The recent announcement by Uralkali (URALL.PK) to leave the Belarusian Potash Company ("BPC") marketing organization following a dispute with its partner, Belaruskali, not only stunned the potash market but also left both investors and analysts raising questions and speculating about the future strategy of Canpotex, the remaining potash trading consortium after the breakup of the BPC.
Agrium (AGU), which jointly owns Canpotex with Potash Corporation of Saskatchewan (POT) and The Mosaic Company (MOS), said that although it will take some time to fully understand the potential short- and-long-term impact among producers and customers, the company doesn't see any change at Canpotex. Agrium's CEO, Michael M. Wilson, praised the potash exporter for its cost structure and its relationship with customers and said that he doesn't see any change at Canpotex.
Wilson said, "As far as Canpotex goes, it's just a great marketing distribution company. It's got long-standing relationships with customers. It's got an excellent cost to serve. I don't see anything changing with Canpotex. And from a strategy point of view, we'll obviously look at price volume and try to maximize the best shareholder value, so I don't see any major change. It's still uncertain as to what actually is happening out there, and the market does tend to overreact a little, so we're sitting and watching. But given Canpotex's strength with customers and cost position, I don't see any change".
Agrium also plans to complete the expansion of its Vanscoy project in Saskatchewan, despite the increased fears of a steep decline in prices following the breakup of BPC. The company has stress tested the potash expansion project under many different assumptions and continues to believe it to be a robust project, even in light of the recent news out of Russia.
AGU's expansion project is 40% through construction already and is on schedule for a 2H14 startup. The company plans to boost potash capacity by 60% to 3.2 million tons at Vanscoy by the end of 2014. The company has stress tested the economics of the project quite aggressively. The project is viable to AGU even if the potash prices drop steeply, say $300 a ton in China. Moreover, there are other operational benefits to AGU from this project as well. An already a very low cost plant globally will further lower company's cash costs by $20-$25 a ton. AGU is trying to move down the potash cost curve and these reductions in costs would be important if industry competitive pressures intensify.
On the other hand, AGU has suspended its Greenfield nitrogen project in June citing high construction costs. Nitrogen accounts for a significant portion of AGU's earnings. Global nitrogen prices have been under pressure in 1H13 due to increase global exports, particularly from China, where weak domestic consumption, lower coal prices, and reduced export tariffs have driven a collapse in floor Chinese production costs to below $300 per metric ton and have resulted in urea oversupply in China.
However, the company indicated that global urea prices are at or close to the floor price as current prices have resulted in lower operating rates, in parts of Europe, while also lowering Chinese urea volumes moving to the port for export. Furthermore, demand from India and South America has continued to remain strong.
Buybacks and Dividend
Agrium also continues to return cash to shareholders. The company began repurchasing shares under its current authorization to buy back 5% of outstanding shares announced last quarter. As of end of July 2013, the company had purchased ~2 million shares at an average price of $88 per share for a total of $179 million.
The company approved a dividend of $0.50 U.S. per common share to be paid on October 17, 2013 to shareholders of record on September 30, 2013. Agrium has a dividend yield of 2.3%. AGU has increased its dividend significantly over the past 1.5 year and is committed to increase it further. Over the past year the company has returned close to $2 billion in capital distribution to shareholders.
Agrium shares are trading in-line to a slight discount to its peers. The company has a P/B ratio of 1.7, compared to 2.6 of POT. AGU has a current P/E ratio of 6.5, compared to 8.2 of POT and 5.3 of MOS. Agrium has a P/S ratio of 0.8, lower than both POT and MOS. AGU has a PEG ratio 0.3, compared to 0.8 of POT and 1.9 of MOS.
Source: Yahoo Finance & Morningstar
Investment Thesis and Conclusion
We have a buy rating on AGU. We believe Agrium was unfairly beaten down by the recent events in the Potash industry. Although the company has a reasonable potash exposure, it also has a very strong retail business which provides protection to the company in periods of weakness. AGU's portfolio balance between wholesale and retail gives investors relative appeal vs. peers given current market volatility.
Among the major fertilizer producers, AGU has a large retail operation and is the largest independent agricultural retailer in North America. The company has expanded its large retail presence to Australia and Europe. Agrium's retail presence provides stability and growth to its cash flows during periods of weaker fertilizer margins. Company's retail segment also provides a lever for increasing profitability and steady growth via acquisition.
Although the weaker potash and nitrogen markets could be headwinds for the company in the near-term, AGU continues to benefit from the long-term favorable trends in agriculture. The company is also in a favorable position on the global potash cost curve, enabling the company to combat falling price by raising operating rates and focusing on the North American market (higher netback prices).