Potash Corp./Saskatchewan (USA) (POT)

BigDogBlog (70.82) Submitted: 5/23/07 2:08 PM : Start Price: $68.90 POT Score: 38.03

Investor's Business Daily
Rising Farm Production Means Rising Profits For Fertilizer Maker
Thursday May 10, 7:00 pm ET
Brad Kelly

.S. farmers are trying to increase corn production to meet growing demand for ethanol. Without enough fertilizer to help corn crops grow, farmers will not meet that demand.
Rising demand for ethanol has led to a 15% rise in planned U.S. corn plantings, according to the Department of Agriculture. The USDA said corn plantings have hit their highest levels in 60 years.


Farmers are planting on half the land that existed in the 1950s.

To grow more crops, farmers have to raise their productivity and that means using more fertilizer.

But corn is not the only crop increasing demand.

Crops such as wheat and rice will be in high demand as the world's population swells.

The U.N. expects the population to rise 40% to 9.2 billion by 2050.

The call for more crops has spurred growth for chemical fertilizer producers. And Potash Corp. of Saskatchewan is one of them.

Just Starting

"We believe we are at the front end of a period of significant consumption growth and strong prices for all our products," said CEO William Doyle in a conference call to analysts.

David Silver, an analyst at JPMorgan, wrote in a client note that global selling prices for major crops, including corn and wheat, are at their highest levels in over a decade.

He wrote this translates into high earnings potential and lower downside risks for Potash (NYSE:POT - News).

In the first quarter, the company raised earnings 56% to $1.85 a share. Analysts polled by Thomson Financial expect $1.71. Its sales grew 34% to $1.15 billion, beating views.

Potash is the world's largest fertilizer company in terms of capacity. Its three main products are potash, nitrogen and phosphate. They are used in the agriculture, animal nutrition and industrial markets.

Each segment makes up about a third of the company's sales. But potash is its most profitable unit.

Potash comes from potassium that is left behind after sea water evaporates and is mined from underground deposits.

Canada is home to over half of the world's potash reserves.

The largest deposits are in Saskatchewan, where giant seas evaporated millions of years ago. Potash has six of its seven mines in Canada's middle province.

The mines have a total capacity of 10.5 million tons. It expects to ship 9million tons of potash this year, up from 7.6 million. Over 90% of its potash is sold for crop fertilization.

Farmers' need for more fertilizer has lifted the price per ton.

Analyst Brian Yu of Citigroup said prices will vary by region around the world. Citigroup does investment banking for Potash Corp.

The U.S. is the world's largest importer of potash, using 4.55 million tons a year. The average price per ton is $220 and that is expected to rise, Yu said.

For example, the Midwest has seen an 8% jump in price per ton to $218 since the start of the year. Yu said another $20 hike is expected by June.

China and Brazil import a combined 7.3 million tons of potash. Brazil on average pays $250 a ton due to shipping costs. But China pays less than $220.

"China is an opaque market and it pays less per ton than the rest of the world," Yu said. "Negotiations last year with China were drawn out and shipments didn't resume until August of 2006, which affected Potash."

There are high barriers of entry into the potash market. It costs about $1.6 billion to set up a 2 million-ton project. The cost to build a mine keeps would-be competitors out of the market altogether.

A new potash mine has not been built since 1985. Yu said that is an advantage for all potash producers.

Potash has begun a $775 million project to expand one of its facilities in Canada to keep production up. The project will more than double output to 2 million tons by 2010 at its Cory plant.

Doyle said the plan is to increase total potash capacity by 57% over the next eight years.
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"Potash is only beginning its climb," he said. "With our plan to increase our potash capacity to 15.7 million tons by 2015, we have significant gross margin potential."
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Potash is the industry leader for gross margins, Yu said.

Strong demand and rising prices has pushed potash margins up 92% to $174.2 million.

The nutrient makes up over half of the company's total profits.

Nitrogen margins rose 65% to $131.3 million, due in large part to its Trinidad operations.

Almost 70% of Potash's nitrogen is used in feed for livestock as well as for industrial uses.

The company's main advantage is that its chemical plant is located in Trinidad.

The process to make nitrogen requires ammonia and natural gas. The country holds 63% of the world's ammonia capacity.

Also, Potash has long-term natural gas contracts in Trinidad.

The contracts lock in low gas prices, which help lift profits.

It has three other plants based in the U.S.

Phosphate margins shot up 93% to $64.2 million.

This was the second highest total in company history.

Phosphate

Potash is the world's third largest producer of phosphate.

Mined from phosphate rock in the southeastern part of the U.S., it speeds the maturity and reproduction of plants.

It also aids growth in animals and is used in soft drinks, food and metal treatment.

Yu said the company has higher grade phosphate than most rivals, including Mosaic (NYSE:MOS - News) and Agrium (NYSE:AGU - News).
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Potash raised its full year outlook by a $1.25 to $7.50-$8.50 a share.
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It sees world demand for potash to grow 12% to 16% this year due to an increase in volumes sold to Brazil, China and India.

Potash invests in firms with the same type of businesses.

It owns a stake in firms in Jordan, Chile, Israel and China.

The total market value of its offshore investments equals to more than $31 a share per Potash share.

"This allows it to further participate in the market without the regulatory concerns that comes with an acquisition," Yu said.

He also said the industry is well consolidated and there are few buy- out targets.

The top five players own almost 60% of the market share, Yu said.

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