Migao Update

I have owned MGO for 6 months now and thought it might be worth while to share some of my thoughts (and maybe get some feedback). MGO has slightly outperformed the TSX by about 5% since August 2010, which is actually pretty good considering the rally that we’ve had.

Being a fast growing company and a fertilizer producer has taught me not to focus too much on a single quarter’s results. There are always hiccups in rapid expansion and China. Building the large plants in a short time takes commitment and foresight. There are upfront expenses and harsh weather that can affect even the best laid out construction plans. MGO seems to be executing well on this front.

Once the facility is built, there can always be major delays. Whether it is extended maintenance time, hot weather or something else; you can’t fixate on a single quarters results for long term earnings potential. This quarter MGO had a disruption in natural gas supply at Sichuan Migao, but that has been solved.

Since the last quarter there have been a couple of newsworthy events…

  • The company plans to build another 100,000 tonnes/year facility in Zunyi, Guizhou Province. This will be done in 2 parts over 2011 and 2012. This will focus on specialty compound fertilizers.
  • A joint venture with SQM to build a 40,000 tonnes/year potassium nitrate. Construction has started.
  • 40,000 tonnes/year potassium sulphate in Shanghai Migao to start production in March 2011.

If you consider the compound fertilizer as a core product then capacity will go from 420,000 tonnes/year to 580,000 tonnes/year by the end of 2012. An increase of almost 40%.

The biggest risk I think is pricing. As long as MGO can pass on increasing costs to their customers, then I can get comfortable with MGO as a core holding. I still think you could $13-15 in 2-3 years with a modest increase in prices and not really any valuation increase. $20 is possible with a valuation bump.

Dean

Disclosure: The author is long MGO.to at time of writing.

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