Private fertilizer entities have operated in Saskatchewan, Canada since the 1950s. However, provincial authorities were not pleased with the benefits and ownership reaped and controlled, respectively, by local citizens. Accordingly, in 1975, the government established Potash Corporation of Saskatchewan (POT), functioning as a commercial provincial crown corporation. With the acquisition of two mines (Duval and Sylvite) in 1977, total production increased to 540,000 tons. Powered by Canpotex, a marketing and logistics company that sells and delivers fertilizer produced by Saskatchewan-based companies (along with Mosaic (MOS) and Agrium (AGU)) to international markets, and expansion (mine acquisitions and establishment of a distribution network in the United States), sales bloomed from $22 million in 1977 to $312 million in 1980.
In 1989, the Province of Saskatchewan privatized Potash, which subsequently went public, simultaneously holding IPOs on the Toronto and New York stock exchanges. In the two decades since, the company has expanded via acquisitions and/or investments in unconsolidated ventures, becoming the world’s largest fertilizer company by capacity. It currently produces three primary crop nutrients: potash, phosphate, and nitrogen, with total operational capacity approximating 12 million tons.
Potash is produced in only 12 countries around the world, with Canada accounting for almost half of known reserves. Most of its consumption growth is occurring in offshore markets where the nutrient has historically been under-applied. With these markets possessing virtually no production capacity, producers like Potash are positioned to continue benefiting. Phosphate is heavily concentrated, with almost three quarters of production located in China, North Africa, and the United States, while India and China play vital roles in establishing market prices. The former relies on imports to meet its rising requirements, compensating for minuscule domestic supplies. After exporting record levels of phosphate recently, China is curtailing exports in order to ensure adequate domestic supplies, boosting prospects for producers elsewhere. Nitrogen’s profitability is primarily determined by natural gas, which accounts for up to 70%-85% of cash cost. North American production is in a favorable position, as shale drilling has resulted in abundant gas supplies. Due to the short time required to build new capacity, relative to potash and phosphate, nitrogen markets show substantial volatility.
While fertilizer purchases are essential to producing crops, their timing can vary, leading to short-term fluctuations in global demand. Indeed, the company was caught in a rough patch during the early months of 2012, as farmers were slow to buy nutrients. Too, drought conditions in the U.S., as well as in parts of South America, hurt application rates and yields, leading to delays in orders. In response, Potash has curtailed production levels at various locations.
But commodity markets are responding to pressure on global supplies of crops, driving up prices in an effort to encourage planting. Farm production shortfalls (especially corn and soybean) during the current year should support an extended period of crop prices at levels that encourage high-yield agriculture. Starting in 2013, we look for demand for Potash’s products to take a turn for the better.
Strong financial results and healthy cash flow levels enable Potash to pursue long-term initiatives. Since 2003, this Canadian entity has ramped-up production at Rocanville, Allan, Lanigan, Cory, and Patience Lake mines. In fact, it is in the latter stages of an industry-leading potash expansion program, which will require approximately $2.0 billion in capital during 2012. Once these efforts are complete by 2015, total operational capacity is on schedule to reach 17.1 million tons. With these projects coming to an end, capital spending requirements are apt to decline in the quarters ahead. This led Potash to recently boost the quarterly dividend payout 50%, to $0.21 a share. Based on the stock’s current quotation, this represents nearly a 2.0% yield, far greater than those of its peers.
For more information in regard to Potash’s business prospects, and the particular investment merits of the stock, subscribers are encouraged to check out our full-page report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.