I’d be disappointed if POT divested fully from SQM. I don’t exactly know all of the circumstances over at SQM, but they’ve got a very attractive business. I think Chile is going to retain at least a minority interest in SQM all said and done (a 100% acquisition isn’t likely), but I think POT could make a case that it’s in the government’s interest to let POT become a majority owner b/c it’s current structure has destroyed wealth with corruption and tax scandals – POT is a very well-run company and has done a good job creating value for shareholders, that could be shared by Chile. If I were Tilk, that’s how I’d play it but who knows what contingent liabilities are out there with SQM regarding the recent improprieties.
Regarding a swap between SQM, ICL and POT – even with a major drop in SQM’s market value, POT would have a significant tax liability due on the sale as it’s market value exceeds it’s carrying value on it’s balance sheet by well over $1B. I don’t know the laws (especially internationally), but if POT could contribute it’s ownership in SQM for an increased ownership in ICL in a tax-free manner, it’d save hundreds of millions of dollars in capital gains taxes. US companies have structured deals in such a manner, but it may not be possible internationally. POT would want Board representation on ICL if that were to happen, however, and it’s something they’ve yet to receive.
I think SQM would be a nice fit for ICL’s chemicals business, so ICL’s interest is not surprising. My preferred approach would be acquiring an additional third of SQM to get majority control of that business (assuming Chile wants to retain ownership which seems to be the policy of their natural resources).
That's not how the accounting works. Dividend payments to shareholders don't flow through the income statement and therefore don't reduce taxable income.
We shall see. I love this company's assets and at current pricing it's quite attractive, but just two days ago the CEO was pushed out and the Chilean IRS is questioning them, as well. This is a very messy situation. The stock is down 29% today as of now.
All this seems to be related to political campaign contributions and lowering tax liabilities. There even seems to be the potential for acquiring lithium mining licenses through political bribes.
If it turns out that POT can be a white knight in all of this, it's a win but I think there's a long way to go before we get to that point.
Interesting development...POT's board representation on SQM has stepped down due to a campaign financing scandal. SQM's stock is tanking this morning. It's a shame. It's an attractive business.
I was confused as to why this was news. This is nothing new. Mosaic has been doing the K3 expansion at Esterhazy for years now. I suspect it only made the news for political reasons. Canada is on the brink of recession (lots of bad news in Alberta, and Saskatchewan also has a fair amount of oil revenue) and I think it was to boost confidence in the province. Could be wrong.
Mosaic made a similar acquisition last year that was under-the-radar, buying some of ADM's distribution network in Brazil. Brazil is an important market for Canpotex and ever since July 2013 there was some worry that Uralkali-Belaruskali would send some of their extra production into Brazil. Brazil's economy has been disappointing and their equity market has sucked, but I think eventually the political regime will change and things will improve. I think the Canadians are trying to lock Brazil's market down, which is particularly important b/c Brazilian potash production is quite mature and I believe declining, though I don't know that for a fact.
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