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Agrium (AGU) of Canada is the largest agricultural retailer in the US and a leading global supplier of agricultural nutrients (fertilizers), industrial products and specialty products. The company owns its own potash mines and has some 50 years worth of reserves in these (see Agrium's investment presentation).

As global demand for food (as feed and fuel) is growing as a consequence of the industrialization and growing consumer spending in the developing countries, the underlying demand for agricultural products like fertilizers and seeds remains solid.

Shortages in raw material for agrichemicals (potash) and agrichemicals production facilities and mines (nitrogen, phosphates) were driving prices higher in 2008. As the credit crunch started to bite in the last quarter of 2008, demand had been put on hold, also on anticipation of lower prices. Prices are still in a secular uptrend, though, parallel to the price trends in agricultural commodities.

Agrium showed very strong earnings again for Q3 2011 with an EPS of USD 1.85 achieved (fivefold the EPS level of 39 cents for Q3 2010) and guidance for Q4 now at USD 1.80- 2.30. Consensus is now USD 2.08. High fertilizer prices and good revenues from its farm retail business were the drivers of these excellent Q3 results.

In December last year Agrium announced a brownfield capacity expansion at its Vanscoy potash facility in Saskatchewan, Canada. The expansion is expected to increase annual production capacity by approximately 50 percent, bringing total annual nameplate capacity to three million tonnes. Capital expenditure for the project is expected to be approximately $1,500 per tonne. The majority of the project construction is expected to take place in 2012 and 2013, with completion projected by the second half of 2014.

Agrium has been punished by the stock market as if it was a highly volatile commodity stock. While commodities' prices are very dependent on shorter-term developments like weather conditions, production short falls, political tensions, etc., the longer-term trend is based on the growth of global demand for these mostly non-renewable resources. With the ongoing industrialization of large economies in Asia and South America, demand keeps on rising, and a good base for demand is therefore built.

But in times of panic or fears of major recessions this trend is often ignored, and short-term actions dominate the share prices of companies related to the commodities industries.

One such sub sector is the agricultural suppliers of fertilizers, an essential industry to help make crops bigger and food supplies sufficient.

Agrium is one of the most pure suppliers of agrochemicals, and due to fact that the company is both a producer and a wholesale distributor the nature of Agrium's business is less volatile than that of the pure producers like Mosaic (MOS), Potash Corp (POT) and Yara (OTC:YRAIF).

Conclusion

Within the fertilizer business, Agrium has very attractive and inexpensive assets that are of great interest to corporate or state investors, especially from the Middle East, China and Russia.

Currently, some destocking is possible as clients wait for the chaos in the European region to settle. The demand for spring needs for the farmer should be strong again, though, and can be helped by the pause happening now.

Meanwhile, profitability remains very high for Agrium, although volatility is the name of the game here with weather conditions also still a large factor for short-term earnings. Longer term, Agrium is very well positioned to continue to benefit from demand from export markets. My advice: Buy on weakness.

Next Dividend Payment n.a. Earnings Announcement Date

(previous year)

08-02-2012
Exp. Dividend (curr. year) 0.28 USD Earnings Announcement Date

(current year)

06-02-2013
Dividend Yield (%) 0.40% EPS (curr. year) 9.53 USD
Price/Book Ratio (curr. year) 1.38 EPS (next year) 9.36 USD
ROE (prev. year) 22.88% P/E (curr. year) 7.34 USD
YoY EPS Growth (curr. year) 0.62% P/E (next year) 7.48 USD

Source: Agrium Is A Great Buy On Weakness