Scotia Capital starts coverage on six potash companies

The group says there is a race to build new capacity in the potash space

(Reuters) -

Scotia Capital, which initiated coverage of six potash companies, said a race to build new capacity was underway, but was optimistic that at least a couple of potash juniors will each get the $2 billion to $3 billion required to develop their mines.

It started coverage of MagIndustries Corp (MAA.TO: Quote), Migao Corp (MGO.TO: Quote), and Potash One Inc (KCL.TO: Quote) with a "sector outperform" rating, while it started Athabasca Potash Inc (API.TO: Quote) with a "sector underperform" rating.

"We are fairly optimistic that at least a couple of the potash juniors will get the $2 billion to $3 billion in capital they require -- likely from Chinese or Indian state-owned companies," analyst Ben Isaacson wrote in a note to clients.

The analyst expects that the majority of relatively lower-cost brownfields will be built over time, as well as a handful of greenfields -- with a preference for solution potash mining over conventional potash mining.

MagIndustries and Potash One could both likely be the first greenfield potash projects "out of the gate," according to analyst Isaacson.

The analyst said Migao succeeded in passing on price changes to its customers, such that it has generally maintained its targeted gross margin band of between 22 percent and 24 percent.

He said Athabasca is focused on developing its Burr project, a conventional potash mine, in Canada.

"We like the resource potential of the Burr project, but are somewhat concerned that, by the time the conventional mine is ready to come online, significant new potash capacity may have already been commissioned," Isaacson added.

Isaacson also started coverage of Hanfeng Evergreen Inc (HF.TO: Quote) and Western Potash Corp (WPX.V: Quote) both with a "sector perform" rating. (Reporting by Isheeta Sanghi in Bangalore; Editing by Jarshad Kakkrakandy)

© Thomson Reuters 2010 All rights reserved