POT - Potash Corporation

[ourkid8]

Hi guys,

 

There is talks in which the Province of Saskatchewan will not support the bid of BHP buying POT.  That would mean the Federal Government "may" block the $38.6-billion deal because it thinks the provincial treasury runs the risk of losing billions in royalty revenue over the long term.  

 

My question is, If that happenes there is a high possibility POT could fall to a very fair price as a lot of arbs / hedge funds are holding out for a higher offer.  At what price would you consider buying POT?  Let's start this discussion as it is a possibility of buying a high quality company at a fair price...  I remember when the BCE deal fell through and the stock fell to around $22, in hindsight that was a steal of a deal!!! (I wish I bought in)

 

Thanks,

 

S

[nodnub]

Hi guys,

 

There is talks in which the Province of Saskatchewan will not support the bid of BHP buying POT.  That would mean the Federal Government "may" block the $38.6-billion deal because it thinks the provincial treasury runs the risk of losing billions in royalty revenue over the long term.  

 

My question is, If that happenes there is a high possibility POT could fall to a very fair price as a lot of arbs / hedge funds are holding out for a higher offer.  At what price would you consider buying POT?  Let's start this discussion as it is a possibility of buying a high quality company at a fair price...  I remember when the BCE deal fell through and the stock fell to around $22, in hindsight that was a steal of a deal!!! (I wish I bought in)

 

Thanks,

 

S

 

This is only clear in hindsight. The BCE deal fell apart in the midst of the credit crunch. There were much better buys in the market at that time.  I also think it's possible that Bell's subsequent performance was only due to the rising tide.

 

[ValueBuff]

nodnub,

 

 

I appreciate your view on the BCE issue re: the rising tide.  However, Bell had called back a lot of debt in order to prepare for the buyout.  The had very attractive debt ratio, especially in the Telecom space.  You basicall had a double plus dividends since that day.

 

It was smart money buying imo.

 

As for Potash, I think anything under 90$ is a massive buy.  this does garner more exploration though.  Needs to look a cash per share net of debt, and just see what the enterprise is P/S afterwards etc.

[Viking]

I noticed Pabrai still holds 10% of portfolio in POT (purchased in 2010 I think). Company is trading at 52 week low. Do posters like POT at current levels?

 

Here is a good overview of the opportunity: www.andrewjohns.ca/sites/default/files/POT_20120329%20POT%20Initiating%20Coverage%20Fertilizer%20Titan,%20Primed%20for%20Growth.pdf

Another article; see p30 for great producer summary (very concentrated): www.andrewjohns.ca/sites/default/files/u17/Industrial_20120329%20Initiating%20Coverage%20Fertilizer%20Titan,%20Primed%20for%20Growth.pdf

 

BMO Farm to Market Conference: most top AG companies present. Each has a 15 minute presentation followed by 30 minute Q&A. For potash: POT, Uralkali (Russian), K&S (German), Agrium: http://audability.com/AudabilityAdmin/Clients/BMO/101319_515201280000AM/lobby.aspx?Event_ID=1319

 

I like the bullish thesis on ag in general: as China industrializes demand for protein etc will increase. Higher demand and largely fixed (or moderately growing) supply = higher prices. Fertilizer companies like POT look to be in a great space as farm yields will need to increase moving forward. The industry also looks to operate like an oligopoly; if demand falls, supply is withdrawn which keeps prices at profitable levels.

 

POT has a low amount of debt and is able to re-purchase shares should things get ugly; they look to have a strong strong balance sheet. They also have invested significantly the past few years to build capacity that will be coming on line the next few years. Free cash flow will get better and perhaps much better.

 

The company is very promotional; this is a red flag for me. Go to their web site and you can find all sorts of reports outlining the bull argument for POT: www.potashcorp.com/investors/

[Uccmal]

Viking, I haven't taken a recent look.  My mind is permanently contaminated from reports of Potash's idiot managers buying shares right at the peak price in early 2008.  That and then the BHP Billiton debacle.  I would have a careful look at management and the validity before investing in this one. 

 

Also for a commodity company the dividend is real paltry.  Since sfk/fbk my required rule is a significant dividend from commodity companies, otherwise you will likely never see your money.

 

Also, do you really believe the thesis of ever growing Potash use.  I dont.  The world is too vast and there are too many substitutes.

 

 

[ExpectedValue]

Also, do you really believe the thesis of ever growing Potash use.  I dont.  The world is too vast and there are too many substitutes.

 

What substitutes are you referring to?

 

 

“Potash, for all intents and purposes is food,” Vincent Andrews, the agriculture analyst for Morgan Stanley, told DealBook. “Because without potash you are not making corn and soybean and without corn and soybean you are not making chicken or beef and that’s what people want to eat.”

http://dealbook.nytimes.com/2010/08/17/why-bhp-wants-potash/

[Shane]

Tariq got to it before me.  I'm a plant scientist by education, potassium is a major macronutrient and there are no substitutes.

 

Edit: whoops

[Viking]

Uccmal, yes, on this one management is a watchout for me. Having said that, the current group has been in charge for many years. And if you look at the decisions they have made over the last 10 years, on balance, they have built a pretty formiddable company. And they are ideally positioned should demand continue to grow.

 

This industry looks to have a much better control on final prices than OPEC does...???

[Uccmal]

To claify: Alternate KOH sources, not alternate KOH

 

As the price point rises other sources and historic sources will be located or re-activated. 

[rogermunibond]

Isn't potash potassium?  There are lots of phosphate sources, but potassium or potash, is much more limited.

[Uccmal]

Isn't potash potassium?  There are lots of phosphate sources, but potassium or potash, is much more limited.

 

Yeah, I fixed it.

[Viking]

I added ther following link to my initial e-mail above.

 

BMO Farm to Market Conference: most top AG companies present. Each has a 15 minute presentation followed by 30 minute Q&A. For potash: POT, Uralkali (Russian), K&S (German), Agrium: http://audability.com/AudabilityAdmin/Clients/BMO/101319_515201280000AM/lobby.aspx?Event_ID=1319

 

I liked the Agrium CEO's presentation/discussion the best... bright, well spoken guy (time to start looking into Agrium!)

[petec]

I haven't looked at Potash for a long time so can't comment on current valuation (which is the only thing that really matters).  But for what it is worth:

 

1) I'd worry about an industry that cartelises something as basic as food production (indirectly).  It's arguably immoral and it may be dangerous because it creates an incentive for governments to subsidise the building of production capacity for strategic rather than economic reasons. 

 

2) There are plenty of other sources of potash.  BHP has Jansen, and Amazon Potash have a massive resource bang in the middle of the Brazilian farm belt that has high operating costs but low transport costs.

 

3) One thing that might clobber fertiliser demand is finding a way to get more fertiliser to stay in the soil rather than get washed away.  E.g. check out a small company called Agrinos. 

 

4) More generally I think it is worth remembering that productivity rises with technology improvements.  Food demand has been rising for ever - China is nothing new in that sense (the scale may be, but I'd want to see a lot of sata to prove that).  But food prices haven't had a long run upward trend.  Are we at a tipping point?  Possibly, but possibly not - it's a bit like the peak oil argument for me!  My best guess is that commodity stocks are value traps on a long view but I say that with about 35% confidence!

 

P

[Uccmal]

Petec, You said what I meant so much better than I did.  Essentially, creative destruction is not limited to high tech, or newspapers. 

[Viking]

petec, I also do not understand how the cartel is allowed to operate given the importance of potash to global food production. However, it has been in place for many, many years and pretty much all capacity coming on line the next 5 years or so is with existing producers (brownfield expansions). And the brand new entrants are looking at such high cost structure to bring new mines into operation they are going to need very high prices in 5 to 7+ years to make the investment pay out so it is hard to see how this is going to result in lower prices.

 

Hard to see how prices come down in a meaningful way when 70% of the players work together, and another 20% of the players are happy to play along. The 10% of the players that are left are not in a position to influence anything. And I have read nothing that actually discusses the current situation changing in any way.

 

I am left scratching my head on this one.

[PlanMaestro]

Essentially, creative destruction is not limited to high tech, or newspapers.

 

As a side story in the the fertilizer industry, nitrates (N) also used to be mined (salitre) and not only that: it was a key raw material in the explosives industry. Chile had a monopoly after winning the "Guerra del Pacifico" against Peru and Bolivia becoming one of the richest countries in the world in the late 1800s. During the First World War the Germans mass produced synthetic nitrate, based on several innovations over decades, that over time destroyed the Chilean industry leaving only ghost towns and the Communist Party behind.

 

http://en.wikipedia.org/wiki/War_of_the_Pacific

http://en.wikipedia.org/wiki/Potassium_nitrate

http://en.wikipedia.org/wiki/Sodium_nitrate

 

 

[Shane]

 

3) One thing that might clobber fertiliser demand is finding a way to get more fertiliser to stay in the soil rather than get washed away.  E.g. check out a small company called Agrinos. 

 

P

 

Potassium is a Cation and is held by the negatively charged surfaces in the soil.  To add Cation Exchange Capacity to soil would require amending the soil - just not possible on a large scale and likely never will be.  So I would argue that K is already held in the soil fairly well as long as the soil is good ag land (I.E. the mollisols in the US Midwest).  Nitrogen & Phosphorous are a bit of a different story but I dont think this applies to K.

 

Nitrate is a anion and does not bind to soil surfaces, Ammonium does bind but when flooded will convert to NH3 and will be lost to the atmosphere (This is why N fertilizer are applies more regularly).  Phosphate is also an Anion.

[PlanMaestro]

Potassium is a Cation and is held by the negatively charged surfaces in the soil.

 

I learned something today. Interesting.

[petec]

Viking, you're right that the cartel has been in place for years.  However my understanding of the potash industry (please correct me if I am wrong) is that most current capacity was (over)built by the Canadian and Soviet governments several decades ago and so potash was been priced close to the cash cost of production for years.  Only more recently has demand grown to the point where the cartel can use (or abuse, depending on your viewpoint) its power, witholding supply to inflate prices.  That is risky:

 

a) it gives other governments an incentive to build supply regardless of cost.

 

b) it holds a pricing umbrella over other producers, giving them an incentive to build supply.  This is especially dangerous in capital intensive industries, because if too much supply is built the price can decline to the cash cost of production for prolonged periods, which is why commodities can trade below the marginal cost of new production for prolonged periods.  This is what lies behind BHP Billiton's strategy, which is to own the lowest cost assets in each commodity and run them full tilt throughout the cycle, which is in marked contrast to the strategy at Potash Corp.  (I'd love to know what the potash price would be now if BHP had succeeded in their bid.)

 

By the way I meant Verde Potash, not Amazon Potash.  Sorry.  I don't know much about it but it's an example of high cost capacity being built.

 

Shane.Smith, thanks: very interesting.  I got it the wrong way round: Agrinos's claim is actually that too much K stays in the soil, and does not get into the plant, and they say their technology helps address this.  More generally, as Uccmal says, I just think that with untold dollars focussed on crop research, I'm wary of assuming that supply can't match demand without rising prices (which is the basic thinking behind the "commodities will stay high forever" thesis).

[Viking]

petec, yes I believe there was massive overbuilding in the 60's and 70's in Canada (not sure about Russia). The industry certainly has come a long way since then!

 

When I look at the current players today all are VERY profitable with potash prices over $400 (where they are today).

 

The challenge for new entrants has been the cost and the time needed to build a greenfield mine; about 7 years and VERY costly (given the very tight labout markets in Saskatchewan).

 

Very interesting industry. POT.TO priced below CAN$40 looks attractice; if it falls to $35 range I likely establish a position. Agrium also looks interesting; I like their retail business (talk about a moat).

 

My goal is to get my wish list together of the best run/best positioned companies in the commodity sector (ag, mining etc). In the 2008 bear market I did purchase any as I had not followed the sector. Being Canadian, we have some world class commodity companies.

 

[Gilp]

Hey guys,

 

Given the recent news about breaking up the Russian cooperation, and recent stock prices drop of all players in the industry, any thoughts about the industry? Investing in the lowest-cost producer(Potash corp.?)?

What about Agrium, that fairly diversified given it's retail business?

[xxx1313]

Uralkali has even lower costs than Potash Corp. However, Potash is a very solid company in this industry. The German K+S is a high cost producer and so it is a very risky play.

[petec]

Personally I'd look to pay less than 10x sustainable free cash flow for a low cost producer assuming prices are set by the median producer on the cost curve when everyone is producing flat out.  That would seem to include a decent margin of safety.

[SharperDingaan]

We would be interested in hearing the boards thoughts on POT as a 1-2 year common share investment. Likely outcome(s), major risks, etc. We have our own view but would rather not disclose at this point - in order to avoid biasing the discussion.

 

Thumbnail sketch:

Available in CAD or USD. Common pays $1.40 USD/yr in dividends

Covert governmental support. Spiked a recent takeover. Funded a previous bailout. Too Big To Fail status in Sask.

Authorized $2B share buyback over the next 12 months

Large, higher cost, new deposit in development

Dominant member in a cartel partnership

 

Current developments;

http://business.financialpost.com/2013/07/30/uralkali-potash/

http://business.financialpost.com/2013/08/07/potash-corp-chief-plays-down-price-plunge/

http://business.financialpost.com/2013/07/25/potash-corp-profit-misses-and-outlook-weakens-as-prices-fall/

 

Don't be shy!

 

SD

[Packer16]

I have been thinking about this and was wondering if a more local firm such as MBC Fertilizer (located in Brzail) that is smaller may have more upside.  As to POT is shipping a big factor in pricing?  Will the break of the cartel have much of an effect on POT's more local markets in North and South America?  I like the LT agriculture thesis.

 

Packer