Monday 22 January 2018

Share watch: Potash Corp - Can you ever go wrong with a near monopoly?

Potash Corp 5-year Share Price
Potash Corp 5-year Share Price

John Lynch

Back in the Good Old Days, punters (the generic term for share buyers) would, in idle moments, play a little game which asked an elementary question, namely: what do you have to do to make pots of money?

The answers were varied but more often than not the most acceptable reply was a choice between the following: (a) a successful crime; (b) involvement with a big rock 'n' roll band; or (c) the ownership of a monopoly.

Because of the assumption that the windfall had to be secure, (a) was not always a runner; (b) was well regarded but would now be problematic because of the dramatic changes in the record industry; so (c) a monopoly, or at the very least a duopoly, would still be rated as a decent bet.

I was reminded of this harmless pursuit when I was throwing an investment eye over Canadian company PotashCorp.

We don't often look at Canadian companies in this column, but this Saskatchewan outfit, because of the business it's in and because of the market domination it enjoys, makes for interesting reading.

It is the world's biggest producer of potash, a key component of agricultural fertilizers, with 20pc of the world's market. It is also the third largest producer of nitrogen and phosphate, with operations in Chile, US, Brazil and Trinidad with a market value of Can$18bn and a workforce of 5,700.

The food sector in Canada is a key one and so the potash industry has had to be protected. After some market difficulties about 50 years ago, PotashCorp became a state-owned operation (the ultimate in protectionism).

By the early 1990s, it was decided to list the company on the stock exchange. To underline the group's importance in Canada, when BHP, the Australian number one global miner, came calling to PotashCorp some five years ago with a Can$40bn takeover bid, it was sent packing.

The Aussies were told the deal would not yield a "net benefit for Canada".

2013 was memorable for the potash industry. The Belarusian potash monopoly was killed off, following disagreement between the Ukraine and Russian potash producers, resulting in the global potash market changing utterly. It was one of two cartels operating the market, the other being Canpotex, the marketing arm for Canadian potash which is 54pc owned by PotashCorp.

Producers were sent into a tizzy; prices and profits slumped. Potash prices are today 40pc down since their peak in 2010.

Into all this mix, the Saskatchewan Company threw a loud banger last year by making a generous bid for German producer K & S. If that deal was accepted, the market dominance of PotashCorp and of Canpotex would have been enhanced and some new potash reserves that K&S wanted to exploit in Saskatchewan would fall into the PotashCorp lap. As it was, the offer was turned down but investors would not be surprised if the Canadian heat was turned up with another bid before long.

Today the 41-year-old business is now dependent on the Chinese, Indian markets and the US dollar. The Chinese market has wobbled and India, the big hope, is unlikely to be a major driver of fertilizer consumption in the next few years.

Dollar strength is another problem, making potash expensive for emerging markets, particularly in Asia and Brazil.

PotashCorp shares are a tricky call. The stock is just above a five-year low at Can$22 with a modest price-earnings multiple of 10. The shares have been falling steadily and today are half that of early 2015. The maintenance of the dividend is also a concern.

Even though the long term fundamentals are dependent on the growing global population - and there is no sign that that is slowing - the potash market remains 'challenging,' higher demand but lower prices are forecast.

Consolidation would appear to be the only way for potash producers. I hate people who recommend 'sitting things out' but in the case of PotashCorp this might be a good option.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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