidized form, phosphate, is essential to the manufacture of a range of products - steel electroplating, toothpaste, detergents and even soft drinks. It is a nutrient that is vital to all life, which accounts for its use in animal feed supplements, vitamin supplements for humans and fertilizers. Life as we have come to know it literally relies upon the mining, processing and use of phosphorus mainly as phosphate.

Since the mid-19th Century, phosphate has been used in fertilizers to promote plant growth and increase crop yields. Nearly 90% of all phosphate used worldwide today goes into fertilizers, typically in combination with nitrogen and potassium. The first modern agricultural revolution in fact occurred when it was discovered how to "fix" atmospheric nitrogen into a useful form (ammonium salts) for use as fertilizer, thus eliminating the need for natural materials such as bird droppings and guano, which by the end of the 19th Century were highly valued due to their use in manufacturing gunpowder as well as fertilizers.

Ever-Growing Demand

Basic demographic forces ensure that the demand for phosphate will only grow moving forward. There are currently more than 6.9 billion people on earth, and 140 million babies are born each year. Life spans are increasing. Population growth is rapid, especially in the developing world. By 2015, UN estimates project that there will be an additional 400 million people, and that by 2020 global population will approach 7.7 billion as part of a steady growth trajectory that is expected to top 9 billion by 2050. More mouths to feed will require increased food production.

Feeding this growing population will not be as simple a task as increasing agricultural output by the same rate that the population is increasing, as standards of living are also rapidly advancing throughout the developing world. A greater percentage of crops will be used to feed livestock as those in the growing global middle class of consumers increase the percentage of meat and poultry in their diet. Because significant caloric energy is lost in the movement up the food chain from grains to meat, much more of the former will need to be produced to provide the latter, which will drive increased demand growth for phosphate-rich fertilizer around the globe.

As mentioned above, a recent study by the International Monetary Fund notes a direct linkage between increasing food prices and instances of political unrest in countries such as Tunisia, Egypt, Sudan and Yemen. Over the period of 1970 through 2007, a mere 10% increase in international food prices was found to correspond with a doubling of antigovernment protests in low-income countries. Could continued rapid price escalation lead to similar unrest in the developed world? The pressure is on everywhere to maximize agricultural output to hedge against such possibilities.

Several other factors are also feeding into the demand situation for phosphate. The proportion of arable land to living and manufacturing and energy production space continues to fall, requiring increased crop yields that have been slow to come. The increased production of biofuels ranging from ethanol to biodiesel is also pitting food against energy in a potentially vicious competition.

A Threatened Supply

To be clear, there is not at present a shortage of phosphate, and the global supply is believed to be large enough to meet several hundred years of demand at the current rate of use. The concerns are around the anticipated rapid growth in demand for the substance, the very criticality of the fertilizer supply as an input to food production and the fact that so much of the world's phosphate reserves are in so few hands. Indeed, just as OPEC controls three-fourths of the world's oil reserves, some 90% of the world's mined phosphate is in the hands of five countries - China, Jordan, Morocco, South Africa and the US.

The US is no longer self-sufficient in phosphate production; it no longer produces enough to supply its own domestic agribusinesses, and one recent report speculates that at the current rate of production and with the anti-mining bias of environmental activists the country could exhaust its accessible and currently worked reserves in as little as 15 years.

Thus, the North American domestic supply of phosphorus is dwindling rapidly. Until 2003, the United States was an exporter of this substance. Now, Morocco supplies nearly 10% of the phosphate rock used in the US. A major American mine, Mosaic's property in South Fort Meade, Florida, may be shuttered due to lawsuits related to its environmental impact, which would take several million tonnes of the country's phosphate rock production offline. In Canada, the Kapuskasing (Ontario) mine owned by Agrium that produces around 1.5 million tonnes of phosphate rock annually is known to be nearly depleted, with only a few years of reserves remaining in the ground.

Phosphate Production and Consumption Projections (Millions of Tonnes)

Production (in mt)

Consumption (in mt)

2010

2017

Growth

2010

2017

Growth

Surplus/
Deficit

Europe

15.5

19.6

3.4%

23.8

28.1

2.4%

(8.5)

Africa

46.7

47.6

0.3%

26.9

30.5

1.8%

17.1

North America

29.2

28.5

(0.4%)

32.1

31.3

(0.4%)

(2.8)

Latin America

9.2

16.3

8.5%

12.8

17.2

4.3%

(0.9)

Middle East

12.1

19.5

7.0%

7.0

15.8

12.4%

3.7

Asia-Pacific

68.3

84.6

3.1%

78.2

93.2

2.5%

(8.6)

World

181.1

216.0

2.6%

180.8

216.1

2.6%

(0.1)

Source: British Sulfur Consultants, Phosphate Rock, 10 Year Outlook Report. Growth based on 2010-2017 annual growth rate

The United States and Canada are agricultural powerhouses - and as such, each is highly dependent on phosphate-laden fertilizer. Canada is the world's leading supplier of rapeseed, from which canola oil is made, the fifth-largest producer of wheat and a top ten producer of turkey meat, soybeans and beef. The United States is the top producer of corn, soybeans, cow's milk, beef, chicken and turkey meat and a top-three producer of tomatoes, lettuce, pig meat, oranges, cherries, eggs and wheat. While beer and wine are more often associated with Germany and Italy, respectively, the US is the second leading producer of hops and the third largest grape grower. Corn and wheat are particularly phosphate-intensive crops. Any circumstances that threaten the supply of phosphate to North America will bring severe ramifications to its citizens as well as the many countries that rely on imports of North American agricultural products!

As everyone has noticed, food costs are rising even ahead of mass awareness of the phosphate supply-and-demand situation - price increases that are driven in part by increasing fertilizer costs. As of mid-February 2011, wheat prices had more than doubled over the course of a year. Corn was up 87%, soybeans 59% and sugar 22%. These increases are almost certain to continue. "I think you've got plenty of people all over the world worried about food supply," noted investment guru James Dines. "When you're [constantly adding to the monetary supply] you have more paper chasing each bushel of wheat, corn and each pound of sugar so prices are going up...So we're in [a] super major bull market in food and that's what's beginning to sink in on the world."

I think that Dines is correct.

Companies to Consider

With this crunch in supply comes an opportunity to profitably invest in North American-based companies that are developing potential new sources of phosphate rock. A few to consider include Canadian junior miners PhosCan, Stonegate and Arianne, each of which will trade at a premium as the US dollar continues to depreciate against the Canadian currency.

Toronto-based PhosCan Chemical Corp. (FOS.TO) is the sole owner of the Martison Phosphate Project, an igneous deposit located in Hearst, Ontario, that may have as much as 120 million tonnes of phosphate rock. The company's current intent is to beneficiate the rock at the open-pit mining site and then divert the product through a 44-mile slurry pipeline to a rail head that would then transport it to Agrium's phosacid plant in Beamer, Alberta. Martison will also produce niobium - which is used in the production of high-strength, low-alloy steels - as a byproduct, with the potential to also produce some rare earth elements. The sheer volume of material processed in such operations gives rise to the opportunity to profitably produce some rare metals that are present in concentrations, too low to be economical as primary products. PhosCan has been publicly traded for several years and has a fully diluted market capitalization of approximately $94 million.

Stonegate Agricom Limited (ST.TO), also based in Toronto, has a pair of phosphate projects under development. Located approximately 150 miles east of Lima, Peru, the Mantaro Phosphate Property is located near the city of Huancayo in Peru's Junin District. The measured and indicated deposits of phosphate rock in the property's west zone are just short of 40 million tonnes, with an additional 376 million tonnes inferred. There may also be approximately 700 million more tonnes in the eastern portion of the property, which links to both Lima and the coastal city of Callao via highway and rail. Stonegate's Paris Hills Project is in Idaho, near the center of the most extensive phosphorite beds in the US. Paris Hills has inferred mineral resources of just under 120 million tonnes of phosphate rock. Rail service is available less than 15 miles from the site. Stonegate Agricom went public in late 2010 and has a fully diluted market capitalization of approximately $240 million.

With its well-situated Lac `a Paul Phosphate Project in Quebec, which has easy access to road, rail and a deep water seaport as well as a ready supply of hydroelectricity and water for beneficiation, Arianne Resources (TSXV: DAN.V) has an igneous deposit of 78 million indicated and 260 million inferred tonnes of phosphate rock with a potential mine life of more than 25 years. Due to its proximity to transportation, the company estimates that phosphate rock from Lac `a Paul can be shipped for as little as $75 per ton - a price that offshore sources cannot approach. As an added bonus, the Lac `a Paul Phosphate deposit also contains titanium reserves as a byproduct that could increase the total value of the project by some 20% to 40%.

Because it has a fully diluted market capitalization of around $116 million, Arianne could well be a takeover target for a larger producer like Agrium, which has a phosphoric acid plant that will be idled when Kapuskasing runs out of phosphate rock in a few short years, or Mosaic. Relative to its peers - Stonegate, Phoscan and MBAC - shares of Arianne are severely undervalued based on project economics, resource size, location and other factors. Due to super-clean and high-concentrate shipped/finished ore, Arianne's production will command a premium price. The time to strike on Arianne is now, before the drill uses its power as a "truth machine" to drive shares significantly higher.

Final Thoughts on Phosphate

It is generally estimated that the typical person can go no more than three minutes without air, three days without water and three weeks without food. Food production requires fertilizer, with phosphate as the critical component - without phosphate fertilizer there is no way for food production growth globally to keep up with the growth of the world's population; it's as simple as that.

A secure supply of this substance is essential to America's future well being - as well as the many other of the world's people who depend on this nation's farming output. Yet the story around phosphate remains under told, much as the North American companies specializing in its extraction are currently under appreciated. An investment in a quality phosphate junior miner is worth a much closer look.

The technology metals, base metals and precious metals that currently command such a significant percentage of investors' dollars won't be of much use to people who do not have enough to eat.

Jack Lifton is a leading authority on the sourcing and end use trends of rare and strategic metals. He is a founding principal of Technology Metals Research LLC and president of Jack Lifton LLC, consulting for institutional investors doing due diligence on metal- and material-related opportunities.

About the Author
Jack Lifton

Jack Lifton is a leading authority on the sourcing and end use trends of rare and strategic metals. He is a founding principal of Technology Metals Research LLC and president of Jack Lifton LLC, consulting for institutional investors doing due diligence on metal- and material-related opportunities.

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