Published: Wednesday, March 17, 2010

A pair of Canadian initial public offerings are coming down the pipes that will test investor appetite for phosphate and lithium, commodities that have been red-hot in recent months.

The phosphate play, called Stonegate Agricom Ltd., is backed by both Sprott Resource Corp. and the entrepreneurs behind Thompson Creek Metals Company Inc. Stonegate plans to raise $50-million to advance its projects in Peru and Idaho.

The other IPO is one that has already generated a lot of attention: Lithium Americas Corp. This company made headlines because it received private investments from auto companies Magna International Inc. and Mitsubishi Corp., which are looking to secure lithium supply because of its use in hybrid car batteries. Lithium Americas did not reveal how much money it hopes to raise.

Last week, a technical report was released on Stonegate's Mantaro deposit in Peru that showed it is a large phosphate deposit with a lot of potential for expansion. Stonegate also owns the Paris Hills project in Idaho, a proposed underground operation that could provide the United States with some much-needed domestic supply. Right now, the U.S. relies strongly on imports from Morocco.

The IPO is well-timed, because the spring growing season tends to be strong period for phosphate fertilizer. But more generally, the market is hot with investors again after it suffered an historic crash in 2008.

Like potash and nitrogen, phosphate fertilizer prices cratered because recession-wary farmers applied less of it to their crops. Now, they are returning applications to normal levels.

Prices for diammonium phosphate peaked at around US$1,200 a tonne before plummeting to US$260 a tonne in 2009. Now, they are back up to the US$500 range.

Edlain Rodriguez, an analyst at Broadpoint Amtech, said a rise in input costs like sulphur has also pushed prices up. "But more than anything else, it's farmers going back to near-normal activity again," he said.

While analysts are generally positive on the phosphate space in the short term, a number of them have raised red flags about low-cost future supply that could cause a glut in the market. Agriculture giant Bunge Ltd. made that warning in January when it sold all its Brazilian phosphate assets to Vale SA.

In the case of lithium, 2009 was a banner year as investors realized that much more supply will be needed to feed the hybrid car market (each car will need about 20 kilograms of lithium carbonate). Prices have nearly tripled over the last decade and topped out at more than US$6,000 a tonne in 2009.

As the lithium market picked up, an army of small exploration companies jumped into the space last year and started developing projects in lithium-rich countries like Chile and Argentina.

But Michael Gray, an analyst at Genuity Capital Markets, said the real key is whether they can produce the kind of material that the automakers want. Lithium Americas should have an advantage since it already has strategic investments from two auto companies.

"There's no question there's enough lithium in the world. The issue is security of supply and the ability for it to be tailor-made to the specifications of downstream users," Mr. Gray said.

He added that Lithium Americas, which has properties in Argentina, "looks compelling" based on some of its disclosure. He noted that the company is unusual in that it is finding lithium brines in sands and gravel. Most companies mine it out of salt.

pkoven@nationalpost.com