Potash Corp - 2013 Second Quarter Update

Potash Corp's second quarter was somewhat weak, and the softness is expected to continue for the remainder of 2013.  Indeed, EPS fell from $0.99 (as adjusted) to $0.72 in the quarter, and full-year guidance was lowered to $2.45-2.70 from $2.75-3.25.  However, some perspective is in order: even at the low end of that range, the company's return on equity will still be around 20% for the year, despite steadily growing assets, as its capital expansion continues, and moderate amounts of debt (an immoderate amount of debt reduces equity, and artificially boosts ROE).

At about 56 million tonnes, global shipments of potash are expected to be in line with last year.  However, because it's requiring a lower price to keep volumes steady, it cannot be denied that the market has weakened since last year.  Realized potash prices fell significantly in the quarter, from $433 to $356, an 18% drop.  Nitrogen and phosphate prices fell, as well.  Also contributing to the weak second half forecast is the lack of a potash contract with China, which will stall sales in the third quarter, though CEO Bill Doyle predicts an agreement will be forged before the fourth quarter.  In addition, currency headwinds are affecting results: a weaker rupee is part of the reason Indian demand has been soft (the major cause remains a domestic subsidy that punishes potash purchases relative to nitrogen), just as a weaker real has offset some of the strength in Brazil.  In the latter case, because Brazil is a major exporter, the economics roughly balance out, since a weaker real means higher US dollar prices for goods sold.

While the softness in the potash market has lingered longer than many investors and analysts had expected - and may persist for the short or even medium-term - the industry's long-term strength remains intact.  People must eat.  In fact, the latest estimate of how many people are going to be eating in the decades to come was recently revised upward, from 10 billion, to a staggering 11 billion, by 2050.  While eventually there will be greenfield supply to meet growing demand, little is likely to come on-stream over the next decade.

Potash Corp shares trade for under $40, but the company's stock market investments are worth $8 per share.  Even after adding back a little over $3 per share in debt (net of cash), the "all in" cost of a POT share is $34-35.  This means that Potash Corp shares are trading at just 13-14 times 2013 earnings, using the mid-point of the newly announced guidance.  Happily for shareholders, management announced a $2 billion share repurchase that will retire up to 5% of shares outstanding over the next year.  This may be increased next year, management noted, as capital expenditures fall, and the already significant dividend could be upped, too.  Investors may want to follow the company’s lead and buy some Potash Corp stock at today’s low prices.

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Potash Corp - 2012 Fourth Quarter Update

Potash Corp recently reported disappointing Q4 and full-year results for 2012, and offered restrained guidance for 2013.  Earnings per share are expected be $2.75-3.25 for 2013, compared to adjusted EPS of $2.76 in 2012.  Demand is forecast to be strong in the Americas and most of Asia, with India being the wild card.  While Potash Corp is often considered the industry's swing producer, India has stumbled its way into the position of swing buyer.  While management wisely assumed little change in India when offering guidance for 2013, they expressed guarded optimism that the Indian government will eventually put agronomics ahead of politics and revisit a flawed subsidy regime.  It's difficult to predict exactly when, however.

CEO Bill Doyle addressed the all-important issue of future potash supply.  He firmly reiterated his long-held position that fears of oversupply are overblown.  Brownfield expansions are likely to go forward, but at a slower pace, he predicted, while greenfield expansions will face significant delays.

The status of Potash Corp's interest in Israel Chemicals was not addressed in the quarterly conference call, either in management's prepared remarks or in the question and answer session with analysts that followed.  The political jockeying that will take place after the recent Israeli election is likely to put any big decisions on hold for months.  This is good news for Potash Corp shareholders, who should fear a purchase of Israel Chemicals, given that it would almost certainly be paid for using underpriced POT stock, in exchange for rather expensive ICL shares.  Warren Buffett has pithily explained that investing is simply "buying dimes for nickels"; Potash Corp management should bear this in mind, because at present any deal looks like it would be just the reverse.

On a happier note, the company significantly increased its dividend, to $0.28 per quarter, and the stock now yields better than 2.5%.

Here is my original investment analysis of Potash Corp. 

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog

The Trouble with Mining - Management or Structural Issues?

Rio Tinto boss Tom Albanese recently became the latest CEO of a major mining firm to be relieved of his duties.  His departure came in response to a $14 billion write-down that resulted from the 2007 purchase of Alcan, then a leading aluminum company.  He joined a growing list of departures that includes the top executives of Anglo American, Vale, Barrick Gold and Kinross Gold.  

Before 2008, the rising tide of the commodities "supercycle," propelled by infrastructure-heavy economic growth from the developing world, was enough to lift the earnings and share prices of many resource producers.  But as Warren Buffett has warned, when the tide goes out, you find out who's been swimming naked.  Today's unforgiving daylight reveals repeated cost overruns, rampant technical setbacks, and a pattern of overpaying for acquisitions.  Investors are left to wonder whether this is a management problem, which is solvable, or a more structural situation, which may not be?

Part of the blame lies squarely on management.  It's well known that around two-thirds of acquisitions fail, largely because acquirers routinely overpay.  The burden of proof, then, falls on senior executives and board members to demonstrate that their own prospective purchases are an exception to the general trend.  Even without the easy judgments of hindsight, the Alcan deal was always risky, given that aluminum is abundant and thus never in short supply.  Managers in the mining industry tend to be particularly poor at allocating capital: not only do they overpay for assets, they often have a soft addiction to issuing new equity, whatever the price; they rarely pay dividends; and they almost never take advantage of weak share prices to repurchase shares. Out-of-control costs and technical failures reflect mismanagement, as well.  Too often, managers have failed to halt development, even when added expenses push the rate of return to dismal levels, and executives have been unable to deliver on production or schedule-related promises.  

Still, many of the problems in the resource extraction industry are structural.  It is telling, in fact, that the names appearing on the casualty list above are managers from the strongest mining firms in the world.  As such, they have built-in advantages over competitors, including the resources to attract the best managers in the industry - in theory, at least - assets that are diversified both by geography and by mineral, and a lower cost of capital.  

Nonetheless there's a long and daunting list of enduring challenges in the mining industry: the difficulty of operating many mines reliably and profitably; unsteady demand; a lack of skilled technical labor, and shortages of general labor; ore grades in permanent decline; and a litany of political, regulatory, legal and environmental obstacles.  As if all that weren't enough, the largest problem is the "hole-in-the-ground" conundrum: every ounce, pound or tonne a producer sells leaves it one unit closer to being out of business.  These challenges surely contributed to many the mistakes and failures noted above.

This doesn't mean that there are no attractive mining investments.  The surest way to get an edge in a commodity business is to be a low-cost producer.  Most importantly, this means owning low-cost mines with long lives, as BHP Billiton does, for example.  As noted, size typically ensures large companies access to cheap capital, as well as a strong balance sheet that can withstand volatile commodity prices.  In addition, vast resources typically allow companies to better navigate the political, regulatory, legal and environmental challenges that exist in the global resource industry.  And a world-class management team is not only desirable, but flat-out necessary.

Potash Corp may be one of the few mining companies that’s worth investing in, despite the general difficulties of the industry.

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Canpotex Signs a Potash Contract with China

Canpotex recently agreed to sell 1 million tonnes of potash to China for $400 per tonne, significantly lower than the most recent deal, which set the price at $470.  At first glance, the move appears surprising.  After all, Canpotex maintains a religious policy of curtailing supply in periods of soft demand, which usually prevents prices from falling abruptly.  And the marketing body, which sells on behalf of Potash Corp, Mosaic and Agrium, has cut production significantly in recent months.  What's more, potash consumption in 2012 was as high - or nearly so - as it's ever been.  However, robust end-market use has not translated into mine production on a one-for-one basis over the past year, as many farmers and distributors have drawn down inventories, rather than purchasing additional product.

Though the price is lower, the deal will have some advantages for producers, both in the near-term, and over the long-term.  For one, it gets a significant amount of product moving.  In addition, it may prompt India to re-enter the market, which has been very difficult of late, largely due to domestic political forces.  Given that potash mining has significant fixed costs, there is also some merit in having a decent base load of product being sold.  Finally, it may also tighten up spot markets later in the year, which accounts for most of Canpotex's sales.

Still, all of these factors likely do not outweigh the price cut.  So what happened?  It's possible that Canpotex simply got outmaneuvered, or that the current supply/demand balance is tipped too far in favor of buyers.  But Canpotex may have forfeited a battle in order to win the war.  The most serious long-term threat to potash producers is the risk of oversupply.  Over the next year, BHP Billiton will decide whether to go forward with its potentially massive Jansen mine.  The project is expected to be very expensive, and cannot be justified unless potash prices are far higher than the present $400 per tonne.  To be sure, what matters most is where potash prices are seven or more years down the road, but it’s difficult to allocate $5 billion - and perhaps much more, in this case - without seeing prices rise and stay up for a period of time.  Only time will tell, but the reduced price may be enough to scare off new production, at least for a few more years.

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Potash Corp - An Acquisition of Israel Chemicals?

A number of outlets are reporting that Potash Corp is in discussions with the Israeli government about acquiring or merging with Israel Chemicals Corporation.  Potash Corp already owns 14% of the company, has long intended to gain control of ICL, and management has recently been hinting at M & A opportunities that they're exploring.  Still, the news took some by surprise.  After all, fertilizer is a strategically important asset, and after BHP Billiton's offer for Potash Corp in 2010 was rejected, many expected it to be a long time before any similar attempts were made.  That CEO Bill Doyle has met in person with Prime Minister Benjamin Netanyahu suggests that the matter is being seriously considered by the Israeli government, though.
 
Despite Potash Corp's sterling record of capital allocation in general, and common stock investing in particular, shareholders should be wary.  Reports suggest that Potash Corp is considering issuing stock to fund the acquisition.  Using stock as a form of currency can only be justified if that currency is fully valued, or overvalued.  Potash Corp stock, however, is currently very cheap.  It's possible of course that ICL's stock is trading at an even more discounted price, but that's unlikely to remain the case when a takeover premium is added.

Reports suggest that it will cost Potash Corp around $13 billion to gain control of the remaining stock, making ICL too big to acquire with cash.  If a company is too big to acquire, though, a deal should not be pursued.  At $40 per share, Potash Corp would have to issue an additional 325 million shares, diluting current shareholders by 38%.  Management has indicated that if they see no hope of eventually gaining control of the companies they hold minority interests in, they would exit their position(s). 

If Potash Corp were to sell their position in Israel Chemicals Corp at current prices, and used the proceeds to repurchase its own stock, it might reduce shares outstanding by around 4%, after accounting for taxes.  There is scant evidence that the market has ever rewarded Potash Corp for its stock investments, so it’s difficult to argue that POT's stock would suffer.  EPS, though, would increase by a noticeable, but not dramatic, amount.  And by reinvesting in their own assets, which they are intimately familiar with, Potash Corp would also be making a less risky move. 

It's difficult to draw any firm conclusions until the terms of a deal are made official, but there's reason to fear that Potash Corp is about to make an expensive mistake.  Government intervention saved Potash Corp shareholders from a low bid a couple years back; many investors will now be hoping that government intervention prevents their firm from paying too much.

My original write-up on Potash Corp is here.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

Potash Corp - 2012 Third Quarter Update

Among the reasons that many investors prefer potash to other minerals and commodities is that it tends to be less volatile - in terms of both prices and volumes.  In many cases, that's true.  The potash industry, however, remains a lumpy business.  The soft results of the third quarter - EPS was $0.74, down from $0.94 in the year-ago quarter - are a result of demand lumpiness from both China and India.  Prices have remained quite firm, though, at $429 per tonne, in line with the second quarter, though down about 5% from a year ago.

In China, demand for seaborne potash has been weak in recent months, as the country meets in near-term needs by drawing down domestic inventories, as well as increasing purchases of more locally sourced production.  The Chinese are very shrewd negotiators, and some of their recent behavior is motivated by the desire to purchase fertilizer at lower prices.  Ultimately, however, Chinese demand for potash increases every year, and short-term tactics to gain negotiating leverage do not change the long-term supply-and-demand equation, which favors suppliers.  Potash Corp management - along with the other members of Canpotex - has elected to counter reduced demand with reduced supply, and pledged to continue doing so into next year, despite the ever-growing gulf between the company’s capacity and its actual production.

India poses a different and trickier problem.  Indian fertilizer buyers depend on heavy government subsidies.  The subsidy regime, though, has been reorganized in the past year, and now favors outlays on nitrogen-based products, at the cost of potash.  But Indian crops face a widening fertilizer imbalance, where the proportion of potash as a percentage of overall fertilizer inputs is far below the scientifically recommended number.  In consequence, India's yields are far below those enjoyed elsewhere in the world.  Over time, this problem will be corrected, but given the political element to it, how and when any remedial action plays out is unclear.

Happily for shareholders, potash demand is robust in virtually all areas outside of China and India, particularly in North America and Brazil.  Given that the two countries have a combined 2.5 billion mouths to feed, and relatively high food inflation, it’s only a matter of time before agreements are signed and potash shipments resume.

As Potash Corp moves closer to completing its large, long-running capex program, the company will begin to generate substantial amounts of free cash flow, especially compared to today's stock price.  Management recently approved a significant increase of the dividend, to $0.21 per quarter, a 2.1% dividend yield at the current share price.  Though significant, a dividend payout at that level leaves ample room for further dividend increases, share repurchases and acquisitions (management reaffirmed their long-term intention to take control of one or more of the companies that Potash Corp owns common stock positions in).

My original write-up on Potash Corp is here.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

Potash Corp - 2012 Second Quater Update

Potash Corp recently reported what would have been record second quarter earnings, but for a write-down in one of the company’s common stock investments.  The year is likely to finish strong, and the company left earnings guidance unchanged, ignoring the effect of the earnings charge.  Business figures to strengthen further in the years to come, as well.

Recent drought conditions in the US have served as a reminder that food doesn't magically appear on people's plates - an obvious fact, but one that many often forget.  Supply shortfalls naturally elevate prices, and as the price of agricultural commodities increase, so does the demand for fertilizer.  Any forgone food production today will require increased fertilizer use in the future, over a multi-year time horizon.  Potash has the added benefit of helping to protect crops from stress, including weather-related troubles.

As the CEO of the industry's leading company, who also serves as the President of the International Fertilizer Industry Association, Bill Doyle has access to an imposing pair of soapboxes; when he speaks, people listen.  Though he is honest and plain-spoken, Doyle uses conference calls in part to maneuver and negotiate with  potash buyers, particularly China and India, the only major countries that buy on contract, with volumes and prices agreed upon before delivery (most buyers purchase their product as needed on the spot market).  He firmly stated on the conference call, for example, that potash prices will be heading upward, beginning now and extending for years to come.  But coming from Doyle this is not a passive prediction from someone sitting on the sidelines, it's a pledge that Potash Corp will be increasing prices.  Considering the industry's disciplined supply management, the newly diminished US crop, and the relentlessly increasing demand from hungry people, it's a safe bet that forthcoming price increases will stick.

However, Potash Corp announced that its capital expansion program is now expected to cost $8.2 billion, up from past estimates of $7.7 billion, thanks to the perverse incentives of cost-plus construction contracts.  While $500 million is a large number, even for a giant company, shareholders have a few reasons to at least feel ambivalent about the news.  For one, the new supply is still expected to arrive on schedule.  Second, with 78% of the capital expansions complete, there's a limit to future expenses.  And most importantly, it's an indication of the substantial cost, and technical difficulty, of bringing on new supply.  This is a plus for all incumbent producers, but is disappointing to would-be competitors that have never actually been in the challenging business of producing potash, and will not be immune themselves to the inflationary consequences of cost-plus work.

My original write-up on Potash Corp is here.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

New Supply in the Potash Industry - The First Greenfield Mine In Four Decades

As discussed earlier, the most significant threat to incumbent potash producers is the potential of major new supplies of potash coming online, which would put downward pressure on both prices and profits.  However, the barriers to entry are very high: a capital cost of $4-5.5 billion, and many years before a greenfield mine reaches full production.

This week, German-based K+S AG broke ground on the first new potash mine in more than four decades (there have been expansions of existing mines, however).  The company, as a long-time producer of potash, has credibility that some other would-be producers lack.  For instance, K+S projects that it will take more than a decade to reach full production of 2.86 million tonnes/year, a much more realistic timeframe than is often cited.

However, the company announced a rather optimistic 2015 as their target date to begin producing at 1 million tonnes/year, and a capital expenditure of just $3.25 billion, significantly lower than most other estimates of the cost of bringing on new production.  Time may show that both of these estimates are too low.

The company also suggested that once in production, it's unlikely to sell its potash through the Canpotex marketing body, citing European anti-trust issues.  However, it reiterated its long-held philosophy of maximizing price, rather than the volume of tonnes sold, even if it requires restricting supply.

Overall, this new development should not cause investors in Potash Corp, Mosaic and Agrium to tremble.  The new capacity will be a long time coming.  And it's moderate in size, especially in the early years, which shouldn't cause significant pricing pressure.  Moreover, any pricing weakness will be counteracted by withholding supply.  However, the added production figures to be sizable enough to increase risks for other aspiring newcomers.  BHP's large Jansen project remains the wild card in the potash industry, but recent signs suggest the company will at least postpone a decision on the project.  If K+S's move was enough to give BHP pause, this week's announcement may actually turn out to be positive news for potash investors.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

Potash Corporation of Saskatchewan - Investment Analysis

Potash Corp is one of the world's leading producers of fertilizer.  Sales of potash account for 64% of gross margins, with the remainder split between phosphate and nitrogen-based fertilizers (since the company's future rests largely on its potash operations, this analysis will focus there).  Five of the company's six potash mines are located in Saskatchewan, the sixth in New Brunswick.  Potash Corp directly supplies the North American market, and sells into the offshore market via Canpotex, a marketing arm operated jointly with Mosaic and Agrium.

Demand

Every year, the world's population grows by around 75 million people, relentlessly increasing food demand.  Indeed, now over 7 billion, global population is expected to reach 9 billion by 2050.  Equally important, as poor people in the developing world grow richer – from, say, $1000 US/year in annual income to $2000 – a large proportion of incremental income is used to purchase more nutritious food, namely protein-filled meat.  However, between two and seven pounds of feed (depending on the animal) are required to produce one pound of meat, putting major pressure on the world's crops.

However, little arable land remains available for development.  To produce more yields per acre, therefore, increased fertilizer use is inescapable.  In fact, despite genetic modifications to crops, more efficient irrigation, and other productivity enhancing measures, fertilizer is responsible for about half the world's crop yield.  For most of the past decade, humanity has consumed more food than has been produced, with the difference being drawn from stockpiles.  This will ensure high prices for most crops for years to come, giving farmers an incentive to invest more in fertilizer.  Since the 1960s, potash demand has grown on average by 3% per year, an upward trend likely to continue indefinitely.

Supply

However voracious the demand for a product, if new supply is very easy to produce, prices - and profits - will remain low.  Happily, Potash Corp occupies a supply-side "sweet spot": it owns many years worth of reserves, allowing for not just steady but growing production; however, there isn't an over-abundance of supply in the industry overall, which would hold down prices.

Company Reserves

One major challenge that most mining companies face is the "hole-in-the-ground" conundrum: each ounce, pound or tonne sold puts them one unit closer to being out of business.  Potash Corp, however, has 100 years of reserves just at existing shafts, and several centuries' worth of additional supply available, so even investors named Methuselah needn't worry about exhausting reserves.

Barriers to Entry

Building a new potash mine – or expanding an existing one – is a very difficult technical challenge, and even if all hurdles can be cleared, the economics are imposing: a two million tonne/year greenfield (new) potash mine in Saskatchewan costs between $4.0-5.5 billion (including infrastructure), and takes at least seven years to produce at full capacity.  Few investors are interested in an investment of such size when the payback period is so far in the future.  After all, a lot can happen over a seven year period (or longer), including rising costs, falling fertilizer prices, royalty changes, credit crunches, and many other unwelcome developments. 

According to Potash Corp, a netback of at least $600 is required to justify such an endeavor, even assuming a very affordable expansion and settling for a very average 10% internal rate of return.  More expensive investments, and a more ambitious 15% return would demand a netback at or above $1000 per tonne.  Currently, netbacks are under $500 per tonne.  These formidable barriers to entry serve to insulate existing producers from new competition, however. 

Eventually, high prices will ensure new greenfield supply, which will push down prices, and make the industry less attractive.  However, new supply can't sneak up and surprise the industry, and it's virtually assured that potash sales will provide investors with attractive returns for many years.  In fact, past projections of future supply have turned out to be much higher than what was actually achieved.

Two added factors make Potash Corp's supply situation yet more attractive:

OPEC-like Economics

Potash Corp is one of three North American producers that sell into the offshore market via Canpotex, which operates a shared infrastructure, reducing costs.  But the marketing body's most important function is to restrict supply when demand is soft, thus propping up prices, similar to how OPEC operates in the global oil markets.  A similar arrangement between several large Russian and Belarusian producers operates in Europe, and the two marketers combined supply over 60% of the world's potash.

Low Cost Producer

Potash Corp is among the world's lowest cost producers.  In a commodity industry, the surest, and often only, way to gain a competitive advantage is to be the low-cost provider.  Just as drivers don't care whether they fill their tanks with Shell's gas or Exxon's, farmers aren't loyal to one supplier's potash over another's; the only thing that will attract a farmer's hard-earned dollars is a more affordable price.  Though Potash Corp is willing to accept reduced volumes in return for higher prices, if it was unable to do so, it could remain profitable even at lower prices.  In fact, it has done exactly that: due to the recession, the company operated at a mere 30% of capacity in 2009, but nonetheless logged the third best results in its history to that point, in part due to its low-cost economics.

Management

Potash Corp has a first-rate management team.  CEO Bill Doyle is competent, honest, an independent thinker, and a patient, long-term planner.  There’s a solid bench of talent behind him, which isn't always the case among senior management in the mining industry.  The company manages its operations reliably and safely, and maintains good relations with its largely unionized workforce.  In addition, it has an unusually transparent board, and superb relations with investors.  One could argue, however, that the board has lavished the CEO with compensation beyond what's necessary to motivate and retain him, though the stock has performed exceptionally well during his reign.

Shareholders will only enjoy excellent returns if earnings are reinvested wisely.  Over the past decade, Potash Corp's management has done an excellent job allocating capital.  The company has reinvested much of its income internally – it'll amount to nearly $8 billion by the time expansions are complete – at high returns on capital: from 2004-11, ROE ranged from 13%-76%, and averaged 29%.  $6.3 billion has been spent repurchasing shares during that period, shrinking the share base by more than 20%.  Most importantly, buybacks have been pursued only when shares were cheap or reasonably priced.  $2 billion was spent over the same time frame on equity investments, which have ranged in price from between $8-10 billion in recent years.  Finally, the company pays a modest, but quickly growing, dividend.  Shareholders can rest assured that management will use earnings to add value in the future.

Valuation

Given the company's cost structure and the complex formula that determines its mining taxes, it's difficult to project Potash Corp's future earnings.  Helpfully, the company has published broad guidelines for its earnings potential over the next few years.  The most aggressive scenario they contemplate is actually quite realistic, and would see the company earning around $6.0 billion by 2015 or 2016.  However, free cash flow would be approaching $6.4 billion, as the company's ongoing capex will have fallen significantly below its depreciation and amortization expense.  Assuming a multiple of 15 times FCF, Potash Corp's market cap would be $96 billion.  Assuming earnings of $23.7 between 2012 and 2016, D & A of $4.2, and capex of $5.5 billion, cumulative FCF through 2016 would amount to $22.4 billion.  Assuming the company's common stock investments appreciate by 50%, to around $12 billion, and subtracting current net debt of around $4.3 billion, the total return for shareholders could plausibly amount to about $126 billion, or $148 per share.  Even if shareholders assumed a more cautious total return of $125, from the current $40 or so price, the return would be well over 25% per year through 2016.

Risks

Any mining project carries with it significant technical risks.  However, Potash Corp operates six mines, and a problem at any specific mine - water inflow, challenges with expansions etc. - won't affect production elsewhere.  The company has decades of experience, and formidable resources, so any problems that arise are likely to be dealt with effectively.

The company's most serious risk is the threat of substantial new supply pushing down prices.  Though the barriers to entry into the potash market are high, they're not infinite, and at some point high potash prices will prompt new supply.  There have been long stretches in the past when profitability in the industry has been ruined by excess supply, and it could happen again in the future. 

While there are over 50 potential potash projects worldwide, only a handful of those stand much chance of being developed.   The most talked-about potential new entrant into the potash industry is BHP Billiton, which may develop its large Jansen project.  However, the company has yet to decide when – or even whether – to go ahead with its project, and recent reports suggest the company may postpone a decision for up to two years.  Overall, it seems unlikely that there will be any new greenfield supply in the industry for a decade or so.

Conclusion 

Potash Corp is a superb company.  It has a valuable economic and strategic resource.  For all the uncertainty that investors face - economic, political, technological - peoples' appetites won't disappear any time soon.  Increasing demand for food, combined with an enviable supply-side equation for the company, means Potash Corp stands to reap huge and growing profits, and high returns on capital, for at least a decade to come.  An experienced, high-quality management team will navigate the company through any challenges, and will continue to create shareholder value.

Sources:

2011 AR, 2012 Q1, a Globe and Mail article on BHP Billiton, and several recent company presentations and transcripts:

http://www.potashcorp.com/media/POT_2012_BMO_Conference.pdf

http://www.potashcorp.com/media/POT_2012_BMO_Transcript.pdf

http://www.potashcorp.com/media/Doyle_Presentation.pdf

http://www.potashcorp.com/media/Brownlee_Presentation.pdf

http://www.potashcorp.com/media/Delaney_Presentation.pdf

http://www.potashcorp.com/media/Moore_Presentation.pdf

http://www.potashcorp.com/media/POT_2012_Analyst_Meeting_Transcript.pdf

There's ongoing commentary on Potash Corp: an update on the first greenfield mine in the potash industry for over four decades; a 2012 second quarter update; a 2012 third quarter update

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.