Author: Peter Koven

The potash business has been in turmoil for more than a year, as farmers have withheld fertilizer applications and prices have plummeted.

But in recent weeks, the market has shown signs of stabilizing and potash prices have actually ticked upward. Another positive came Wednesday, as Mosaic Co. offered new potash sales guidance for the first time since mid-2008. The company said it expects to sell between 1.7 and 2 million tonnes of potash in its fiscal third quarter at an average price of between US$340 and US$360 a tonne.

Those numbers are much higher than Canaccord Adams analyst Keith Carpenter was modeling. As such, he noted that they bode well for another large fertilizer company, Potash Corp. of Saskatchewan Inc.

"The sales guidance speaks volumes of how quickly the market is returning to more normalized purchases following a challenging [2009]," he wrote in a note to clients. He also pointed out that the potash price of US$350 per tonne that was negotiated between China and the Belorussian Potash Company is proving to be the bottom for pricing.

As a result of Mosaic's guidance, he increased his first-quarter sales volume estimate for Potash Corp. by 300,000 tonnes to a total of 1.8 million. His full-year sales estimate increased from 7.4 million tonnes to 7.7 million. That remains in the range of Potash Corp.'s guidance of 7 to 8 million tonnes.

He raised his earnings per share estimates on Potash Corp. for 2010, but kept his price target the same (it is based on a multiple of 18.5 times 2011 earnings). He rates the stock a "buy" with a target of US$130.00 a share.

Peter Koven

The problems facing First Uranium Corp. have been well documented. Unfortunately, they are not contained to just that company. Gold Wheaton Gold Corp. owns two gold streams from First Uranium's mines, so it is also vulnerable to First Uranium's reduced production and liquidity issues.

Adam Schatzker, an analyst at RBC Capital Markets, pointed out that two of Gold Wheaton's three gold streams are from First Uranium operations, and those account for about 47% of Gold Wheaton's mining asset value. Thus, First Uranium's problems create "significant risks" to Gold Wheaton shareholders, he wrote in a research note.

In a worst-case scenario, Mr. Schatzker said that First Uranium could face insolvency. But that is not the most likely outcome. One of the company's problems is that it could face a $42-million penalty payment to Gold Wheaton, but Mr. Schatzker expects the two sides to reach some sort of compromise that will not cause further immediate trouble for First Uranium.

"It is not in [Gold Wheaton's] interest to see [First Uranium] driven to insolvency," he wrote.

He added that First Uranium's crisis highlight the risks that Gold Wheaton shareholders face when so much of the company's value is tied up in just one other entity. As a result of this situation, he has ascribed a multiple of just 1.0 times net asset value to Gold Wheaton, which is very low compared to other royalty companies. He lowered his target price to 30¢ a share from 35¢, but maintained a "sector perform" rating on the stock.

"If [Gold Wheaton] is able to make new, high quality acquisitions that diversify its risks, we would likely use higher multiples," Mr. Schatzker wrote.

Peter Koven

There are certain drivers to the gold price that everyone talks about: U.S. dollar weakness, rising investment demand, producer de-hedging, and reduced central bank selling. Citigroup Global Markets analyst Alan Heap focuses on a different one: China.

In a note to clients, he called China the "most important source" of future demand growth in gold. And it is not just from the central bank — he noted that in 2009, retail investment demand in China was "particularly" strong as overall Chinese demand rose 10%.

The focus on Chinese gold demand comes amid renewed concerns about asset price inflation in the country. Recently, the Chinese government has taken steps to curb bank lending after letting it run completely out of control in 2009. That stoked inflation fears and strengthened the case for citizens to own gold.

Of course, Asian central banks are not expected to ignore gold, either. Mr. Heap noted that Chinese and Indian central banks remain extremely underweight gold, with only 1.5% and 4.1% of their total reserves in the precious metal. That compares to the European average of 54%.

Peter Koven

TD Newcrest analyst Daniel Earle was one of the first big believers in Ventana Gold Corp. and its La Bodega gold discovery in Colombia. He was ahead of all the other analysts in raising his target price as the discovery got more and more exciting. But given the legal dispute that now hangs over the company, he has cut his target on the stock by 20%.

Everything was going great for Ventana until last November, when Socieded Minera La Bodega Limitada, the company that owns mineral rights to La Bodega, requested arbitration in an attempt to invalidate the option agreement that hands the project over to Ventana.

Mr. Earle wrote that this action appears to be an attempt to extract more money from Ventana after its phenomenal exploration success at La Bodega.

"[Sociedad Minera's] argument that the option agreement is illegal under Colombian law would seem to require that Ventana's respected counsel was grossly inadequate," he wrote in a note.

Mr. Earle thinks it is "highly unlikely" that the arbitration panel finds the agreement illegal. And even if it does, he noted that the panel may conclude that Sociedad Minera tacitly accepted the terms of the agreement, since it is has already accepted four of the five required payments from Ventana. In such a case, the intent of the agreement would likely have to be honoured.

"We therefore think the risk of Ventana being stripped of its right to acquire the mineral rights to the La Bodega property is very low. However, without resolution, we expect the dispute to cast a lasting pall over the potential value of the company," he wrote.

As a result, he cut his target price on the stock to $12.00 a share, down from $15.00 a share. The new target comes after he reduced his target multiple to 0.8 times net asset value (NAV) from 1.0 times NAV (using a 5% discount rate). Right now, he calculated that it is trading at just 0.5 times NAV. Other development-stage gold companies in his coverage universe trade at a much healthier multiple of 1.1 times.

Mr. Earle noted that the arbitration process could be completed in a relatively quick three to six months, as the issue before the panel is very straightforward and rulings cannot be appealed.

Peter Koven

Mining giant Vale SA has made a bold move into the phosphate and nitrogen fertilizer sectors with a US$3.8-billion all-cash deal to buy Bunge Ltd.'s Brazilian fertilizer business and a 42.3% stake in Fosfertil SA.

Did Vale pay too much? BMO Capital Markets analyst Tony Robson suggested it is possible. He pointed out that according to Bunge's presentation, the transaction is valued at 12.6 times three-year average EBITDA for the fertilizer assets, which looks like "a fairly steep price given the volatility of the phosphate business and what BMO Research views as weaker margins at Brazilian operations compared to those in Saudi Arabia and Northern Africa."

From a strategic standpoint, Mr. Robson wrote that the move shows that Vale is re-investing domestically in Brazil at the expense of its global diversification strategy. This should not come as a surprise, as the company had some well-publicized run-ins with the Brazilian government over its global ambitions.

Mr. Robson was disappointed to see that Vale's 2010 dividend will be maintained at 2008 and 2009 levels of US$2.5-billion (US48¢ a share), but wrote that it is "understandable" given the new fertilizer acquisition and the company's planned capital spending of US$12.9-billion this year.

He rates the stock a "market perform" with a price target of US$30.00 a share.

Peter Koven

Yamana Gold Inc. has finally provided an update on its Agua Rica development project in Argentina, and the economics look very strong.

The company now envisions Agua Rica as a standalone project producing 282 million pounds of copper and 136,000 gold equivalent ounces a year. The internal rate of return (IRR) is estimated at 15% assuming gold prices of US$950 an ounce and copper prices of US$2.25. The IRR jumps to 24% using higher prices (US$1,050 gold and US$3.25 copper).

Analysts are generally pleased with the numbers, which suggest Agua Rica will be a very robust project.

The company is seeking a strategic partner to share the estimated US$2.1-billion construction cost, and BMO Capital Markets analyst David Haughton expects that it will get one.

Analyst Dan Rollins of UBS Securities anticipates that capital costs will come it at US$2.4-billion, above Yamana's current target. His production forecast for Agua Rica is largely in line with the company's estimates. He did not make any changes to his valuation for Yamana given the lack of an updated feasibility study on Agua Rica. He rates the stock a "buy" with a price target of $16.00 a share.

Peter Koven

Analysts are slashing their ratings on Inmet Mining Corp. after a disappointing production report and outlook.

Toronto-based Inmet continues to be plagued by start-up problems at Las Cruces, it's oft-delayed copper project in Spain. It was supposed to reach commercial production in late 2009, but now it has been pushed back to May of this year as the company faced a number of operational and equipment problems (and heavy rainfall didn't help, either).

UBS Securities analyst Onno Rutten noted that Las Cruces' production in the fourth quarter (3,300 tonnes of copper cathode) missed the company's expectations by 60%, and missed his own more cautious outlook by 40%.

"Strong performances at Cayeli and Ok Tedi [mines] were entirely offset by exceedingly weak results at Las Cruces," he wrote in a note to clients.

Analysts Fraser Phillips at RBC Capital Markets and Greg Barnes of TD Newcrest both suggested that the problems at Las Cruces could continue to be a drag on Inmet's share price until the company demonstrates some improvement in the operation. And that could take some time.

"Inmet has retained a team of third-party consultants to help determine whether operational issues could further delay the ramp-up — which suggests to us that management is not fully confident that it fully understands the problems at the operation," Mr. Barnes wrote.

All three analysts downgraded the stock to "hold" from "buy" (or their equivalents). Mr. Rutten has a price target of $75.00 share, Mr. Phillips' target is $65.00 a share, and Mr. Barnes' target is $70.00 a share.

Peter Koven