When looking at Potash Corp.'s (POT) value as a publicly traded company, I think that many are missing why they are much more valuable then their current valuation. Many believe that the fertilizer stocks have been driven up just like many of the commodity stocks. Commodity stocks have had a run as the dollar has devaluated, but there is one large difference with respect to fertilizer: people have to eat. Food is a basic necessity such as heat and water and as the world's population increases its intake of meat, it will continue to increase demand for feed which is comprised mostly of corn. The basis against fertilizer is generally ethanol, as it is currently using approximately one-third of the United States' corn crop.
Another important factor with respect to many of the agricultural stocks is that they are not the boring stocks of yesterday, but more of a technology play. Look at Monsanto (MON) and their 'Roundup Ready' products. The reason farmers use Monsanto's seeds are because they raise yield. This is important, because if you have already maxed out your farmland, the only way to increase your crop is through increasing yield. This is where fertilizer comes into play as its sole purpose is to add nutrients and increase yield. If you look at many of the emerging markets, many of these countries such as China and Brazil have very low yields when compared to the United States and Canada.
Fertilizer is composed of three main nutrients: nitrogen, phosphorous, and potassium. Looking at POT, they have major production of all three. With respect to Nitrogen, they produce 2% of the world's capacity. More impressively, they produce 6% of the world's phosphorous and 22% potash. They are the third largest producer of phosphorous, the second largest producer of nitrogen and the number one producer of potash globally. Nitrogen is produced in approximately 60 countries with 57% of production controlled by world governments. Phosphorous is produced in approximately 40 countries with 47% of production controlled by governments. Potash is produced in just 12 countries and only 19% is government controlled.
Not only is POT the number one producer of the world's potash but it also has investments in other major players. It has a 10% investment in the world's sixth largest producer of potash ICL. They have a 21% interest in Sinofert of China, which is the 8th largest producer. APC, the tenth largest producer is 28% owned by POT. Lastly, They have a 32% interest in Chemical & Mining Corp. of Chile (SQM), the 13th largest producer of potash.
The most interesting situation with respect to potash is the worldwide increase in production. Most have heard that POT is increasing production dramatically and doing it within a quicker time frame, as they have mines that were shut down when the price of the commodity was not as lofty. When you look at worldwide demand growth, you see producers are looking at an increased need over a large time frame. The average mine takes five to seven years to get into the production phase while nitrogen takes three and phosphate takes three to four years.
Mosaic (MOS) has five mines in the United States and Canada. Their production for 2007 was 7.4 million tonnes, and current capacity today is 9.2 million tonnes as they complete an expansion in early 2007. They plan to increase capacity 5.1 million tonnes by 2020. Only 400 thousand tonnes of capacity will be added by 2010.
Agrium's (AGU) production for last year was 1.73 million tonnes and capacity has reached 2.06 million tonnes. They are planning an upgrade to their current mine to increase production, and also planning a new greenfield mine in Canada. Intrepid Potash (IPI) produced 790 thousand tonnes of potash in 2007 and has a reported capacity of 870 thousand tonnes. They have reported deteriorating reserves, but are planning to increase production by 250 thousand tonnes by 2011.
Foreign companies are also adding production. Belaruskali is a state run company. Their production of 8.3 million tonnes last year was generated at full capacity. In 2009 or 2010 they will have a new mine up and running that should increase production by 500 thousand tonnes. They are evaluating a new mine to replace an existing mine that is running low on reserves.
Uralkali has had some issues as of late. One of the top producers of potash in the world, they experienced flooding and a sink hole in their #1 mine. Last year they had production of 5.1 million tonnes. This is 100% of capacity. This flooding caused a loss in production of 1 million tonnes. They are currently upgrading mines #2 and #4 and estimate that these changes will increase production by 1.9 million tonnes by 2010. They will be making a decision some time this year to start a mine #5, and if they decide to progress it should be completed in 2015. No information on how they will progress with mine #1 due to the flooding.
Silvinit, like Uralkali, has outdated mines that they are currently upgrading. Last years production was 100% of capacity at 5.5 million tonnes. Last year they bid $1.5 billion for the Perm area in Russia that has an estimated 3 billion tonnes. They received a loan for the same amount to build a new mine that could be running as early as 2016. This mine could increase production by a third.
K+S produced 3.8 million tonnes last year and a capacity of 4 million. It is guessed that their production has very little chance for expansion and would guess they would see a decrease in production in the upcoming years. Most of their older mines have been shut except one. I
srael Chemicals had a production of 5.08 million tonnes and capacity of 5.68 million tonnes. Their main mine is expanding and it is estimated that they will increase production by 250 thousand tonnes this year and another 250 thousand tonnes by 2011.
The Arab Potash Company produced 1.86 million tonnes last year and has a capacity of 2.03 million tonnes. They have very low cost operations and will complete a 500 thousand tonne expansion by 2009. There is the possibility for a similar 500 thousand expansion also.
China has four companies and they produce about 3.1 million tonnes a year. None of this production is for the export market as they have a very difficult time meeting needs within their own country. By 2009, Gelmud Qingfeng Potash Fertilizer will have implemented an increase in production of 700 thousand tonnes per year. They also have projects underway that could add 2.5 million tonnes per year by sometime in 2009-2010.
Brazil has two companies Vale (RIO) and SQM. Vale produced 670 thousand tonnes and has the capacity of 850 thousand tonnes. They should be able to reach production of 100% of capacity soon. This one mine will be depleted by 2015 and they are exploring opportunities to replace production. SQM produced 690 thousand tonnes last year and has capacity of 780 thousand tonnes. They invested one billion dollars to increase potash capacity by 250 thousand tonnes per year as well as a 300 thousand tonne potassium nitrate production increase within the next three years.
Production and capacity are looking to be increased in the upcoming year by new greenfield projects. These projects take five to seven years and will have no immediate affect on supply, they only show an approximation of growing demand within that timeframe.
Eurochem is possibly going to build a 2.3 million tonne capacity mine in Russia. Paperwork was signed in July of this year to get started. Uzkhimprom has awarded contracts of $124 million to build a 200 thousand tonne per year mine. Also, Russia has auctioned three large deposits. Eurochem was awarded an estimated deposit of 1.167 billion tonnes for $170 million. Acron was awarded an estimated deposit of 682 million tonnes for $700 million. Lastly, Silvinit won an auction for $1.48 billion for an estimated deposit of 3.074 billion tonnes.
In Argentina, Rio Tinto (RTP) and Vale are both looking to start new projects, but are still evaluating content. Thailand has the possibility of a mine that could produce 1 million tonnes per year, but the mine lacks the characteristics for safety and ore grade. The government just pulled out and feasibility of the projects is being assessed. MagIndustries is planning a 600 thousand tonne mine in the Congo, while BHP Billiton (BHP) has been granted an exploration license in Ethiopia.
Even with this huge projected growth worldwide in potash production, POT is eclipsing the competition. Even if potash demand growth is only 4%, current projects just barely meet demand. This year, potash demand is not being met - even with Potash Corp.'s Lanigan increase and Uralkali's, overseas demand is still too great.
2009's growth forecast has an estimated 50% from POT alone. 2010 is the first sign of a major project other than POT going on line. Uralkali and Silvinit have production added that will add almost 3 million tonnes. An increase at POT's Cory and PL mines will also add growth. NB adds to POT's growth in 2011 while minor increases abroad have slight changes.
2012 and 2013 are the big story as all five POT projects come on-line and again they have over 50% of the increased production for the world. 2013 looks to be the only year of surplus if demand increases at 4% per year. The five past years have seen potash demand growth at 5.6%.
POT's production increases will add 9.16 million tonnes over this time frame. Taken together, and including upgrades to current facilities, POT will see production increases of 10.11 million tonnes at a cost of $6.78 billion. Overall, POT will see capacity reach 18 million tonnes. Capital spending will peak in 2010, and then a marked drop off is seen in the subsequent years, following which POT will see the largest increase in net if demand is steady. Capacity in 2012 will reach 23 million tonnes.
In summary, demand for fertilizer will increase substantially in the upcoming years as increases in demand will drive up pricing. Since most commodity bull runs last 10-15 years, there could be an increase of pricing with respect to potash for the next seven years or so.
Another thing to remember are the existing contracts that will be expiring at lower prices coupled with the fact emerging market demand for fertilizer will likely increase as farm land acreages are likely to remain the same with the exception of Brazil.
The excess capacity that POT is developing will prepare them for an even longer run if there is still increased demand going forward. Even if the ethanol situation is replaced in upcoming years with more hybrids or even liquified natural gas, it seems that increased demand will still need to be met as China's middle class will continue to grow and their current production increases will likely not meet their demand, while India's population growth will someday likely make it the largest country in the world.
I believe that POT is not only a good play in the next year, but also should see increases in earnings at least through 2011. Potash Corp. has major control in global potash pricing, and they could scale back some of their new mines if commodity pricing decreases.-Michael Filloon in seeking alpha
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