TOP CONTRIBUTORS

Kryssia Uraguchi

Sean Hinton

Max Mickiewicz

POT AT A GLANCE

P/E ► 8.49 VERY HIGH EV/EBITDA ► 6.87 VERY HIGH ROA ► 32.2% AVG ROE ► 58.1% AVG Debt to Equity ► 1.14 AVG Current Ratio ► 1.38 LOW Interest Coverage Ratio ► 43.6 AVG

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating ExpensesSG&AAmortization & Depreciation

The Potash Corporation of Saskatchewan (NYSE: POT) (TSE: POT) was the largest crop fertilizer company in the world in 2008 with $9.4 billion in sales.^[1] In 2008, Potash Corporation was the world's largest potash producer and was also the world's the third largest producer of both nitrogen and phosphate.^[2] These are the three primary crop nutrients essential for producing fertilizer. The company also controls the majority of the world's excess potash supply. By adjusting its production to match world demand, the company is able to maintain high prices. Also, the company benefits from operating in an industry with high barriers to entry. Potash Corporation estimates that a new entrant would have to spend at least $2.5B to get a new mine operational.^[3]

The populations of countries like China and India are developing appetites for high-end foodstuffs that require more fertilizer during production; in addition, the world's growing demand for oil has led to increased fertilizer demand for the planting of corn, a major ingredient in ethanol.^[4] Ironically, the economic growth in developing countries has also meant the destruction of arable land that grows key crops like corn, grain , and sugarcane, as cities expand and farmlands are converted for industrial use, forcing farmers to use more fertilizer in order to maximize the crop yields.^[5]

The company's long term growth from aforementioned trends was halted during the beginning of 2009 because of decreased demand from developing countries like China, which forced Potash to cut output production; the company says it will increase output again once demand increases.^[6] Due to the production cut, revenues have decreased from $1.9 billion for the first quarter of 2008 to $923 million for the first quarter of 2009; accordingly, net income has fallen from $566 million in Q1 2008 to $308 million in Q1 2009.^[7]

[edit] Business Overview

Potash Corp sells its fertilizers and crop nutrients to three markets in over 50 countries:^[8]

• 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^[9].

POT's revenue increased approximately 39% and its net income increased nearly 70% over 2007, which can be attributed to significant price increases.^[10] POT's operating margin increased because it does not spend nearly as much maintaining and increasing capacity at its mines than it did building them. Price increases in its products also contributed to the favorable operating margin.^[10]

[edit] Products

POT's sales are evenly distributed between potash, nitrogen, and phosphate. Over the past five years, nitrogen sales have fallen by 7% while potash sales have increased by 7%. Phosphate sales have remained stable.^[10]

• Potash (22% world capacity, 34.3% revenue)^[11] 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^[3], and 50% of the world's reserves are in Canada,^[12] where it has seven mines. Potash is mostly used in POT's fertilizer products.
• Nitrogen (2% world capacity, 34.4% revenue)^[11] is a naturally occurring gas that is necessary for cell maturation, plastics, resins, and is a key component of proteins and enzymes.^[9] It is used in POT's fertilizers, animal feed, and industrial products.
• Phosphate (6% world capacity, 31.3% revenue)^[11] is a key nutrient used in increase crop yields, in soft drinks, and other food products.^[13] Phosphates are mostly used in POT's industrial products.

[edit] Trends and Forces

[edit] Margin Expansion And Ability To Set Prices

The demand for fertilizer has skyrocketed as 75 million new mouths enter the population annually.^[14]. By matching supply with demand, POT has been able to set its own prices and gain a significant margin on its nutrients. Supplying exactly as much as the market demands keeps prices up since there is a degree of scarcity. Increased margins and profitability are important to POT to pay down debt and reinvest in mines to increase capacity to meet increasing potash demand.

The rising demand for its fertilizers and nutrients have caused average year-over-year selling prices to increase considerably. Selling prices for potash increased 162%, nitrogen increased 57%, and phosphates increased 135%.^[5] Gross profits have been rapidly growing with price since POT has considerably less expenses today with mine upkeep, rather than towards the beginning of its business when it had to build its mines. Gross profits for potash and phosphate tripled^[15][16], while nitrogen gross profits increased 30%.^[15] Gross margins, a measure of profitability, was variable for POT's nutrients. Nitrogen gross margins remained the same over 2007 even though gross profit increased 30%^[15] because of the 52% increase in natural-gas costs. However, phosphate gross margins increased approximately 12% despite ballooning costs for key products to make phosphate usable, like sulfur and ammonia^[15], whose prices rose 249% and 42% year-over year, respectively.^[15]

[edit] Ethanol and Biofuels

The demand for biofuels, like ethanol, is increasing as the search for alternative fuel sources continues. POT's fertilizer and nutrients are essential to grow corn, wheat, and sugarcane, key crops to produce ethanol. Ethanol in the U.S. is produced from corn, one of the most fertilizer and nitrogen intensive crops^[5]. The rise in demand for biofuels, food, and feed for livestock has pressured farmers to plant a record amount of corn, which is now being grown on approximately 90 million acres in the U.S.^[5] The increase in demand also caused corn prices to jump approximately 125% from January 2007 to 2008^[17] In addition, POT has gained more pricing power as corn acreage continues to increase since its fertilizers and nutrients are essential for crops, like corn. The increase in corn prices reflect POT's price increases. Brazil, one of POT's major customers, is the largest producer of ethanol worldwide and produces its ethanol from sugarcane. Together, Brazil and China import approximately 80% of POT's potash supply.^[18] POT's potash production and sales increased 31% over 2007,^[19] and Brazil, China, and India still have a lot of fertilizer use potential since they would need to at least double the amount of fertilizer to match already developed agricultural markets^[5]

[edit] Reduction in Arable Land

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.^[5] 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,^[20] 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. A bad crop season for any reason decreases the demand for POT's fertilizers and nutrients.

[edit] Labor Strike Settled

As of November 14, 2008, Potash Corp had settled with the United Steelworker's (USW) Local 7689, USW LOcal 189, and USW Local 7458 with a collective, 3 year agreement retroactive to May 1, 2008. The cost structure of the settlement does not alter the long-term cost structure of Potash's operations, specifically because they do not include commodity-based bonuses.^[21]

Previously, approximately 500 employees of Potash Corp. from its Allan, Cory and Patience lake division have been on strike demanding higher wages and profit sharing in company’s increasing revenues as far back as August 2008. The strike affected approximately 30% of the company’s annual potash production capacity.^[22]

[edit] Competition

Potash Corp has few competitors since the fertilizer industry has significant barriers to entry, or obstacles that prevent new competitors from entering the industry. Potash Corp estimates that it would cost upwards of $2.5B for a new company to enter the industry.^[3] 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) is a $5.7 B^[23] fertilizer company, the second largest potash producer, and the largest phosphate producer with 15% and 16% of global market share, respectively^[24]. Rising global demand for fertilizer has increased its revenue 68% from 3Q07 to 3Q08^[24] and management plans to increase potash output to better meet global demand.
• Agrium (AGU) is the largest producer of nitrogen and supplies fertilizer to outlets such as retailers and distributors. In addition, it produces potash and phosphate like its competitors and had $5.2 B in sales over 2007^[25]. Agrium has a 16% global share of the retail fertilizer market^[26] and had a $206 M year-over-year net income increase^[26] due to the major increase in global demand for its fertilizer and crop nutrient products.

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.

[edit] References

1. ↑ POT 2008 10K  
2. ↑ | Potash Corp. 2008 Annual Report, "Company Overview: Potash," p. 10
3. ↑ ^{3.0 3.1 3.2} | Potash Corp. 2007 Annual Report, "Company Overview: Potash," p. 10
4. ↑ | Stock Traders Daily: Yates, Johnathan, "Going Beyond Big Oil to Profit from the Rise of Crude" (5/14/09)
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5} Potash Corp. of Saskatchewan, 07/24/2008 Morningstar Analyst Report, "Potash Corp Reports 2Q", p. 1
6. ↑ | Bloomberg: Donville, Christopher, "Potash to Keep Output Cuts Until China Demand Returns" (5/14/09)
7. ↑ POT 2009 10Q  
8. ↑ | Potash Corp. of Saskatchewan 2007 Annual Report, "Company Overview", p. 6
9. ↑ ^{9.0 9.1} | Potash Corp. of Saskatchewan 2007 Online Annual Report, "Essential Nutrients," p.5
10. ↑ ^{10.0 10.1 10.2 10.3 10.4 10.5 10.6}
11. ↑ ^{11.0 11.1 11.2} | Potash Corp. of Saskatchewan 2007 Annual Report, "Company Overview", p. 7
12. ↑ | Potash Corp 2007 Online Annual Report, "6 Keys to Understanding Our Business," p. 17
13. ↑ | Answers.com: "phosphate" definition
14. ↑ | Potash Corp. of Saskatchewan Annual Report, "Our Global Story," p. 5
15. ↑ ^{15.0 15.1 15.2 15.3 15.4}
16. ↑ | Bloomberg.com: Canada: Donville, Christopher, "Potash Profit Rises Threefold as Nutrient Prices Gain (Update3)" (7/24/2008)
17. ↑ | www.wikinvest.com: Corn Prices
18. ↑ | caps.fool.com: Kelly, Brad: "Rising Farm Production Means Rising Profits For Fertilizer Maker," (5/10/07)
19. ↑ | Potash Corp. of Saskatchewan 2007 Annual Report, "Company Overview", p. 8
20. ↑ | C.I.A. World Factbook: Brazil, China, India
21. ↑ Potash Corp Press Release, November 14th, 2008, "PotashCorp Announces Ratification of Labor Contracts..."
22. ↑ IIIR Group Labor strike, shutdown for maintenance to lower sales volume in 2H 08
23. ↑ | MSN Money: Mosaic Co. 2007, "Financial Statement"
24. ↑ ^{24.0 24.1} | www.wikinvest.com, Mosaic Company (MOS)
25. ↑ | MSN Money: Agrium Inc (AGU), "Highlights"
26. ↑ ^{26.0 26.1} | www.wikinvest.com, Agrium Inc.
27. ↑ 2008 POT 10K
28. ↑ 2008 MOS 10K
29. ↑ 2008 Agrium 10K
30. ↑ 2008 POT 10K
31. ↑ 2008 MOS 10K
32. ↑ [Agrium (AGU)|Agrium]]<ref>[http://www.agrium.com/uploads/Agrium_Fact_Sheet.pdf September 2008 Agrium Fact Sheet]</li></ol></ref>

[edit] External links

• Company Website