Sunday, January 27, 2008

Potash (POT) King Shows No Mercy

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Thanks for 2 readers for letting me know of this article... this article states (as I've said before) why Potash (POT) has a premium valuation over Mosaic (MOS), simply the ability to expand production anytime soon. But I still think the valuation gap is too wide [P/E Ratio by Stock], as increases in production will take a long time...[Potash Expands Mine for $2 Billion].

As I keep saying, pricing power, pricing power, pricing power. While the stocks fluctuate 30% some weeks as people throw everything out - this is the most immune bull market I can find - which in theory should be the "safest" (outside of the panic movements). I'm a broken record on this group...

Also, sounds like Mr Doyle is open to a buyout offer. While that would be a nice 1x gain, I hope it doesn't happen for a few years - I'd rather have year after year of 30-40% gains in these names, rather than a one time 50% premium.

Potash King Shows No Mercy
  • Bill Doyle is the most powerful chief executive in Canada, maybe the world. Don't laugh. The CEO of Potash Corp. sells something everyone needs -- fertilizer -- and he and his peers can charge what they want.
  • Even the mighty Chinese government has little choice but to accept the price of the two global potash-selling cartels: Beijing stared them down once, and blinked (asking for a US$20-a-tonne price cut, but accepting a US$25 hike in 2006-07). This time, the price will likely go up by more than US$100.
  • The Chinese are playing tough in negotiations, but the potash makers have them over a barrel. And Mr. Doyle -- his company is the world's largest fertilizer maker -- has the temerity to brag about it. If the Chinese don't like his price, he'll sell to someone else.
  • "We'll do better without them," he said yesterday, leaving Beijing with the "real political risk" of facing food shortages.
  • Tens of millions of people are leaving poverty behind in China, India, Brazil and Eastern Europe each year, buying cars, homes and better food. Specifically, they are eating more meat, which requires more grains to feed the animals, which is why prices for corn and other basics have soared. And don't forget ethanol.
  • To get more out of their fields, farmers buy fertilizer -- demand is growing by 4% per year. Inventories are at their lowest in 17 years, and only Potash has the ability to raise production between now and 2012, by restarting idle mines, further cutting its industry-low costs.
  • Demand and production are rising, costs are falling and prices are soaring. One ton of potash in North America cost US$232 way back on Oct. 30. By March 1, it will be US$414. Prices in Brazil and Southeast Asia are even higher.
  • Potash will be the next Canadian jewel to be snapped up by a foreign buyer. Like Alcan, and Canada's nickel and steel giants, it trades at a decent price, but nothing like the premium foreign buyers would pay. High commodity prices and profits made those deals seem like bargains in retrospect. Potash investors should take note. "We know BHP Billiton has taken a look at us, we know Rio has looked at us" and sovereign wealth funds "are also a possibility," Mr. Doyle told me. It makes sense. If metals are strategically important to developing nations, agriculture will be, too.
  • "I don't think [the stock price] is nearly representative of our value," Mr. Doyle said, a standard line for CEOs but probably true in his case. "It won't be cheap if someone does take a run at us."
Long Potash and Mosaic in fund and in personal account





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