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Agrium Downgraded to Neutral

Zacks Equity Research

We have downgraded our recommendation on Agrium Inc. (NYSE:AGU - News), the third largest potash producer in North America, from Outperform to Neutral. The company is also a leading global wholesale producer and marketer of all three major agricultural macronutrients − nitrogen, potash, and phosphate.

Agrium’s net earnings increased three folds to $293 million or $1.85 per share in the third quarter of 2011 from $61 million or $0.39 in the prior-year quarter. Results benefited from record high crop prices and overall strong fundamentals for agriculture and the crop input market.

Revenues in the quarter rose 52.0% year over year to $3.1 billion.

Agrium took a number of initiatives to meet the growing demand for fertilizers. On September 26, 2011, Agrium executed a long-term rock supply agreement with OCP S.A (“OCP”) to purchase rock phosphate for its Redwater, Alberta phosphate facility. The rock phosphate from OCP will replace that supplied by its mine at Kapuskasing, Ontario, which will deplete by 2013. We believe that OCP will be a reliable long-term supplier of high quality rock phosphate. The agreement covers rock supply for a period till 2020 at prices that are based on a formula that tracks finished product pricing and key published input costs. It offers downside protection to Agrium in periods of low phosphate prices.

Agrium follows a focused strategy to grow along the value chain through a combination of acquisitions and organic development. On May 2, 2011, Agrium acquired Cerealtoscana S.p.A. (“CT”) and its subsidiary Agroport for $27 million plus working capital. On December 14, 2011, Agrium approved a one million tonne brownfield potash capacity expansion at its Vanscoy potash facility in Saskatchewan, Canada. The expansion is expected to increase annual production capacity by approximately 50%, bringing the total annual nameplate capacity to three million tonnes. Capital expenditure for the project is expected to be approximately $1,500 per tonne. The majority of the project construction is expected to take place in 2012 and 2013, with completion expected by the second half of 2014.

However, the global macroeconomic situation presents some risks that have the potential to impact agricultural markets. Significant uncertainty surrounds the outcome of sovereign debt problems in Greece and Portugal, among other European nations, and the record high U.S. government debt levels.

Agrium is also subject to risks arising from the legal disputes. At present, the company is facing a number of litigation claims, and may be subject to further disputes and lawsuits. Any material or costly dispute or litigation could adversely impact Agrium and its consolidated financial position and results of operations. On November 15, 2011, Agrium announced that MOPCO management has suspended its operations at the MOPCO nitrogen facility in Damietta, Egypt, due to local demonstrations. MOPCO is majorly owned by the Egyptian government. Agrium has a small (26%) equity position in the facility, which has been in operation since 2008. MOPCO has also temporarily suspended construction on the expansion project, which is adjacent to the existing facility.

With strength in markets across most products and services, Agrium expects a solid fourth quarter and believes industry fundamentals will remain strong in 2011. Agrium expects fourth-quarter 2011 EPS to be $1.80 to $2.30 diluted earnings per share. This excludes any estimates for hedging gains or losses or share-based payments expense in the fourth quarter.

Agrium faces stiff competition from CF Industries Holdings Inc. (NYSE:CF - News) and Potash Corp. of Saskatchewan Inc. (NYSE:POT - News).

Currently, Agrium maintains a Zacks #3 Rank (short-term Hold recommendation) over the next one-to-three months.

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