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We All Need to Eat

|Includes: BG, BHP, CF, INTC, MFE, NTR, Nutrien Ltd. (NTR)

Everyone needs to eat. So while the light continues to shine on oil and gold, this past week gave centre stage to food.

In past issues of Equedia Weekly, we said this year would be the year for takeovers and mergers. The year is far from over and already we have seen some incredible takeover bids and battles. Just this past week, we witnessed yet another billion dollar deal: the recent takeover of McAfee by Intel for $7.68-billion.

Despite that deal, no other sector rang more prominent than fertilizer. 

The fertilizer sector has been ripe with takeovers and rumours during the past few years. Just last year, CF Industries (NYSE: CF) completed a long battle to buy out Terra Industries while simultaneously fighting off a hostile takeover bid from Agrium (TSX: AGU). Earlier in the year, Vale spent $4.7 billion acquiring a controlling stake in Fertilizantes Fosfatados SA from Bunge Ltd. (NYSE: BG), as well as Bunge fertilizer assets in Brazil.

In January, BHP Billiton (NYSE: BHP) agreed to acquire Canada's Athabasca Potash Inc. for about $331 million. But now they're looking to become the world's biggest potash producer by attempting a hostile takeover, bidding close to $40 billion for Saskatchewan's Potash Corp (TSX: POT) (NYSE: POT).

You see, the big miners are all moving to monetize their production skills and tap into long-term growth in the food sector, especially in emerging markets. And it's not only a smart decision, it's the natural progression for miners that want long term cash flow.

First and foremost, Potash Corp (at current production rates)  has mine reserves that will last close to 200 years (that's not a typo); as close to an annuity for shareholders as there is in the mining business (first mentioned in Key Things You Should Know).

But to make things even more attractive for BHP,  the United Nations' Food and Agriculture Organization estimated that the global population will swell to 9.1 billion in 2050 from 6.8 billion.

If BHP is successful in the acquisition of Potash Corp, they would control roughly 30 per cent of global potash production - and thus, have a stronghold on Potash prices.

What is Potash?

Phosphate, nitrogen, and potash are the three core components of most fertilizers. Of the three, Potash is not only the priciest but also the rarest of the three - it is currently mined in only 12 countries. Even though Potash Corp's main business is mining potash, they also rank third in worldwide production of the other two components, phosphate and nitrogen-based fertilizers.

Potash does a lot of things. It is a major source of potassium, which is found in every plant cell. It helps plants grow stronger, retain more water, assists in nutrient transfer, activates vital plant enzymes, and resists stress caused by weeds, insects, diseases, and temperature. It also has the ability to keep the food fresh once it is picked and sent for sale.

Why is Potash Important?

Basic farming 101 tells us that the nutrients in the soil are eaten up by crops - hence the reason why crop rotation has been practiced for thousands of years.

Fertilizers replenish the nutrients in our soil after harvest. These nutrients are mostly taken up by and removed with the harvested crop. That means they need  to be replaced, given back to the soil, in order to ensure next year's crop.

The replacement of nutrients is not an option - not if farmers want to maintain healthy yields and crops. Potash not only revitalizes the soil, it makes plants better - and it's 100% natural.

All of these reasons explain why potash demand is increasing year after year. To meet this demand, two million new tonnes of potash are required every year - that's the equivalent of a new mine being built every year!

And potash is still being significantly under-utilized in many countries.

The world's leading emerging economies Brazil, Russia, India, and China will require an additional 28 million tonnes of potash annually to maximize fertilizer application rates - the equivalent of 14 new potash mines. Potash inventories in June 2010 were reported to be 34 percent lower than June 2009.

Furthermore, from the peak of 1.8 billion acres in 1981, total harvested area of world grains is down 6.8 percent. Arable land covers just 3% of the world's surface. Based on historical data, arable land decreases by 25 million acres annually. That means one hectare (2.47 acres) of productive land is lost every 7.67 seconds.

It's no wonder that while U.S. housing and commercial real estate prices have been dramatically hammered, U.S. farmland has continued to climb year-over-year.

Without safe and natural fertilizers, the world's farm land will slowly disappear, leading to food shortages which could become a new natural disaster.

More Room for Potash Corp?

Despite the recent sharp increase in share price of Potash Corp., there still may be room for further growth. Canaccord Genuity's Keith Carpenter looked at other fertilizer, chemical and agricultural deals done in the past three years and calculated an average premium of 41%.

We anticipate another offer this coming week from BHP.

The Overall Outlook

Despite the dramatic drop in potash prices from our market down turn, the outlook for potash remains extremely bright.

No matter the economic outlook, the world needs food - more than it needs oil or gold...

Until next time,

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August 22, 2010


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