BHP is essentially spinning off its lower growth or non-core assets. Low growth in mining and oil and gas often means they generate a good deal of free cash flow, so a complete spin-off of that hurts available free cash flow that could be used to develop Jansen.
I personally think Jansen has more value to Canpotex members than it does BHP b/c (i) they own the expensive infrastructure needed to transport the potash and (BHP would have to build their own) (ii) it threatens Canpotex’s pricing power long-term.
From a capital optimization standpoint, BHP’s petroleum business has far higher IRR’s than potash. I look at a lot of these projects at work (not necessarily BHP’s) and the returns are far more attractive than what BHP would get out of potash. Oil and gas is very capital intensive, too (eating up available cash flow to develop Jansen), and I think it’s in BHP’s best interest to devote capital to highest returning investments, which oil and gas surpasses by a good margin even with oil at $65/bbl
Ultimately, I think Jansen is JV’ed with Potash Corp and potentially other members of Canpotex b/c BHP needs access to Canpotex’s infrastructure. Mosaic and Potash Corp have been outspoken about the bad economics of the project, which is true by my math. I wonder, however, if capital costs will come down when Potash Corp finishes its Rocanville expansion and Mosaic finishes the Esterhazy K3 expansion in 2017-2018 (due to supply and demand of engineering talent). The question of a potential JV is the price BHP would get for the capital it’s already sunk into the project. I don’t think PCS or Mosaic would give credit BHP for anything already invested at this point but BHP is a well-run company and won’t accept that at this point. Just my thoughts.
Great info, thank you! I haven't followed ICL very closely, as I've always preferred SQM's business, so I appreciate the info. Thanks.
Correction; Israel Corporation owns 46% of ICL. That’d be enough to acquire a controlling stake for Potash Corp
Agree it’d most likely be a cash deal if a deal occurred. You could be on to something about ICL and labor relations at DSW…you made a great post the other day.
If POT wanted to take a run at a controlling interest in ICL, Brownlee recently said they’d be willing to flex their balance sheet up to 2.5x Debt-to-EBITDA, meaning they’ve got another ~$3B in debt capacity. I think Potash would ask for at least $4B for their Phosphates business (7x EBITDA multiple), so that’d be enough for a controlling stake if Israel Corporation wanted to sell their 52% interest (to go along with POT’s 14% ownership). I honestly don’t know how all the ownership works with Israel (or with Chile and SQM for that matter), but POT is in ICL to eventually get a controlling stake, as they’ve stated for some time now, which they wouldn’t get if they just bought the public float.
To me, this seems like a plausible set of transactions. Doyle used to talk about how they thought the Dead Sea was the 2nd best potash asset in the world (behind Saskatchewan), and it’d give POT better logistical advantages selling into the highest growth markets. I’d bet against this happening b/c all of the stars would have to align perfectly, but I’d be very surprised if the thought hasn’t entered the minds of execs at POT.
Potash Corp has been going through investigations of its Potash, Nitrogen and Phosphates businesses (it’s been communicated by Tilk publicly). They have sounded positive on Nitrogen (which surprised me) and obviously Potash, but they have been shaky on their commitment to the Phosphates business but they said they are still going through their review process. Tilk recently said (at an investor presentation or CC, I forget which) that they weren’t sure they could grow their phosphates business. To me it sounds like they are considering a sale but that doesn’t mean anything will happen. Mosaic is the obviously candidate to buy. Mosaic hasn’t been too bullish on potash – so it’s not surprising there’d be rumors on a Potash/Mosaic deal (maybe a potash mine for phosphate mine swap?). Companies always investigate these things, but you’ve got to be able to strike an attractive deal for both parties.
Potash Corp’s phosphate mines have value, so they aren’t going to be shut down or anything. If Potash Corp thinks they have better uses for potential cash proceeds from a sale, they may do that. Maybe that’s buying SQM, Compass Minerals, buying back stock, or maybe JV’ing Jansen with BHP or Legacy with K+S, who knows? I know Doyle hated Jansen and he was very outspoken about that, but if BHP ever gets 7-8mm tons of potash supply in Saskatchewan, that’s a threat to Potash Corp, and if the price is right it may make sense to get that mine underneath the Canpotex umbrella. BHP is not a “price-over-volume” type of mining company but that’s a very long-term concern, not a next five years thing.
I know it’s obvious, but Belarus is in dire financial condition. They actually have $1B in debt maturing in August 2015 (that debt is in USD). Their currency has been pounded, and it even weakened substantially more in January. They are desperate.
A side observation, but Berezniki looks like a miserable place. All it’s really known for is (i) a massive sinkhole and (ii) being one of the most dangerous cities in Russia. Mind you, when I say dangerous, I don’t mean “the ground your house is built upon may collapse” (which is probably true), I mean crime and prostitution. The Kama river that flows to the side of Berezniki has apparently been heavily polluted. That place is a total disaster.
To clarify, I think Uralkali is in a bad situation, too.
I just think Moody’s or S&P cutting a rating has no major impact b/c the markets speak months before one of the agencies take action. Based on current pricing, the market has already downgraded Uralkali. “Junk” just means non-investment grade (they'll be BB+/Ba1) and there are plenty of good companies in the world that access debt capital markets that have “junk” credit ratings…its not nearly as bad as the name implies. K+S is BB+/Ba1 and they have successfully hit the markets for the Legacy project.
I just think Uralkali is a very strong company, even without Solikamsk-2. Their cash flow statement is always excellent, even in low price environments. Being in Russia exposes them to lots of risks, but given how their debt is trading right now I think they can still issue new debt if they choose to.
Uralkali’s public debt issued 18 months ago is trading around 84-86 cents on the dollar (due in 2018, 3.75% coupon). Not good but the capital markets aren’t closed to them. If they wanted to raise $1B in 5-year debt they could do it at ~7% coupon rates. I know the company has its issues right now, but this is the lowest cost potash producer in the world. Their cash flows are great at their operating mines and were still quite strong in the first half of 2014, so this company can self-finance itself b/c of its cash flow strength. They can probably pay for the majority (if not all) of their greenfield capex with internally generated funds. The question is what the shareholders want to take out of the company. This company isn’t going bankrupt anytime soon, siting their very strong cash flows even considering Solikamsk-2
I don't know much about Belarus' debt obligations, but I do know in the past when Russia has lent capital to Belarus the country pledged a minority stake in Belaruskali as collateral. That could have pretty major implications for the world potash markets if Russia gets an equity stake in Belaruskali.
Good points. Potash mines are very capital intensive projects, and access to capital markets is challenged for Uralkali given (a) they are potentially losing their investment grade ratings and (b) capital markets are very unhealthy in Russia right now. Potash mines are cash flow machines when operating, but they just lost a good deal of capacity with Solikamsk-2. Uralkali may pay labor in rubles, but that isn't too big of a deal b/c their cash operating costs are so low (it's not a major outflow for them). Finding an E&C firm (the guys that do these greenfield projects like AMEC Foster Wheeler) that will accept payment in rubles will be difficult -- that is a bigger deal. Do we know what E&C firm is doing these projects for Uralkali?
The market seems to be giving Uralkali a free pass on this stuff, which I don't really get. Greenfield potash projects are harder to do in Saskatchewan b/c the potash formation is lower than in Russia/Belarus but it's still architecturally quite challenging, particularly considering the prevalence of flooding in the region.
Goldman is forecasting Legacy/K&S supply coming on to market in 2017, so it's a longer term call on the north american potash premium eroding. We'll see. I'm a little skeptical of the Belarus stuff. Lukashenko is still in power there and he's still crazy, though he's beginning to distance himself a little from Russia. Two weeks ago there was an announcement of a re-instatement of a potash export duty in Belarus...I wonder if it's related?
I had a hard time finding anything verifying it, as well. I can't report exactly what the wrote in the research piece, but specifically, Goldman voiced concern about North American potash's premium pricing being threatened due to growth in supply (Canpotex and K+S) and the recent elimination of trade sanctions. The report specifically notes cargoes are set to be delivered from Belarus to the US gulf in February. I contacted IR to see if this can be verified.
One thing they noted in the research piece that I was not aware of is the end of American trade sanctions with Belarus, and that Belaruskali will now begin exporting to the US, a major customer for Canpotex, and with that will come competitive pricing. I would guess the competitiveness of their exports into the US is quite strong, considering USD strength and the exceptional weakness of the Belarusian ruble. There are other things they bring up that are the usual stuff (Capacity additions, etc.)
The one thing I've been wondering is what lower oil is doing to capital costs on greenfield/brownfield projects. Capital costs have risen a good deal in recent years, and some of which is due to a lot of demand for oil sands projects and labor costs from the Williston basin in North Dakota (this will be in decline materially). Could help the economics on Jansen? I'd be curious on what firms will be getting quoted on capital costs in Saskatchewan right now.
That mine is a goner. The note from Uralkali yesterday saying the mine has faced an average of over 700 cubic meters per hour of brine inflow tells me this mine very likely won't recover. Analysis by JPM says mines "typically do not recover" if they get over 250 cubic meters per hour. Uralkali's stock is tanking on the Micex right now (down 7%) after strangely holding up yesterday.
I agree 100% with this. I have little doubt that Potash Corp is not looking at this, already as a minority investor. Their potash capacity is nice, and it's close to Brazil (a big problem with Saskatchewan potash is that it's so far away from rising demand regions, such as China, India, Brazil, etc.) SQM is also an investment grade firm, so if you acquire them you aren't taking on an over-leveraged firm or anything. Very good company that gets strong returns, ROE often exceeds their equity cost of capital (hence yielding the valuation premium the company gets).
I really like the iodine business SQM has, and I believe Potash Corp would, too. It's similar to the potash story -- according to the USGS, Chile has 60% of world iodine reserves. Japan is the only other significant producer. It's basically same story with Lithium -- Chile is 58% of world reserves. If you control supply, you have pricing power and I think Potash Corp loves that. This is really a very nice complement to the existing Potash Corp portfolio.
ADDITIONALLY, I feel Compass Minerals' potash business is a potential target, too. Potash Corp only produces muriate of potash, and Compass has sulfate of potash -- a higher grade commodity exposed to different supply/demand dynamics that'll diversify Potash Corp. I think it'd only cost around $1B if they wanted -- could be the same as proceeds from a potential ICL divestment. I'd like to see them target that if not successful with SQM.
Abbaman is correct, it was JPMorgan. They cited the problems at the Uralkali mine, as well as Mosaic closing down its Carlsbad potash mine that was high-cost, but still contributed 300k-400k of capacity. To be honest, after reading the report, it sounds like they are almost writing off the Solikamsk-2 mine...not exactly forever, but they really question its ability to produce tonnage in 2015.
I agree 100% with your thoughts on Nitrogen and phosphate. In past years it was even discussed whether Potash Corp would form an MLP with all of or portion of the nitrogen business (ala CF Industries and Terra Nitrogen Company, LP) to raise cash (they didn't do it, obviously), but now to be talking about expanding the business -- that is new. I do know that Mosaic has spent a fair amount of time assessing Nitrogen last year, as well, and they choose against a greenfield nitrogen plant and instead secured supply from CF in the Florida phosphates acquisition they did last year -- I believe Mosaic was concerned about too much nitrogen capacity in the US? The economics are probably more favorable expanding an existing POT facility in the U.S. (Mosaic doesn't have any nitrogen plants to expand). We'll see. Mosaic would be the obvious candidate for a potential sale of phosphates, or a portion of it -- they seem to be emphasizing phosphate now.
Good point about the Israeli elections in March. They'll certainly wait for those before making a decision. I'm not too enthusiastic about selling ICL when its been beaten down so much.
SQM is my favorite of the equity investments, as I believe their lithium and iodine businesses fit the Potash Corp strategy of controlling large amounts of supply of particular commodities and the pricing power that yields, but I think it'd be difficult making a full acquisition of SQM due to their ownership structure.
Thanks for posting. This turned out to be an important investor presentation. I really liked the presentation Tilk gave this morning.
Regarding phosphates, the comment, “growth in phosphates is more challenging for (Potash Corp) than in potash and nitrogen” was pretty telling. Also, some of the positive commentary on the nitrogen business was interesting. Nitrogen will be given priority on growth/“opportunity” capex…that sounded new to me. Also, Tilk said, “We can certainly lever our balance sheet” for acquisition opportunities. They also mentioned strategic M&A’s and Joint Ventures…I wonder what that would be?
Abbaman, regarding the equity investments, I was a little confused by what Tilk said…Potash Corp definitely does have significant board representation with SQM. They account SQM as an “equity method investment” b/c of this influence of control. Brownlee is on the SQM board. They have no influence on ICL and it’s been stated before by Doyle – their goal is to get operational influence with their investments and ICL is a divestment candidate if they can’t obtain that.
Overall, a good presentation. This strategic review stuff was interesting, and I feel I’ve got a better idea of where this company is headed with the new CEO…we were kind of in the dark the last few months.