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Why investors should pay attention to Agrium’s phosphate business

Jose de la Puente

An investor's guide to Agrium, a high-dividend company (Part 6 of 7)

(Continued from Part 5)

Agrium’s Phosphate segment isn’t as small as it seems

Phosphate is Agrium’s smallest segment. It represented 3% of 2013 EBITDA. With two production facilities in Alberta and Idaho, Agrium has a total phosphate production capacity of 1.2 million tonnes a year. It’s the fourth-largest phosphate producer in North America. The largest North American Phosphate producers is Mosaic (MOS), with 4.3 million tonnes. Next comes PotashCorp (POT) and CF Industries (CF). These companies, plus Agrium (AGU), are all top-ten holdings in the Market Vectors Agribusiness ETF (MOO). They represent a total 18.6% of the fund.

Phosphate is Agrium’s smallest wholesale segment. But you should be aware that in 2013, Agrium experienced lower phosphate prices and volumes and higher costs. So, in 2013 phosphate only contributed 1.8% of the company’s gross profit. But Phosphate’s contribution to earnings has historically been higher. It’s averaged a 5.5% contribution, reaching up to 13.1% of gross profits.

While volumes are expected to get back to historical levels, prices could remain low. But Agrium still has a price advantage.

Higher-than-average net selling price due to freight advantages

2013 was an irregular year in that Agrium’s average selling price for phosphate was lower than PotashCorp’s (POT) and CF Industries’ (CF). But historically, Agrium has sold phosphate at much higher prices. As you can see from the graph, on average, Agrium has sold phosphate at a 16.2% higher price since 2006 compared to its peers.

Because of its strategic location in the northwest of North America, Agrium enjoys lower freight costs due to proximity to end markets.

No longer vertically integrated: Reducing margins?

The main input for phosphate is phosphate rock. Agrium used to mine the product. It’s a supply for phosphate production. But, last year, the company shut down its mine and started purchasing the input from OCP (Morocco’s Office Cherifien de Phosphate).

The contract with OCP sets a price that’s indexed to phosphate fertilizer price. Even though this action could increase supply costs slightly due to external supply, indexed prices bring more stability. Even though margins could end up lower due to external supply, Agrium still provides its own ammonia. Ammonia is another key input for phosphate production. Agrium’s ammonia comes from its nitrogen facility.

Continue to Part 7

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