Union Resources (UCL.ASX) - is phosphate getting sexy?

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You would think that in a recession there has to be demand for food right? True enough, and the global population is rising so demand for food must be rising. How to get more food from a fixed quantity of land? Well its not as hard as you think for several reasons:

1. Clear more forests - Its happening in Africa, Brazil and Indonesia, but it is becoming more difficult in the West. In Asia, illegal logging is the main culprit.

2. Improve land utilisation - drive around the Philippines - its a country which poorly utilises land. Most landowners seem to be speculators living in the city. Asset rich, and most often income poor, unless they are working for some foreign company.

3. Increase land area under irrigation: Hydro schemes are of course good for regulating runoff to avoid floods, it greatly increases the number and productivity, and reliability of farm output.

4. Increase fertiliser usage - Fertiliser is important to replace the critical nutrients depleted from intensive farming. The more food grown in the third world, the greater the need for nutrients, and thus fertilisers.

You guessed it! I am suggesting an investment in fertiliser feedstocks. Why? There are several reasons.

1. The industry is ripe for global consolidation

2. There are some great project investments around

3. Large companies love big projects

Firstly there are different types of fertiliser, and I can't claim to have any knowledge on the supply and demand for each type, however we can understand that certain soils will have a requirement for certain types of nutrients. Based on my research, tropical soils are generally deficient in phosphorus, potassium, calcium, and magnesium, but rich in aluminum and iron oxides. There is therefore a growing market for potash, phosphate and nitrogen-based fertilisers. The shift to a meat-based diet can only elevate the demand for fertilisers since that requires even more pasture or greater productivity, otherwise food prices have to increase, biofuels have to be displaced, which augers well for fertiliser producers who can grab a greater share of the commodity price premium. At the end of the product chain is the 'rock' producer, i.e. The producers of potash and phosphate rock.

There is a shortage of nutrients in soils for a number of reasons. In the tropics they are leached out of the acidic soils. In other areas, there are natural deficits depending on rock type and intensity farming techniques. I was surprised to find out that even the largest food producers like Australia, Canada and Brazil have a shortage of raw material for making fertilisers. Most raw feedstock is located in Morocco and China, however Morocco dominates exports, with less coming from the Middle East and other countries.

My interest in this industry was captured by a Macquarie Equities recommendation for Incitec Pivot, a fertiliser producer. Fertiliser prices have tanked in the wake of the recession, though clearly they see come upside in the fertiliser and/or explosives market. Notwithstanding their recommendation, I have always been fond of the 'spec' with global ambitions. I was reminded of a stock which I recommended about a year ago - Union Resources (UCL). At the time it had acquired a 50% interest in an offshore Namibian phosphate project. It has a 2 billion tonne resource offshore grading 18%Ph, and it can be easily upgraded to <26%ph.

Compare this project with Minemakers Ltd (ASX:MAK) Waranah phosphate project in the Northern Territory. It is located 200km from Tennant Creek, then there is a 1100km rail haul to the coast. The cost to build a rail line out here would be prohibitive, particularly as there is already a rail link from Mt Isa to Townsville. Does the immediate vicinity need another port link? It is a large tonnage resource, but it also has overburden to remove. The idea that they are going to build a 3Mtpa mine here is laughable, and it gets even funnier when they talk up a downstream beneficiation plant in the middle of nowhere. They would have to build a town. The company in its presentations says the infrastructure is great...and it is...but the distances are prohibitive. Its not going to happen, and the proposed Resource Rent Tax is an extra problem, as it raises a sovereign risk. Today's announcement that Minemakers is seeking Asian finance for this project is therefore surprising. I think it looks like ramping of the stock, which rose by 23% today. You might ask why. I have a clue.

Minemakers has a 14% stake in Union Resources though its takeover last year of Bonaparte Mining. Bonaparte, and now Minemakers, has a 43% stake in the offshore Namibia Sandpiper phosphate deposit we previously discussed. Might we expect that Minemakers is trying to raise its stock price prior to a script-based takeover of Union Resources. I have been looking to buy UCL for 0.4c, but because of the prospect of a takeover by Minemakers, I have acquired a stake at 0.5c. An consolidation of their respective project interests is understandable. Minemakers has some $34mil in cash, whereas Union (UCL.ASX) has very little.

I think this industry could get very exciting in future as I expect some company like Incitec Pivot will make a move on Minemakers (after they take UCL). Fertiliser is one of those strategic resources because it is concentrated in a few countries - both potash and phosphate rock. I just like the far superior economic potential of a project in offshore Namibia. That project once developed will sit at the low end of the global phosphate mine cost curve, able to compete with the Moroccans, who I presume are also close to the coast. Moroccan fertiliser makes its way around the world, as I think Namibia's will.

Union Resources (UCL.ASX) is an interesting stock for several reasons. It also holds a stake in the Mehdiabad Zinc-Lead-Silver project in Iran, the largest undeveloped zinc-lead project in the world. The project has been nationalised, which explains the decline in UCL stock, but if revolution or a coup is achieved in Iran in the next 1-3 years as the hated Iranian regime is ousted, there is the prospect of UCL reclaiming its 40% stake in this project; if not its exploratory funds through export insurance. So the company has enormous upside from two projects. The stock has 1.9 billion shares on issue at 0.5cents, capitalised at $9.4 million.

Minemakers has 108mil stock according to Google Finance (check these numbers as they look low..maybe some listed in Canada or Europe) at 29c. They have $34mil in cash. Best still - all of UCL's projects are outside of the jurisdiction of the fascists in Canberra. At least when the fascists in Iran nationalise your assets they don't pretend to do it for your interests.

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Andrew Sheldon www.sheldonthinks.com