The story of 2010 in the potash industry no doubt belongs to the BHP-Potash (BHP) (POT) saga. The deal that captivated the world also highlighted the fact that the industry itself is already consolidated and offers investors large "pure plays" in the sector. The deal also brought attention to this very cozy industry where the companies are all partnered up in cartels and the few small independents really are not all that independent as their shares are owned by the big boys.
Cargill and Mosaic (MOS) announced that the 64% controlling stake held by Cargill will be distributed to its shareholders, thus putting Mosaic into play. Potash Corporation of Saskatchewan may be big enough to go it alone, and literally pushed potential suitors away, but Mosaic might be a better fit for a diversified miner due to its size and new ownership structure. The barbarians are still at the gate, and some of the world’s largest miners want into the potash business in a bad way, making this news the potential story of 2011.
Cargill has decided to spin-off the Mosaic shares in an attempt to keep restless shareholders at bay and allow themselves to remain private. This move probably paves the way for a Mosaic takeover bid, while at the same time enabling those Cargill shareholders to monetize this asset either now or at higher prices in the future. Ironically, this deal will most likely enable those same shareholders to demand an IPO of Cargill in the future as they look to monetize that asset as well and our long-term guess is that this move will ultimately result in both companies eventually changing hands.
BHP has made public the fact that it wanted to become one of the largest potash miners in the world. Potentially the company could have two huge mines coming online over the next decade (one is definitely going to be built, the other is in the final stages before plans are made). However they have indicated through their overtures to Potash Corp., along with various rumors over the years regarding others including Mosaic, that they would also be interested in making a purchase. Obviously the world’s largest and smartest miner believes that physical potash prices are going up, thus the desire to jump into the business right now rather than having to wait for mines to be built.
The real winners from this announcement are Mosaic’s minority shareholders. Currently the stock trades without a takeover premium factored in as they are controlled by a large corporation, providing protection from those wanting to mount a serious takeover bid. With all of the BHP-Mosaic rumors that have been constantly turning up over the years, it is quite possible that Cargill had to turn them away multiple times.
Mosaic has attractive assets within the fertilizer industry. They have dominant market positions in both the phosphate and potash crop nutrient segments and have a valuable seat within Canpotex, the powerful potash cartel. The company also has brownfield expansions planned for their potash mines, which should increase production by about 50% by 2020. The company also expects 1.3 million tonnes, currently part of a toll mining agreement, to revert back to them, providing an increase of about 10% to their current production. Currently the company has the second highest production capacity in the industry, following the merger between the Russian firms they will fall to third in regards to capacity.
Potash Corp. has declared its intentions of remaining single at this time, the Russians are off limits for obvious reasons, and this leaves Mosaic as the most attractive pure play in the industry.
We have covered the industry for years, paying particular attention to the juniors, but always keeping an eye on the ‘Big Three’ (Potash Corp., Mosaic and Agrium (AGU) as their capacity utilization and planned mine expansions dictated in which direction the industry was going. Over the past three years many of the juniors with reputable projects have been bought out at high valuations, leaving a few greenfield projects of merit available along with the much larger producers.
The entire industry is in a bull market right now as potash prices are rebounding strongly and the producers find themselves once again with a lot of bargaining power. Over the next 18 months prices should continue to rise as India and China will need to renegotiate their supply agreements from Canpotex at least two times by our count. Also we expect the producers to pay far less in shipping rates now that buyers are once again eager to get their hands on supplies, possibly reverting to pre-crash levels. Mosaic trades at a discount to its peers, but we expect that this gap should close over the next year as investors realize that the company is strategically situated within an industry that will become very important in the years ahead as the world pushes its limits on food production.
Over the next year we expect to see merger and acquisition activity in the industry of some merit. BHP Billiton, Vale S.A. and even the Russians could all be potential acquirers. Rio Tinto (RIO) is our dark horse, emerging only if someone else makes a move, but if they do emerge we would expect it to be done in tandem with their Chinese partners. All of the potential suitors have significant resources at their disposal, and moving forward the hurdles will not result from financial issues but rather political ones.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.