Friday, November 16, 2007

Potash (POT) Expands Mine for $2 Billion

There was an announcement this week about Potash (POT) expanding their mining capacity by 15% over 5 years... at a cost of nearly $2 billion.
  • Potash Corp of Saskatchewan Inc (POT) plans to expand a Canadian potash mine and mill for $1.8 billion to boost the company's output of the fertilizer by nearly 15 percent within five years, it said on Wednesday.
  • Potash Corp, the world's largest fertilizer producer, said it will expand the capacity of its Rocanville facility in southeastern Saskatchewan by 2 million tonnes a year amid strong global demand and high prices for the crop nutrient.
  • The expansion will boost company-wide potash production capacity to 15.7 million tonnes annually by 2012, three years earlier than previously estimated.
  • UBS Securities analyst Brian MacArthur said the new output is expected to be low-cost, tax-efficient and eventually boost Potash Corp's allocation in Canpotex, the exporting joint venture of Canada's potash fertilizer producers.
  • The price tag for the project is 25 percent less than building an all-new mine and mill in Saskatchewan, which would require new infrastructure such as transportation links, Potash Corp Chief Executive Bill Doyle said.
  • "With our existing facilities at Rocanville, we have a significant head start," Doyle said in a statement. "For example, we only need to sink one new shaft instead of two, which will save considerable time and money."
  • Saskatoon, Saskatchewan-based Potash Corp said the deposit and facility are valuable due to the high quality of the potash and close proximity to the U.S. market.
  • The company is also working to boost output at other mines, including Patience Lake and Cory in Saskatchewan and its facility in New Brunswick.
  • In September, Doyle said he did not expect his competitors to add new production capacity any time soon. Potash Corp has said it expects to sell 9 million tonnes this year.
This shows 2 things (a) their confidence in the long term trend and (b) how darn expensive it is to expand capacity. I wrote back in late October after Potash's last earnings

Worried about new potash mining supply coming online?

As global demand for potash grows, the prospect of greenfield projects continues to be discussed, but no one has committed to undertaking such a long-term project. The cost to develop a conventional underground 2-million-tonne greenfield mine and related mill - if constructed on a viable deposit - is estimated at more than $2.2 billion, excluding infrastructure outside the plant gates, with costs and lead times for construction inputs and new equipment continuing to rise. Such an investment would not generate positive cash flow for five to seven years. Given an expected potash consumption growth rate of 3-4 percent annually, roughly equivalent to one new greenfield mine per year, we believe long-term potash industry fundamentals are very positive. Through debottlenecking and expansion projects at existing facilities, PotashCorp is currently developing approximately 6 million additional tonnes of production to come on line incrementally over the next several years, providing additional gross margin leverage based on expected higher volumes and prices.

So here is that expansion... again as I have stated, I favor Potash and Mosaic (MOS) because they have the 1 nutrient (of the 3 main ones that go into fertilizer) that cannot be 'manufactured' - you literally have to mine it, and that is a natural constraint. Potash has the premium valuation in the space because its the only one with "easy" ability to expand production; and by easy we see it will take a few billion bucks and half a decade. This is why the supply constraint in this industry will be such a bottleneck. To bet against these companies is saying (a) we are not losing farming land to urbanization (b) we are not losing people who farm - i.e. they are not moving to cities in emerging markets and (c) they will not want a higher standard of food. You can also throw in such factors such as more and more severe droughts and weather conditions worldwide, or the world push to biofuels on top of that as well; but since some would argue those I will stick with my 3 points above.

Both Potash and Mosaic are now back to their 50 day moving averages - I continue to nibble at both; Mosaic is now my largest position and I continue to believe this is one of the most sheltered places to be in terms of company execution (stock wise, nothing seems to be very sheltered). You have great demand if China and India GDP goes to 2% or 5% or 12%. And more of our food supply is going to "energy" instead of "eating". And pricing power in this sector is among the best out there. While one could make a case against the farm equipment makers in a slowing global economy, it is just hard to find one against fertilizer since its 'consumed' and needs to constantly be replenished. I am not worried about them as businesses in any way, shape or form - its simply the market itself that is the issue, but for long term investments these are now attractive prices.

Long Potash and Mosaic in fund; no personal position

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