Is Potash Corp./Saskatchewan Inc. (NYSE:POT) a $50 Stock?

PotashInvestors should take advantage of agricultural prices before the coming turnaround. Potash is the mineral fertilizer of choice and the market demand for this commodity is higher than ever. It is a necessary element to achieve the ideal balance, which farmers need to ensure their land gets in order to receive adequate nourishment.

Just like the old cereal commercials, potash is a part of a successful agricultural operation along with nitrogen and phosphate. Nitrogen can be obtained from natural gas while phosphate and potash are mined—potash being the rare one of the two. Given its crucial importance to food production, potash may be as important a commodity as oil. The world’s population simply depends on it.

Potash is also very expensive to bring to production. At least seven years of lead-time is necessary to go from exploration to production. (Source: Winnipeg Free Press, last accessed September 15, 2015.) And that’s only if all the permitting and regulatory matters are resolved promptly. (Source: TD Economics Special Report on Potash, last accessed September 15, 2015.) This means that existing miners have an advantage over new ones.

Meanwhile, the low prices of the past few years, at around $300.00/tonne have helped to boost interest and increase the spread of potash to farmers, who would not consider it before. Miners increased production around 2009, when prices hit a record $900.00 a ton—at a production cost of $1,590/ton—lasting a short period. Nevertheless, this ensured a strong supply base.

China has bought just about half of the world’s potash. But the peak prices of 2009-2011 reduced its popularity among farmers, lowering prices. Now after three years of lower (still higher than the 20-year average) costs, many farmers have grown reliant on potash and we can expect prices to start rising again. Canada’s Potash Corp./Saskatchewan Inc. (NYSE:POT) is an ideal candidate.

Some 75% of world reserves are located in Canada and Russia. And even if global reserves are estimated at 210 billion tons, only a fraction of these can be mined. PotashCorp has access to most of these as the world population increases to nine billion and available agricultural land becomes scarcer, meaning that land productivity must increase.

Potash consumption will rise to around 75 million tonnes from 60 million in 2015. In ten years, it may hit 100 million tonnes. Alone, India imported just under five million tonnes and China 15 million tonnes. Brazil, Indonesia, North America, and Europe are also major potash consumers, while Africa may see the fastest rise in potash consumption. (Source: Fertilizer’s Role in Food Production, last accessed September 15, 2015.)

PotashCorp could swallow up Germany’s K + S (DE:SDF) potash and fertilizers group to consolidate its global reach and market position. Together, PotashCorp and K+S (Source: Canadian Mining Journal: last accessed September 15, 2015), both specializing in the extraction of potash, would produce 14.5 million tonnes of the ‘ore’ for food and agricultural uses, surpassing the giants of the former Soviet Union and the new giant entrants to the sector. A successful bid would shake up the market and attract the interest it has lost among investors over the past two or three years.

K + S played the cool game, hinting that the offer price was too low and that for negotiations to even begin, the Canadian company would have to be more generous.

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K + S makes around $4.5 billion a year in revenue. But it stands to double production at its Legacy potash mine in Saskatchewan. This is Canada’s potash rich province, where it plans to start producing two million tonnes/year at the start of operations. It so happens that the Legacy mine is in PotashCorp’s backyard.

The market for potash, whose demand keeps rising because of agricultural development in emerging markets, as well as its continuing popularity among North American and European farmers, has been flat over the past few years. Potash prices were sustained because of a duopoly between the North American CANPOTEX sales group and the Russian-Belarusian equivalent BPC. In July 2013, Russia’s Uralkali, the world’s biggest potash supplier, left the BPC cartel.

At first, PotashCorp suffered in the markets. But it has since started to trade at the pre BPC-breakup level, in the high $30.00s and low $40.00s last year, hitting a 52-week high of $47.10 on January 30th.

Indeed, the end of the potash duopoly did not affect the potash price as much as analysts feared. Belaruskali just signed a new China contract for $315.00/tonne. The price is not great compared to the 2012 $400.00/tonne and less than half the $800.00/tonne briefly reached at the height of the commodities bubble in 2009. But neither is it close to the dreaded $200.00/tonne many had predicted.

Indeed, the potash majors’ response to the threat of lower prices has been to consolidate. PotashCorp was one of the first to respond, offering to buy Israel Chemicals, another major potash and phosphate producer, in 2013. That offer was rejected on political grounds with the intervention of Prime Minister Netanyahu himself. Israel Chemicals since acquired one of the most promising Potash juniors, Allana Potash, which is about to start producing the fertilizer in Ethiopia.

PotashCorp wants to reduce competition from the likes of Rio Tinto plc (NYSE:RIO) and BHP Billiton Limited (NYSE:BHP), two of the world’s largest mining companies, by taking out medium size competitors like K + S.

It is certainly possible that PotashCorp’s management and K+S reach an agreement over the 41 euros per share prices expected by the Germans. But the Canadians no doubt have the hostile takeover plan ready. PotashCorp will simply deal with K+S’s investors rather than its management—which used the excuse of the fate of its employees in Europe as part of its excuse to reject the former’s bid.

It so happens that PotashCorp is in a very good position to achieve either one of these strategies, given that it is led by German CEO, Jochen Tilk. He knows his target and its investors well.

PotashCorp can try to persuade K + S shareholders by making a direct offer for their shares; if enough of them accept the offer, the deal goes through. That would be the simplest scenario. Otherwise, PotashCorp could try to take over bits and parts of K+S in order to gain influence over the supervisory board and challenge the German management team from within, replacing unfriendly types with malleable ones, which would then accept the offer.

From its new potential high position, PotashCorp could start to influence the price of potash all by itself by winning market share across more geographical regions. As for K+S, its future seems marked. If PotashCorp fails to take it over, there is a Rio Tinto or BHP Billiton ready to take its place.

Potash production in Germany is expensive, because of very high environmental standards. In addition, PotashCorp may well be more interested in gaining K+S’s salt and its Legacy mine in Saskatchewan—gradually shutting down potash production in Europe.

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