Bill Doyle would have told K+S to go pound sand a long time ago. Steiner speaks nonsense.
Part of me thinks a big reason why Tilk was hired as CEO to get a big deal done to grow market share. If not K+S or ICL, who???
Thanks for the info. The conference call next week will be interesting.
Let me just preface this by saying I DO NOT expect this to happen, but PotashCorp has some negotiating leverage here. They’ve got around 5 million tons of excess capacity. K+S is investing in a speculative Legacy project (they’ve quoted in the past they need $400/mt for the economics to work, albeit in a higher nat gas environment) and they are high cost producer of potash. PotashCorp has broken out of Canpotex before (decades ago), and they can royally screw K+S’ potash business over if they flex their muscles. When BPC broke apart, K+S issued a press release saying it caused “significant irritations”. They are very vulnerable w/ their high cost structure and clearly benefit from Canpotex’ price over volume strategy.
I’m just trying to picture the 2020 potash market in Saskatchewan. PotashCorp/Mosaic/Agrium running their respective mines at 75% to 80% of capacity, while K+S is running Legacy near 100%...that isn’t going to cause displeasure among Canpotex members? Not even a little? I think this K+S offer is PotashCorp trying to get ahead of this situation. If K+S is going to be difficult and issue ridiculous press releases valuing the company on very fuzzy math, I think part of PotashCorp at least considers their potential to materially impair K+S’ potash business.
I’d bet against it happening, but I don’t know if Canpotex is particularly strong if K+S is operating Legacy in five years.
Look at it this way...POT has the power to increase K+S market value by 30% (it just happened), and they also have the power to decrease their market value by ~50% by walking away AND increasing volumes w/ their spare capacity, albeit causing destruction to their own business in near-term.
That is what the spike is from. There was some concern a year or so ago that Belarus would begin exporting potash to the US when some sanctions were relaxed. The Belarusian ruble is a dirt cheap currency, so their ability to export has really created some pressure in US, and other markets across the world that Canpotex is selling into.
New Mexico potash tends to be higher cost potash, so you can understand why the NM representative working on this.
Good point. I didn't know that - thanks for the info.
The more I think about it the more I think this deal is mostly about Legacy. POT won't shut down the German mines. It'd be great for them if they could but it's not going to happen. Legacy's economics aren't good but, but the value POT could save from reducing the probability of a price war in Saskatchewan in 5-10 years from K+S is potentially quite large. Potash prices have a long way to go to reach cash costs -- we are FAR from a press war and even lower demand, but under those conditions potash prices could drop at least another $100/mt. Many mines are still cash flow positive even at $200/mt so prices *can* fall there, and even below. This has happened to this industry before (lasted for many years) and I think K+S has more strategic value to POT (and MOS) than direct economic value. They want Legacy. I think they are willing keep Germans employed if they can protect pricing power in SK
Anyone that has ever had to value an asset before would find K+S' press release a TOTAL JOKE, for so many reasons. That is absolutely child's play valuation math. Are they high? It's a serious question.
The analyst community has to laugh at that release. They've all been through the CFA curriculum and are assuredly laughing at that press release. No wonder so many people are short K+S. If POT actually increases its offer on K+S and has to keep those German mines open, it's absolutely time to sell all of your shares of POT b/c they'd be using perfectly good capital to buy such a mediocre company. Bill Doyle would never let something like that happen.
The fact that Potash Corp hasn't issued a press release yet shooting down K+S offer is concerning. If POT ups its offer on K+S, to me it signals this company would be in for many years of trouble in the future.
All but one of K+S mines are incredibly old. One of their mines, Sigmundshall, will be depleted by around 2018 (company provided info). They only have one mine that was built in the last 50 years (Zielitz), which looks like a decent asset although the ore grade is below what you’ll find in Saskatchewan and the FSU. These other mines have limited lives – they are over 100 years old. The more I look at them, the more I understand why K+S is willing to invest billions in an uneconomic project (Legacy).
I suspect Potash Corp. fears Legacy’s impact on Canpotex. The German potash mines aren’t attractive assets. I think most of their value comes from running them at lower utilization rates, and PCS doesn’t want to (or won’t) do that. K+S has a good Salt business, but let’s be honest, Potash Corp isn’t trying to buy K+S for this business.
How will Canpotex react in three years when Legacy is producing at 95% of capacity? It’s mostly Potash Corp that has the idle capacity. PCS is going to be cool with holding a few million idle tons of capacity to inflate prices, just so K+S can run Legacy at full capacity and benefit from PCS still implementing a price-over-volume strategy? We just saw what happened with OPEC. Will K+S want Legacy to be under Canpotex? They aren’t going to invest $4b in speculative dollars just to run the mine at 80%.
You're correct. I don't know the labor relations in Germany on potash, or political ramifications. Idling a mine, or running mines at lower capacity utilization, may not be acceptable. I was limited in characters in my post to bring it up but its obviously important. If POT is forced to operate these mines at current capacity, I don't find this acquisition attractive. I think there is significant value to them long-term if they are to use more of a price-over-volume strategy in Germany, and I think it'd help with political relations in Saskatchewan putting Lanigan and Cory labor back to work. Brad Wall hasn't been too kind to them lately.
Potash isn't as strategically important to Germany as other countries. I wonder if Germany would be open to running potash mines at lower capacity if POT made investments in the Salt or Basic Chemicals businesses? That may not be attractive to you due to your concerns on capex, but POT has A-/A3 credit ratings -- they have room to flex their financial leverage up by using debt to fund some of this. Even if they are downgraded one notch, they'd still be the highest rated firm in the potash industry (Mosaic is BBB/Baa1).
Don't get me wrong, I wouldn't stretch to get this deal done. K+S just isn't that great of a company, but I do see unique value to Potash Corp if Germany gives them some flexibility.
Before we get into the potash business, I think K+S’ Salt business is worth around $2.5B. It’s a nice free cash flow business. Their basic chemicals and other business is also a nice cash flowing business that I think is conservatively worth $300MM.
POT has lower cost, idle potash capacity in Saskatchewan than K+S German mines. Both Lanigan and Cory mines have 3 million tons of idle nameplate capacity; conservatively we can say there is 2.3 million or so of idle true operational capacity. About half of K+S potash is exported outside of Europe, so capacity could be replaced by POT mines at materially lower cost. Cory and Lanigan idle capacity could replace those K+S tons to Brazil and Asia. I estimate ~$200MM in annual cost synergies replacing 2.3mm tons of higher cost German potash production with Cory and Lanigan (an est. PV of ~$1.35B over 10 years)
The Salt and Complementary Business are worth around $2.8B and the operational synergy (switching German mine capacity to Lanigan and Cory) has $1.35B in present value to POT. So that is $4.15B in value before you even get to Legacy and 4.5-5 million tons of K+S potash capacity which still generates positive cash flow. That business actually was still quite profitable in 2011-2012, and you could even flex up idled German capacity if conditions warrant.
Legacy Mine. This mine is potential a problem for Canpotex in two years. K+S does have a distribution network in North America for its Salt (Morton) business, so they have some existing infrastructure. It'd require modest capex to support Legacy, but I think they could operate outside of Canpotex. This would require another $2B in capex to bring online but I think could be a nice long-term asset. That’s capital costs of $1,000/ton for this mine to POT, which is not bad, and option for more brownfield expansion at lower capital costs.
I never really liked K+S, but there are opportunities here to create value for POT. I actually support the acquisition proposal.
I agree. I actually was writing that are the end of my post but I was distracted. ICL didn't happen. SQM maybe or maybe not was in the cards, but now is a mess. K+S kind of feels like a 3rd option...and in the back of my mind I do worry that they are just anxious to do a deal. Chasing K+S and increasing an offer would be a mistake.
You make a good point ion the dividends/share repos - I think some of POT's investor base is in the company for the free cash flow/dividends. K+S sets the free cash flow story back over the next two years.
The stock price action today implies there is validity to this deal. We'll see. I admit I haven't done much work on K+S but they've always been a marginal producer in potash. POT is a low-cost, producer with very strong financial strength. Adding K+S dilutes those two strengths, although modestly.
My personal opinion here but I’ve never thought K+S had that attractive of assets. Their European potash business mines lower grade potash ore and accordingly is higher cost. The salt business is OK – nothing that you couldn’t get by buying Compass Minerals (which also has a sulfate of potash business that I think would look good in POT’s portfolio).
I’m looking at financial projections by equity analysts on this firm’s business and it’s going to be cash flow negative the next two years. They are raising debt to make these investments, which I view to be speculative, in the Legacy mine. I don’t think K+S is an attractive company. POT has obviously looked at this more closely than me but I wouldn’t want to use the balance sheet to acquire this company. If K+S wants more of a premium, to hell with them. The way I view it, they are struggling. They are building financial leverage to make an investment in Legacy, which really could be a poor use of capital for them b/c potash prices are quite below the price they publicly stated they needed for the Legacy mine to be economic. They are stretching to do Legacy.
POT wanted a deal for ICL. Israel wouldn’t let it happen. SQM, once a potential takeover candidate, is now a total mess.
K+S threatens Canpotex' pricing power b/c it'd be a relatively large mine in Saskatchewan that isn't under the Canpotex umbrella. Mosaic's stock popped on the news, too. I don't think POT/MOS/AGU want a fourth party operating a large potash mine in Saskatchewan.