- The prospects of a softer Q2 that may extend into a seasonally weak Q3 will likely overhang the stock in the coming months.
- As we enter Q4, most of the issues and turnarounds should be behind the company.
- The Retail division continues to provide an important degree of diversification to Agrium.
- The Viterra acquisition should boost 2Q/3Q results within Retail.
Agrium Inc. (NYSE:AGU) is one of the world's foremost agribusiness enterprises, positioned as a vertically-integrated manufacturer, marketer, and retailer of crop nutrients and farm-related inputs with global operations spanning Australia, Europe, the Americas, and North Africa. Agrium's operations are divided into three distinct business segments, including: 1) Retail; 2) Wholesale; and, 3) Advanced Technologies (NYSE:AAT). In its Retail segment, the company is the world's largest agricultural products retailer, boasting a global network of ~1,500 farm outlets. Within its Wholesale division, Agrium is the world's third-largest producer of nitrogen and a leading producer of potash and phosphate. Finally, its Advanced Technology segment, while still small on a relative basis, is an increasingly important vertical presence in the specialty fertilizer space. Agrium's retail presence can provide stability and growth to its cash flows during periods of weaker fertilizer margins. Its near-term strategy is to build its retail operation by acquisition and to expand its potash production.
Agrium's Phosphate Facilities
Agrium owns and operates two phosphate production facilities, and the location of its production facilities on the western side of North America offers a competitive advantage over producers in southeastern U.S. in the form of lower production and transportation costs when selling to the western North American region. Agrium's phosphate facilities mainly serve customers in North America and it is able to realize higher prices than its peers that also sell into the international market.
- Redwater - Agrium's facility in Redwater, Alberta has an annual production capacity for 660,000 tonnes of monoammonium phosphate (MAP). In 1999, Agrium began mining its phosphate rock mine in Kapuskasing, Ontario in order to supply its Redwater phosphate facility. The mine in Kapuskasing was depleted in mid-2013 and has been shut down. The Redwater facility now uses phosphate rock that is purchased from OCP through contract pricing linked to the price of phosphate fertilizers. The Redwater facility had previously operated from phosphate rock source from Africa and is expected to remain competitive due to a nearby source of low-cost sulphur and integrated ammonia.
- Conda - The Conda, Idaho phosphate facility has an annual production capacity for 300,000 tonnes of MAP. The Conda facility is supplied by phosphate rock mined at Agrium's Dry Valley, Idaho mine, which has an annual capacity of 2.0 million tonnes of phosphate rock at an average grade of 31% P2O5. The Conda facility is supplied with ammonia from Agrium's nitrogen facilities in Alberta.
Agrium's Vanscoy Potash Mine
Although Agrium's Vanscoy mine is the company's sole potash project, it is a large, worldscale facility with current annual nameplate capacity of 2 million tonnes. The mine is currently undergoing an expansion project, which is scheduled to be completed in the second half of 2014 and to ramp through 2015. The $1.8 billion project is expected to increase capacity by 1 million tonnes to 3 million tonnes and reduce per tonne costs by $20-$25 per tonne.
The mine is a conventional underground potash mine located in Saskatchewan. Production at Vanscoy mine began in 1969 and more than 45 million tonnes of potash have been produced. Agrium owns 7,200 hectares of surface rights required for the current operation of Vanscoy, including the processing plant and tailings area.
Agrium Nitrogen Operations Summary
Viterra Retail Acquisition
As a reminder, Agrium closed its ~$370 million (CDN) ($340 million) transaction of Viterra in October 2013, acquiring 210 retail locations in Canada, which more than tripled the company's Canadian footprint to 304 stores. The acquired Viterra assets in Canada are extremely complementary to Agrium's Canadian-centric wholesale operations. This enhanced footprint will provide Agrium with improved distribution and downstream market intelligence, which can translate into higher utilization rates and volumes on the wholesale side.
The Bumps Along The Road
Agrium's wholesale operations have been hit by several challenges these last several months, with the most recent the boiler failure at the Carseland facility that weighed on 1Q results. However, there is still optimism that the company will get through the recent production issues and see a strong lift from its Retail division over the full year.
The Consensus EPS estimate for Agrium in 2Q:14, previous to the release of 1Q:14 EPS, was $4.95/sh versus $4.94 in the year-ago period, or a flat to up result. Why the decrease? The Retail business is well-positioned for growth: the wholesale fertilizer business is in some disarray due to operational issues and lower product prices. Agrium is likely to absorb ($0.35) in costs in 2Q:14 from an outage at the Carseland nitrogen facility. There are an additional ($0.20/sh) in outage costs for 2Q:14 at the Joffre plant due to downtime at Nova Chemicals, and at the Redwater nitrogen facilities. The effects of these issues are compounded by a 24 day plant maintenance outage at Agrium's Conda phosphate facility. The company attempted to use lower quality OCP phosphate rock to reduce its costs, which has led to operating issues: as a result, phosphate volumes are likely to be 10-15% lower y/y in the second quarter during a period of high phosphate prices. The Canadian outages limit the earnings contributions from lower tax jurisdictions. As a result, the consolidated tax rate is likely to rise about two percentage points for both the quarter and the year.
Coming away from the quarter's earnings report, it is clear how many initiatives the company has in motion: Carseland and Redwater are under repair, Borger is expanding, and Vanscoy is nearing its expansion tie-in period, while in Retail, Viterra is being absorbed as operations in South American and Australia are streamlining - all as management has reorganized the AAT unit, selling the small turf and ornamental pieces to Koch for $85M. The payoff for many of the current stresses should come in 2015, as the capacity expansions and realization of Retail's financial/operating goals.
In the meantime, Agrium's management sketched out a rest-of-year view similar to those given by the other fert. Near-term, weather speculation and urea traders' reads on Chinese exports will likely drive the stock, but over the cycle, AGU shares are attractive given the potential for stable growth in earnings out of the Retail/Wholesale combination.
While there is disappointment over the ongoing issues within the Wholesale segment, the 2015's prospects appear bright, particularly in Retail. A continued rationalization of Retail's footprint across North America is expected, and should further increase the working capital improvements and operating performance throughout the balance of the year. Additionally, the Viterra acquisition should boost 2Q/3Q results within Retail. Currently, the expectations for material improvements in Retail remain fairly low, which over the intermediate to long term should remain a key driver of the stock price, particularly when Wholesale's operational issues are in the rear-view.
The weak 2Q/14 earnings guidance was a surprise, but the near-term challenges (nitrogen and potash downtime, lower nutrient price realizations) will likely persist through 2014. However, 2015 will bring significantly improved earnings and FCF as nitrogen and potash operations improve, and the Retail segment continues to grow through organic and inorganic avenues. The Wholesale segment will likely be impacted by: 1) nitrogen operational issues and related downtime, 2) Vanscoy expansion-related downtime, and 3) lower nutrient prices. While the Retail segment is expected to perform well, the Viterra integration will take some time and lower corn acreage presents some headwinds.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.