Agoracom

Dear Shareholder,

The following article discusses the recent developments of Legend International.

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AGORACOM

Legend Has It: Funds Dig Deeper In Fertilizer Trade

(This story originally appeared in Hedge Fund Trades, a weekly newsletter published by Dow Jones & Co.)

By Mara Lemos Stein

With fertilizer companies looking pricey, hedge funds hungering to play the agricultural commodities boom are getting into small and obscure trades in the sector to profit from the cycle they believe is just beginning.

A new affluent class in developing countries will keep demand for food growing in years to come, but the same grains used to feed the livestock that feed populations are being pulled into fuel production, so more crops need to be grown, say hedge fund managers and analysts.

More crops mean more fertilizer use, and fertilizer producers need basic ingredients such as phosphate, which explains the rationale for betting on Legend International Holdings Inc. (LGDI), a company with the rights to explore phosphate rock in northwestern Australia.

Atticus Capital certainly saw the appeal in the trade, which is paying off handsomely. Last December, the New York-based multibillion-dollar hedge fund firm bought 18.75 million shares of Legend through a private placement at 80 cents a share, or $15 million. Four months later, the value of that stake has grown threefold thanks to rising phosphate prices and the likelihood that Legend will get a supplier contract in the coming months, even if production is at least two years away.

Behind the price boost was Legend's release last week of a study detailing the scope of its deposits in the Georgina Basin in Queensland, Australia. The study, by British Sulphur, a consulting division of CRU Group, forecast annual gross earnings at $702 million, based on a best-case scenario with global phosphate rock prices at $200 per metric ton and annual production of 5 million tons. Phosphate rock concentrate exported by Morocco, the world's second-largest producer after the U.S., traded at $350/ton to $400/ton in March, according to the study, so earnings could potentially be much higher if prices remain around that level.

Even if Legend's earnings are only theoretical right now, the bet is for the long run, and investors believe recent commodity price gains are going to continue a while.

"This is a bet on phosphate prices, based on the supply and demand imbalance," said Bill Matlack, an investment banker with Scarsdale Equities LLC, who personally owns shares in Legend. "I'm comfortable with [Legend's] story, and the numbers announced in the scoping study are compelling." Scarsdale has provided investment banking advice to Legend and may do so in the future. Other members of the firm are also holders of Legend's shares.

Atticus, a key early-stage investor, seems to share the faith in the venture and is strengthening its position in the trade.

The firm, run by Tim Barakett and a regular investor in the mining sector, increased its position in Legend during the first quarter to nearly 13% of the outstanding shares and, as of March 31, had 28.8 million shares of the phosphate rock prospector in its portfolio, according to regulatory filings. On Thursday, that stake was worth $70.5 million, compared with $55 million a week earlier.

Legend trades on the over-the-counter and highly illiquid Bulletin Board market, and thus it's below the radar screen of the vast majority of investors. Atticus got into the name after its analyst Duncan Maclean saw a presentation by the company and recommended it to the portfolio manager, according to Legend's executives. Atticus didn't respond to several requests for comment.

Legend's market capitalization jumped 85% this year to over $410 million last week after the scoping study was released. The company aims to list on the American Stock Exchange as soon as the stock meets the criteria of trading above $2 for a month. It crossed that threshold for the first time on Wednesday. The company does not have any revenue.

The next hurdle for Legend is getting an agreement to supply a major manufacturer, known in the industry as an offtake agreement. Such a deal would enable the company to finance the development of a beneficiation plant to boost the quality of the rock, the construction of a 300 kilometer slurry pipeline to carry the product to the port of Karumba, as well as of a drying facility and berthing area at the port. The cost of these capital expenditures is pegged at over $800 million by the study, which can be covered in about one year of production if phosphate rock prices trade at about half their current level.

"The main thing is the offtake agreement, and that will bring us financing," said Joseph Gutnick, Legend's chief executive officer, whose family controls 47% of the company.

Given the current tightness of supply, Gutnick said in an interview with Hedge Fund Trades, he expects a contract should be reached in coming months.

"We don't think it will take too long to consummate deals because of the need that exists for the rock," said Gutnick. "There are plants, for instance, in India that are only running at 30% capacity." These plants produce the widely used fertilizer mixes monoammonium phosphate and diammonium phosphate, known as MAP and DAP, said Gutnick.

Legend expects to ship its phosphate rock to Asia, primarily to India, China and Indonesia, he said.

Like any bet in commodities, price is the main factor in the Legend trade, as a drop in phosphate rock price could make the project unviable. In fact, a rise in phosphate rock's price is Legend's raison d'etre. The Queensland deposits were first identified in the 1970s, when a feasibility study put them at 1.46 billion tons, but low market prices at the time didn't make for a profitable venture so exploration and production never happened.

Last year, Gutnick, who is known in Australia as "Diamond Joe" because of his history in prospecting for the gem, was again looking for diamonds and stumbled into another kind of rock - phosphate rock. After research signaled that phosphate was in high demand, Gutnick applied for the rights to develop the site, which he got in October, just in time to capture the sharp price jump in phosphate rock. One of three primary soil nutrients besides nitrogen and potassium, phosphate rock jumped to its current high of around $350 from $50 at the start of 2006 thanks to the supply/demand imbalance.

"It was not even lucky; it was serendipitous," said Gutnick.

High grain prices are an incentive for farmers to use more fertilizers, and analysts predict phosphate rock will never trade at its low again. In a quarterly newsletter released last November, analysts at Mosaic Co. said that the phosphate price cycle has shifted higher because of structural changes to the market, which will push consumption of the nutrient higher at an annual growth rate of nearly 4% in the next five years. Plymouth, Minn.-based Mosaic (MOS) is one of the largest fertilizer producers in the world.