Where did you see the $500/MT comment? That wasn't commentary from BHP, was it? It wasn't mentioned in their conference call. I'm guessing that was from an analyst?
BHP made some news in the financial industry in the past few days, with the announcement of a spin-off of its non-core mining business. CEO Andrew Mackenzie said, "We are not in a hurry and we have to take account of how current market conditions have perhaps made some of the potential partners less interested than they might have been"
I think this is kind of obvious, b/c BHP first floated the idea publicly that it was exploring the potential for JV partners on Jansen a few quarters ago. The lack of interest isn't surprising, but the fact that it's being communicated to investors publicly is newsworthy.
Meanwhile, K+S continues to invest in its Legacy solution mine, which kind of undermines the Jansen project in my opinion.
Will BHP ever get into the potash industry?? I still think their best bet is buying a minority interest in PCS. I know buying Mosaic is an obvious alternative, but Mosaic's potash mines are higher cost (Esterhazy is huge, but it's got challenges) and BHP's strategy is low-cost production. Agrium's Vanscoy mine is higher cost than much of PCS' production, too, so I don't see them being too interested in that.
So here's my question....
What do shareholders prefer; (1) POT buying back its own shares or (2) increasing ownership percentage in SQM, ICL and/or Arab Potash Company?
SQM, ICL and Arab Potash Company are all poor performing stocks over the last 1-2 years. I've been most intrigued with SQM lately, although the ownership structure is complicated which may make increasing ownership more challenging. There was an interesting transaction a month ago where Albermarle bought Rockwood Holdings at 13x EBITDA; Rockwood is a specialty chemicals company and producer of lithium, similar to the non-potash business of SQM. I think SQM's iodine business is attractive, as well.
Personally, I don't like POT buying back its own shares. I agree with abbaman that it has supported the share price, but I'd like to see more opportunistic acquisition of other businesses. I like the potash story, but I think it'd be good for POT to diversify into other markets that also have inelastic demand curves and strong pricing power, such as the businesses SQM has with its lithium and iodine businesses. The potash industry has a history of volatility and I think some diversification would be nice, particularly if the diversification is into industries that have producer pricing power and low-cost production, which is what POT is all about.
Just my opinion.
(1) POT already pays a pretty large dividend and given comments that Doyle made about how seriously the Board takes the dividend, I think they'll be cautious regarding quarterly dividend increases in the future. I do agree the company may favor special dividends but I'm not seeing a ton of free cash flow. I'm just looking at their cash flows and they look tight in 2015...
EBITDA of 3 billion
Capex of 900 million
Dividends of 1.2 billion
Taxes of 600 million
Interest Exp. of 165 million
Not a lot of free cash flow there for growing the dividend unless you see a lot of growth in earnings/potash+phosphate pricing from current levels. I think a good percentage of the recent share repurchases were financed with existing cash and new borrowings, and not free cash flow.
(2) I'd prefer the company to build some cash for potential acquisitions if the equity markets pullback. Specifically, I find SQM interesting as well as Compass Minerals' potash business that produces sulfate of potash from the Great Salt Lake, which POT does not produce.
I'm going to miss Doyle. There's a ton of fluff in that interview. I was waiting for him to talk about how excited he is to be moving to Saskatoon with his family and then inevitably bam; that's how he ends the interview.
I think PCS was under a good deal of political pressure to hire a CEO that will be based out of Saskatoon. The company for years has been accused of being managed out of Chicago, which is controversial obviously b/c this company was started as a crown corporation of Saskatchewan. The whole layoff announcement in 4Q13 and the dividend comment may have been the straw that broke the camel's back. Personally, I think that is exactly how a publicly traded company should be operated but politically in Saskatchewan that may not be popular.
I thought David Delaney was going to be the next CEO, but I believe he is a Chicago guy and that just wasn't going to be popular. Politics are big with potash in Saskatchewan.
Thanks for bringing this up. I've looked at it and I'm skeptical but I'm interested to hear some of the bullish takes on it...
I look at base metal mining companies a good deal at work and a big problem with some of these Greenfield mine deposits is there is no infrastructure in some of these areas and companies have to build roads, rail, ports, power generation -- this can be billions of dollars of investment and there's no guarantee that some of these countries won't eventually expropriate these investments after they are made.
So this is a solution mine. Look at the trouble Vale had with its Rio Colorado project, a solution mine in Argentina. They sunk 2.5 billion into it and walked away last year as capex ran up to 2,500/ton. Allana's capex estimates are way underestimated here.
This project in Ethiopia needs supportive infrastructure, which will be costly. Also, it's a solution mine and to produce from a solution mine you need energy (natural gas)...lots of it. Solution mines are very energy intensive and I don't know where the hell they are going to source the natural gas. There's tons of it in the middle East and North Africa but there are no pipelines in place to transport it from Egypt and Lybia, nor are there LNG import terminals near Ethiopia. If you don't have hydrocarbons you can't produce potash from a solution mine, so this is even more investment that is needed.
I will say that it is attractive from a logistical standpoint, in that its a short cargo ship ride to India which cuts down costs and netbacks a good deal so that's some real value there but some of these capital investments make be insurmountable unless the gov't makes them, which is doubtful.
I don't expect many 'thumbs up' for this post (keep in mind I'm long PCS shares) but...
(1) PCS is really not a cheap stock. It's 23x 2014 earnings (P/E). That's a really high multiple for a commodity company. BHP is 13.5x 2014 earnings, btw. The equity markets seem to have already priced in a material recovery in potash prices. If you look at PCS's historical forward multiples, it's ~15x. If anything, this stock is *expensive* relative to its historical valuations.
(2) I agree with abbaman that a BHP takeover is unlikely. BHP has A+/A1 credit ratings and I think they could easily finance a deal, but I don't think it happens for the reason he states...the 'net benefit' perspective. I think PCS has lost some political goodwill over the last year (layoffs before Christmas, Doyle's public comments on the dividend). I think those actions are exactly what a CEO and Board should do, but politically its not good.
(3) I don't think Jansen is aggressively pursued by BHP. I don't think BHP is interested in Mosaic -- Esterhazy's brine inflows make this an expensive mine and I don't think they'll like the Belle Plaine solution mine (nor the Carlsbad mines). BHP wants low cost operations, and Mosaic doesn't have them which obviously supports PCS valuations. I think BHP will come to the table, however, and try to acquire a minority stake in PCS. I believe Saskatchewan limits minority investments by foreign companies in Cameco to 15%, and I see BHP eventually (w/in 2 years?) buying a 10% to 15% stake in PCS b/c it's the only economic way BHP gets its low cost potash mines (unless it surprises people with a Belaruskali acquisition).
(4) Has anyone read this "Potash: An Inside Account of Saskatchewan's Pink Gold" book? I'm in the middle of it right now. It's very political but provides a great historical review of the industry. Good stuff.
This is a few weeks old, but I found this commentary interesting...
Joel Jackson - BMO Capital Markets - Analyst
So a lot of investors are asking this question, and I apologize in advance for asking it to you. (laughter) But a lot of people ask you this question ‐‐ I'd like to qualify ‐‐ a lot of people ask you this question, about there ‐‐ maybe some of my competitors are writing it. I don't personally
believe it. They will say, PotashCorp should JV with BHP and Jansen, and build it together. What
you think about that?
Wayne Brownlee - Potash Corporation of Saskatchewan Inc. - EVP and CFO
My question is, what's the win‐win? I understand what's in it for them. I don't know what's in it for
us. We can ‐‐ one, we have 8 million tonnes of surplus capacity right now, or will have by 2016. Two, if we wanted even more capacity, we could do it for half the cost of Jansen; maybe even
30% of the cost of Jansen.
The idea about getting the equity participation in PCS or some of Jansen is ‐‐ I'm pretty sure if I
talked to any of our shareholders, they would say, why are you going to give them a free run at a
portion of your shares to try and get involved in an investment that is probably the worst
investment that you can make, from a return on investment calculation?
So I understand that there is an idea that people have, and we get it. And we agree with it that if
there is a way to deter or to have control over a new mining project ‐‐ whether it's Jansen, or it is
anyone else's project ‐‐ we are incentivized to have a look at what we can do to protect our
And we would do it as part of the equation of protecting the franchise; giving up equity in a
Company in a way that would potentially take away from a substantial premium down the road, if
they wanted to take another run at us. It doesn't calibrate for us. So we are open to anything that
generates shareholder value, in the short answer. But I never quite understood that proposition.
Regarding overcapacity, I think some of the concern is not about current capacity but future capacity. If you spend some time looking at K+S, they are leveraging up their balance sheet and substantially cutting their dividend to support the large financing requirements for the Legacy solution mine in Saskatchewan.
What K+S is doing is putting themselves in a vulnerable position (leveraged balance sheet), cutting their dividend (raising their cost of equity) and exposing themselves to large operational risk building this Legacy mine in a period of depressed potash pricing. The economics don't work for Legacy, but they are dead-set on building this mine which I think hurts Canpotex. Also you've got the Jansen mine looming -- I doubt its producing potash in the next 7-8 years but it's out there and analysts are going to point to it for years to come.