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Potash Corporation of Saskatchewan (POT) |
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WIKI ANALYSIS
The Potash Corporation, the world’s largest Potash producer, helps farmers grow more crops per acre by selling them potash, phosphates and nitrogen, which are key ingredients for fertilizer. In 2011, Potash has seen increasing demand for all three of its business segments, leading to record quarterly earnings.[1] This increased demand is driven by rising gas prices, which leads to an increased demand for biofuels like ethanol and soybean oil.[2] Similarly, the agricultural market has rebounded in 2010 and 2011, leading to greater demand for fertilizers and feed supplements. Furthermore, Potash and its industry competitors such as Mosaic Company (MOS) benefit from monopolistic pricing power as a result of high Barriers to entry and Economies of scale .[3]
On August 17, 2010, Potash Corporation of Saskatchewan declined an unsolicited $38.6 billion cash offer from BHP Billiton (BHP) for the company.[4] Potash Corp.'s board stated that BHP's offer did not reflect the strength and strategic importance of Potash Corporation's financial capabilities and does not take into consideration the growth that Potash's board sees at hand in the future.[5] Speculation exists that Potash may be attempting to lure other buyers such as Rinto Tinto or SinoChem.[5]
Business Overview
Business Financials
Potash's most recent annual earnings were aided by increased global demand for fertilizers and feed supplements as the world food crisis continued and arable land continued to decrease.[1] Earnings for 2010 were $1.8 billion, the second highest in Potash's company history, and marked an improvement from $980.7 million from the previous year.[1] Gross margin similarly increased this past year, totaling $2.6 billion driven largely by potash's 70% contribution.[1]
Unsolicited Takeover Bid in Late 2010 Still Reaping Benefits
On August 17, 2010, Potash Corporation of Saskatchewan declined an unsolicited $38.6 billion cash offer from BHP Billiton (BHP) for the company.[4] Though speculation regarding the offer exists, BHP's move has been perceived as a sign of recovery in commodities; in the United States, the S.&P. 500 experienced its largest gain in half a month and the Standard & Poor's 500-stock index grew by 1% as a result of the offer.[4] Potash Corp.'s board stated that BHP's offer did not reflect the strength and strategic importance of Potash Corporation's financial capabilities and does not take into consideration the growth that Potash's board sees at hand in the future.[5] As agriculture trends around the world begin to require increased fertilizer, Potash's markets and sales will increase.[5] Since the unsolicited bid, Potash's value has nearly doubled.[1]
Business Segments
Potash Corp sells its fertilizers and crop nutrients to three markets in over 50 countries:[6]
- Fertilizer, along with its crop nutrients (potash, nitrogen, and phosphate), is sold to to a number of retailers and distributors who then sell the fertilizer to farmers around the globe.
- Feed supplements are for livestock, like cattle. The rising population and increasing meat consumption around the globe have grown this division as farmers demand more feed for their animals.
- Industrial sells potash, nitrogen, phosphate, and ammonia to companies for a wide variety of products, such as computer screens, soaps, soft drinks, metal treatments, food products, and plastics[7].
Products
- Potash (71% of total gross margin)[2] is POT's main product. It is an important crop nutrient used for fertilizer and is limited in supply. It is mined in just 12 countries worldwide[9], and 50% of the world's reserves are in Canada,[10] where it has seven mines. Potash is mostly used in POT's fertilizer products.
- Nitrogen (10% of total gross margin)[2] is a naturally occurring gas that is necessary for cell maturation, plastics, resins, and is a key component of proteins and enzymes.[7] It is used in POT's fertilizers, animal feed, and industrial products.
- Phosphate (10% of total gross margin)[2] is a key nutrient used in increase crop yields, in soft drinks, and other food products.[11] Phosphates are mostly used in POT's industrial products.
Quarterly and Annual Earnings
Q1 FY 2011 Quarterly Earnings
Potash announced record earnings for the first quarter of 2011, posting earnings of $732 million for the quarter as compared to $444 million in year-ago earnings.[12] Gross margin for the first quarter was $1.1 billion, another improvement from $729 million in the first quarter of 2010.[12] These earnings were driven by increased demand and favorable prices for the quarter in all three of Potash's nutrients.[12] Demand was especially strong internationally in Latin America and Asia, with 3.0 million tons being shipped to these regions for the quarter.[12] Domestic shipments in North American were 2.4 million tons.[12]
Potash's segment margins grew to $743 million, the highest margin in company history for first quarter sales and a 40% increase in year-ago comparisons.[12] Phosphate's gross margin similarly increased, more than doubling last year's earnings. Gross margin totaled $150 million for the quarter.[12] Nitrogen's gross margin increased by 50% for the quarter, totaling $135 million.[12]
FY 2010 Annual Earnings
Earnings for 2010 were $1.8 billion, the second highest in Potash's company history, and marked an improvement from $980.7 million from the previous year.[1] Gross margin similarly increased this past year, totaling $2.6 billion driven largely by potash's 70% contribution.[1] Potash announced earnings of $482.3 million for the fourth quarter of 2010..[1] These earnings reflected yearly highs and improvements from 2009. Potash's Q4 earnings were the highest quarterly earnings for the fiscal year.[1]
Earnings were driven by increased demand and higher prices for potash, phosphates, and nitrogen.[1] Because of higher demand and prices, margins for the fourth quarter grew to $763.0 million, an increase from $272.7 million the previous quarter.[1] For the full year, gross margin totaled $2.6 billion.[1] Increased demand was seen across geographic segments and boosted international sales.[1]
Trends and Forces
World Food Crisis and Concerns for Soil Fertility Positively Impact Potash's Sales
Large farming regions within the United States, India, and China are experiencing severe drought conditions that makes growing crops extremely difficult. Higher demand for food due to lower supply will improve demand to fertilizer. Furthermore, previous reluctance to purchase fertilizer has led to a surge in demand as of late, as soil fertility becomes an increasing concern. [13]
Crop commodities also grew this past year as the world's arable land continues to fall and grains and oilseeds compete for decreasing amounts of land.[1] The environment in 2010 and 2011 have provided farmers with the necessary conditions to increase investment in fertilizer and agricultural growth.[1]
High food prices, and moderate drought conditions will improve demand for the Potash Company's products. Severe drought conditions will decrease demand. Low food prices, and great weather will decrease demand for the Potash Company's products.
Increasing Gas Prices in 2011 Positively Drives Potash's Earnings
Ethanol in the U.S. is produced from corn, one of the most fertilizer and nitrogen intensive crops. [14] Corn prices jumped 125% over the past few years due to heightened demand for biofuels, food, and livestock feed. [15]
The demand for Ethanol and biofuels peaked in 2008 along with gas prices and has jumped again in the last two years. People only consume ethanol, it seems, when gas prices are extremely high. For instance, the Midwest has seen a 52% drop in ethanol consumption, with only a 3% drop in gasoline consumption. Ethanol is about 15-20% less efficient than gasoline, and studies have shown it needs to be about 40 cents cheaper per gallon to compete. [16] However, events in the Middle East have raised oil prices and driven demand for corn fertilizers.
Reduction in Arable Land Increases Demand for Fertilizer
The amount of arable land worldwide is dwindling. The population boom has cut the amount of arable land per person in half over the past 50 years.[14] Brazil, China, and India are three of the five most populous countries and are trying to meet the growing demand for food, fuel, and feed for livestock. Brazil, China, and India each have just 7%, 15%, and 49% of arable farmland, respectively,[17] and with their respective populations on the rise, these countries need to make the most of the arable land they have. In addition, weather factors such as temperature, rain, floods, droughts, and hurricanes destroy arable land for a particular crop season and many times the land is unusable for a few seasons.
Reduction in arable land should increase the demand for yield-increasing fertilizers in the long run and benefit the Potash Company. In the short run, however, violent destruction of arable land through natural disasters could disrupt the Potash Company's contracts and damage the company's profitability.
Competition
Potash Corp has few competitors since the fertilizer industry has significant barriers to entry and Economies of scale . Potash Corp estimates that it would cost upwards of $2.5B for a new company to enter the industry.[9] A company would need five to seven years of development time to build mines and factories, build rail and gas lines, and purchase rail cars and storage before it can even begin making a profit.
Potash Corp has two main competitors, Mosaic Company (MOS) and Agrium (AGU). The potash market has been in deadlock between Mosaic and Potash corp since 2005. Potash made a successful play on phosphates from 2005-2007, but started losing out to Agrium and Mosaic in 2008. Potash has enjoyed its largest competitive success in the expansion of its Nitrogen production, which has directly eroded Agrium's superior market-share. .
- Mosaic Company (MOS) is a $19.04 Billion[18] fertilizer company, the second largest potash producer, and the largest phosphate producer with 15% and 16% of global market share, respectively[19].
- Agrium (AGU) is a $5.82 Billion nitrogen and supplies fertilizer producer. In addition, it produces potash and phosphate like its competitors and has a 16% global share of the retail fertilizer market due to the major increase in global demand for its fertilizer and crop nutrient products. [20] [21] and had a $206 M year-over-year net income increase[21]
Although Potash Corp and its competitors have similar revenues, POT's ability to set favorable prices by controlling the limited supply of potash have set it ahead of its competitors in terms of net income and margins. In addition, it also competes with private, government owned companies. Government owned companies are not usually profit driven. Government owned companies can set their prices below market value to help subsidize their farmers costs and would force the other companies in the industry to lower their prices too, or face losing their customers.
References
- ↑ 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 | Potash announces year-end earnings
- ↑ 2.0 2.1 2.2 2.3
- ↑ Potash contract news release, Reuters 2009
- ↑ 4.0 4.1 4.2 Potash Producers Rejects $38.6 Billion Bid by BHP Billiton
- ↑ 5.0 5.1 5.2 5.3 Potash rejects BHP's $38.5B hostile takeover offer
- ↑
- ↑ 7.0 7.1 | Potash Corp. of Saskatchewan 2007 Online Annual Report, "Essential Nutrients," p.5
- ↑
- ↑ 9.0 9.1
- ↑ | Potash Corp 2007 Online Annual Report, "6 Keys to Understanding Our Business," p. 17
- ↑ | Answers.com: "phosphate" definition
- ↑ 12.0 12.1 12.2 12.3 12.4 12.5 12.6 12.7 Potash Announces First Quarter Earnings
- ↑ | Map of International Drought, Global Researcher
- ↑ 14.0 14.1
- ↑ | www.wikinvest.com: Corn Prices
- ↑ [http://news.yahoo.com/s/ap/20090714/ap_on_re_ca/us_farm_scene_e85_outlook | Yahoo News: Massive Ethanol Decrease in 2009]
- ↑ | C.I.A. World Factbook: Brazil, China, India
- ↑ | Google Finance, "Market Cap Info"
- ↑ | www.wikinvest.com, Mosaic Company (MOS)
- ↑ | MSN Money: Agrium Inc (AGU), "Highlights"
- ↑ 21.0 21.1 | www.wikinvest.com, Agrium Inc.
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