Will the Potash Boom Benefit CN and CP Rail?

The agriculture boom and growing demand for fertilizer may be doing great things for potash producers and their investors, but it should also provide a boost for Canada’s railways.

Canpotex, the world’s largest potash exporter, which is owned by Saskatchewan producers Potash Corp. (POT), Agrium Inc. (AGU) and The Mosaic Co. (MOS), announced plans to spend more than C$500-million to nearly double its potash shipping capacity on the west coast to meet global demand.

It will add 11 metric tons (mt) to the already 12mt with the new greenfield Ridley terminal near Price Rupert, B.C. and a brownfield expansion at Neptune Block Terminals in North Vancouver. The terminals are serviced by Canadian National Railway Co. (CNI) and Canadian Pacific Railway Ltd. (CP), respectively.

While Canpotex has not said how the 11mt of additional potash will be divided between the two locations, RBC Capital Markets analyst Walter Spracklin expects a 50-50 split. He added that it is unclear who would provide the funding for these expansions.

The Neptune expansion is expected to benefit CP before 2012, while CN will likely see more long-term advantages, the analyst told clients. That’s because the Ridley terminal, expected later than Neptune, will allow CN to establish a potash operation in Prince Rupert where there was none before.

“In the long term, we believe that the Ridley terminal would provide a competitive advantage from a cost and service perspective,” Mr. Spracklin said, adding that the terminal would also give CN a better chance at bidding for Canpotex’s export potash business when it is due for renewal in 2012.

He has not made any adjustments to his earnings per share [EPS] estimates for the rails because the projects are several years down the road, but sees C$0.19 of additional EPS for CP and C$0.09 for CN.