Vale May Bid for Mosaic: Let the Great Potash War Begin

Bloomberg reports that a Brazilian newspaper has hinted at a pending $25b bid by mining giant Vale S.A. (VALE) for The Mosaic Company (MOS), the world’s largest phosphate producer and #2 potash producer. This follows up on earlier reports that Australian miner BHP Billiton (BHP) was interested in snapping up North American potash assets. Mosaic shares were up 12% yesterday on the rumor/news, with the market cap now topping $22 billion.

You heard it here first, or if not first then I’ll settle for most bluntly - this news is just the opening salvo in an all-out agriculture bidding war that has likely just begun.

To the mega-miners, the attraction is obvious; getting into agricultural commodities is a great diversification play away from metals and ores; meanwhile potash, phosphate, and nitrogen-based nutrient/fertilizer pricing has held up infinitely better during the past 18 months than for any of the hard commodities (ex-gold).

North America = Good; China = ?

It also represents a strategy shift away from seeking alliances with Chinese firms that are increasingly resorting to…oh, I don’t know what term to use except “ungentlemanly” tactics, as evidenced by the recent detaining of 4 Rio Tinto employees by the Chinese government following a rebuff of Chinalco’s (Aluminum Corp. of China) offer to take a $19.5b stake in Rio. Oh wait, sorry - China claims the two events have nothing in common. I leave you to your own peanut gallery responses…

So the Australian and South American miners are looking westward & upward, and when they do they see agriculture firms throwing off massive amounts of cash flow, and have great secular trends at their back (for a clearer picture of this, check out my earlier commentary:

Potash Corp Slashes Q2 Estimates, But Group Holding Up Well (June 26);

Potash production cut 20%; Will Pricing Be Preserved? (Dec. ‘08);

Potash Pricing Quietly Holding Up Well, So Why Has Commentary Vanished? (November ‘08);

All Signs Point to a Bidding War

Mosaic, Potash Corp. of Saskatchewan (POT) and Agrium (AGU) - the three largest North American producers - all trade for less than 10x operating cash flow, and balance sheets are strong across the board. More importantly, there is an extremely limited global supply of the key nutrients, which help to increase crop yields in a world that has more people by the second - all of which want to, need to, will do anything to….EAT. Preferably proteins, which means more grains for feedstocks, which means the world’s arable land is quickly becoming just as valuable a resource as oil, water, and gold.

Small Premium Bids Need Not Apply

These next comments refer most specifically to Potash Corp. (the largest holding in the Secular Trends Model Portfolio), but they also apply to the smaller producers. These companies have been waiting decades for global appreciation of their products to reach the peak levels seen the past few years. They’ve suffered through long periods of capital-intensive investments and low margins in mines that take 5-7 years to develop…they will not sell out quietly. 10% or 20% premiums simply aren’t going to cut it, especially when all 3 major producers have seen their stock prices halved or more in past year. With Vale and BHP already in the mix, the next logical step is for a smaller miner to come in and bid for, say, Agrium (the smallest market cap of the three at $6.3 billion).

Mosaic is a natural target because it is majority-owned by Cargill, the world’s largest private company but a private one nonetheless. While its financials are harder to parse through, Cargill might be happy to get access to a capital windfall, as it doesn’t have the same freedom to access the public markets the way its “tickered” peers do. Also, Cargill is very focused on the agriculture sector as a whole, so it might be the most receptive to diversifying its business segments.

This Industry is Overdue for a Shakeup - and a Little Maturation

Potash Corp, on the other hand, may be the most stubborn. And I say that lovingly. It is in no need for cash, has tons of capacity sitting in wait, and is very keen to maximize its long-term value proposition. But I’d be happy to see a share multiple bump across the board, and also to see some impetus to break up the old-school exporting/marketing group Canpotex, which represents the needs of all three major firms. Potash Corp. may be receptive to a minority stakeholder, but only at substantial premium to current prices, which would still give investors some of their briefly held gains back from 2007-2008 runup.

Let the bidding begin…

Disclosure: author holds no personal stakes in the companies mentioned; Potash Corp (POT) is held in the Secular Trends Model.

Comments

[johnz:]

Looks like MOS is going to 70 by the end of the year

Jul 17 02:28 PM

[AndrewBaker:]

In a very bad marketplace, it's hard to find businesses that will not only carry on but thrive and prosper too, and Potash Corp. of Sask. (POT) is one of those that will.

It is the biggest producer of one of the most important chemicals for growing and increasing crops and yields, and its product cannot be replaced by any substitute.

Now attention is being given to this area, watch this stock take off and get to a price which truly values its worth.

Disclosure: I'm long POT, and staying long.

Jul 17 02:40 PM

[Laughing:]

Nice pic of delicate arch!

Jul 17 02:49 PM

[taojaxx:]

In case you don't know, Vale denied they were interested in buying MOS.
Similarly, AGU just cut the listed potash price from $770 to $512 per short ton, and POT announced that North American potash inventories were uo 152000 tons in June, bringing them 115% hgher than the average level of the last 5 years.
As to the world needing proteins, this is the pump argument overused last year to justify ridiculous valuations for fert stocks which were subsequently cut in half, in 3 or in 4 from peak to trough.
Reminds me of the "they don't build real estate anymore" we've been satiated with during the bubble heydays.

Jul 18 09:36 AM

[Ryan Barnes:]

To Taojaxx: Yes, I read all the same reports that you have in the past 24 hours. Yes, Vale denied interest in MOS, just like every acquirer in the past 20 years has done when faced with a potential leak.

And yes, inventories are up at Potash Corp, and Agrium has announced price cuts in the range of 20%; this is why share prices have been cut in half as I mentioned. As to the broader thesis of global demand for protein being higher...if you think that's comparable to real estate, that's your right...I just don't see any comparison.

The increased demand for real estate was based on the increased access to cheap credit, making ever larger patches of the demograpic quilt feel that owning a home was their "right". That part of the fundamental equation has changed. The increased demand for proteins in a growing population has not changed to date, and I don't see anything stopping it.

Best of luck to all in your investing efforts.

Jul 18 02:19 PM

[taojaxx:]

Ryan,

Thanks for responding. My point is this argument about population growth is so general, I view it as useless for our purpose: it assumes similar oligopolistic supply structure and no extra discoveries whereas as we speak current pricing triggers development and Brazil for example announced one such discovery.
As to the link with the real estate bubble, POT from $45 to $226 back to $50 (so multiplied by 5 and subsequently divided by 5.5) seems to me to fit the definition of a bubble.
As you said, best of luck in your investment. After 30 years in this investing business, I have found that the major success factor was precisely that: luck. It oftentimes comes alongside hard work ("the harder I work, the luckier I get"), but not always.


On Jul 18 02:19 PM Ryan Barnes wrote:

> To Taojaxx: Yes, I read all the same reports that you have in the
> past 24 hours. Yes, Vale denied interest in MOS, just like every
> acquirer in the past 20 years has done when faced with a potential
> leak.
>
> And yes, inventories are up at Potash Corp, and Agrium has announced
> price cuts in the range of 20%; this is why share prices have been
> cut in half as I mentioned. As to the broader thesis of global demand
> for protein being higher...if you think that's comparable to real
> estate, that's your right...I just don't see any comparison.
>
> The increased demand for real estate was based on the increased access
> to cheap credit, making ever larger patches of the demograpic quilt
> feel that owning a home was their "right". That part of the fundamental
> equation has changed. The increased demand for proteins in a growing
> population has not changed to date, and I don't see anything stopping
> it.
>
> Best of luck to all in your investing efforts.

Jul 18 06:09 PM