Key Factors You Need To Know About Nutrien
Summary
- It is all about potash prices where Nutrien is a low cost producer but there is also plenty of potash supply capacity out there.
- Thanks to the merger with Agrium in 2018, it is likely that Nutrien will remain cash flow positive in any potash price environment.
- From an investing perspective, Nutrien is a good buy, but not yet a great buy. It also depends on your appetite for dividends. I created 3 possible investing scenarios.
Nutrien (NTR) is a company created in 2018 after the merger of Potash Corporation and Agrium. Potash Corporation was always regarded as a really good business due to its low-cost production and Agrium as a good retailer thanks to its scale and leading retail position across North America. This made the business always too expensive for me from an investing perspective. However, at the moment, the business is trading at decade lows and therefore it deserves another good look.
I'll focus on the most important things when it comes to investing in Nutrien: potash, cash flows and the stock price in relation to possible future cash flows. I have created 3 scenarios that give a good risk and reward perspective for investing in Nutrien.
Potash
Potash is a cyclical commodity. When prices are high, lots of new investments usually lead to oversupply for a certain time and vice versa, when prices are low, there is limited investment that often leads on supply gaps.
5 years potash price - Source: Mosaic
We are currently in an oversupplied market with plenty of potential supply within the market. Just Nutrien can increase production by 6 Mtpa from existing mines without high costs. Until demand grows enough to cover for the current oversupply, potash prices can remain depressed.
Potash supply and demand forecast - Source: Mosaic
Given the net new capacity potentially coming into the market shown in the chart above, it is likely potash prices will remain subdued for years to come and that is also why investment banks downgraded Nutrien on 'lower for longer' potash prices.
Source: SA
So, it is unlikely that we will see a boom in potash prices and a subsequent boom in Nutrien's stock price in the coming years like it was the case in 2008 or in 2011 when potash prices reached $800 per ton.
But, investing is not about catching an uptrend in a commodity. Investing, and especially value investing, is finding investments where the risk of things getting worse is low, which leaves the upside to unknown possible positives and long-term structural trends. With Nutrien, it is unlikely things will get worse because the company is a low-cost producer of potash, it has a good retail business and it is likely demand for food will grow in the future.
Source: Nutrien 2019 Capital Markets Day
You might think that with cash production costs at $50, potash prices at $250 are still very high and there is much more room to fall. Well, cash costs are only one part of the equation.
If we look at one of the largest possible potash projects coming into the market, BHP's (BHP) Jansen project, the total cost to build the mine is expected to be around $5.7 billion to produce 4 million tons per year. If you wish to just get your investment back in 10 years, then you need a price of potash of $142.5 per ton over 10 years just to cover for the initial investment ($5.7 billion divided by 40Mtpa (10 years of production) = $142.5/t). Add approximate cash mining costs of $60, taxes and other costs, and you quickly get a minimum of $200 per ton just to break-even on mining potash.
This is important because it is unlikely for potash prices to fall below $200 - $250 per ton and stay there for longer which allows us to calculate Nutrien's cash flows with a margin of safety.
Nutrien's cash flows
Over the last two years, with potash prices between $250 and $350, Nutrien achieved free cash flows of $2 billion per year and, given the last guidance, it is likely they will do the same in 2020.
Nutrien's guidance for 2020 - Source: Nutrien
2020 guidance is for $3.8 billion in EBITDA. If we deduct $0.6 billion for interest payments, $0.2 billion for tax alongside $1.8 billion of depreciation, earnings should be at $1.1 billion. Thus, we come to around $2 in EPS.
On cash flows, if I add the $1.8 billion in depreciation back and deduct the $1 billion in CAPEX, I get to almost $2 billion in cash flows. That is $3.5 in cash flow per share. If they pay out 50% of that, it is enough to sustain the dividend of $1.8 per share that currently gives a yield of 4.71%. They will likely do more buybacks and invest part of the free cash flow into growth and investors should expect additional future returns.
All in all, $2 billion of free cash flows per year on a market capitalization of $21 billion leads to high single digit investment returns. An attractive proposition in the current environment.
Given the retail business that should make money no matter fertilizer prices, the $650 million yearly synergies thanks to the merger and the extremely low cost production that leads to high margins, it is unlikely for the dividend to be cut and it is unlikely that Nutrien's cash flows ever fall into negative territory. Therefore, Nutrien looks like a low risk long-term investment at the moment. But, let's put things into a market perspective too.
Nutrien's stock price and investment perspective
I have created 3 investing scenarios for Nutrien depending on their short to medium cash flows which is usually what the market focuses on.
In the negative scenario, one where let's say BHP decides to go onward with their Jansen project and put it into production by 2025, it is likely potash prices will remain closer to $200 rather than $300. In that case, and alongside some other business weaknesses, we could see Nutrien's cash flows fall to $1 billion that would be just enough to sustain the dividend.
X-axis year, y-axis FCF
If that happens, given the current valuation, we could assume the market would apply a 10 to 12 free cash flow ratio to the stock and we could see Nutrien at a market cap of $12 billion. This is also the biggest risk when it comes to investing in Nutrien and one you should keep in mind before investing. I am not saying it will happen, just that it can happen.
In the most likely scenario, cash flows might be subdued for a year or two, but thanks to global population growth and growing demand for food alongside Nutrien's operational growth activities, cash flows should steadily rise and reach $3 billion in the future.
In the above scenario, I would not be surprised to see Nutrien's market cap above $30 billion in a few years. This, alongside the dividend, would give investors double digit returns from investing in Nutrien now.
Within the boom scenario, one where Nutrien is capable to bring its idled production online and sell potash at high prices, cash flows could easily surpass $4 billion and more, that alongside some market exuberance could easily lead to a market cap of $60 billion and above.
All in all, the investing scenario is positive for Nutrien, the business is a good business with low cost production and conservative management which is not a bad thing in the current environment. See how it fits your portfolio.
If you want to read my full 50 page report/notes on Nutrien, you can find it here.
If you prefer watching or listening, please enjoy my video on Nutrien.
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This article was written by
Analyst’s Disclosure: I am/we are long NTR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (28)
Please tell what you mean by "natural limits" Thanks
retail growth in US, Brazil, Australia. Online sales. Models for optimal seeds, fertiliser input ...
specialist to sell it to the farmers....--> More and at higher margin.So you do not seem to buy that. Why?Greetings Nicklaas
