In times like these everyone is looking for bargains when they go shopping, and it’s no different in the investor world. That’s why I’m looking at this penny stock, which is heading up the value curve.
Gensource Potash (LSE:GSP) is a Canadian mineral fertiliser company developing a project in the province of Saskatchewan — one of the world’s leading potash hubs.
Feed the world
So, what is potash and why is it important? Well, potash is a natural fertiliser that contributes to healthy plant growth.
It has become indispensable to crop farmers around the world, and with the global population expected to reach 10 billion in 2050, potash demand is only going one way.
Earlier this year, potash prices more than doubled to $562 per tonne following Russia’s invasion of Ukraine. This is because of Western sanctions on Russia and Belarus, countries that previously supplied 40% of the market.
From this, it’s clear to me that there is immediate and long-term value to be extracted from investing in a vibrant global potash player.
Gensource Potash
A bona fide penny stock currently trading at 22p in London, Gensource has developed a vertically integrated business plan delivering potash direct from its Tugaske project to its offtake customer HELM AG.
Gensource envisions building a series of smaller scale, low-cost production modules. Tugaske in Saskatchewan is the first of those, with estimated operated costs of just CA$85.08 per tonne.
CEO Mike Ferguson recently said that construction of Tugaske will commence later this year, and in June the company and its offtake partner revealed plans to double production to 500,000 tonnes per year in the face of soaring fertiliser prices and constrained supply.
A higher production rate at Tugaske and higher wholesale potash prices implies significantly improved margins compared to the 17.1% post-tax IRR Gensource forecasted at the previous rate of 250,000 tonnes.
The construction period at Tugaske could last up to two years, so I still have plenty of time to invest before the company starts hitting those healthy profitability margins.
But I’ll be doing so sooner rather than later because Gensource won’t be a penny stock forever, in my opinion, given future potash demand projections and the company’s modular growth plan.
Potential downsides
However, one figure in the industry doesn’t think potash prices will stay high for much longer. Last month, Brazil Potash president Adriano Espeschit said prices will ‘normalise’ by 2023 as more supply comes online.
Either way, Gensource is protected from wholesale price volatility via its offtake with HELM. The agreement provides a pricing mechanism tied to the retail price of potash, which historically comes in at a sizeable premium to wholesale pricing.
A final point I’ll be bearing in mind is the escalating cost of energy and how this could negatively impact Gensource’s margins once they start mining from the Tugaske project.
Overall, though, I am going to invest in Gensource while the stock is still cheap, as the growth potential is something I don’t want to miss out on!