Shares of Potash Corp. of Saskatchewan (NYSE:POT) are trading lower after Canadian authorities said last night they will not support the $39 billion bid (~$130 per share) from BHP Billiton Limited (NYSE:BHP) for the company. Since receiving the bid in mid-August shares of POT have traded between $140 and $150 per share with investors clearly believing the company is worth more than $39 billion. With the bid now all but dismissed, investors will now need to determine what the freely floating price of shares should be.PotashCorp is a powerhouse in the fertilizer arena making it a prime takeover target for large mining companies looking to diversify, such as BHP. PotashCorp alone controls 20% of the world's potash capacity, a critical fertilizer component. Along with Agrium Inc. (AGU) and Mosaic Co. (MOS) these three Saskatchewan, Canada fertilizer producers dominate the market.
These fertilizer companies are leveraged plays on the global economic rebound reflected in their relatively high valuation. As the horizon clears and the economic pictures becomes clearer, fertilizer dealers will be willing to restock ahead of expected demand. Prices of key ingredients (nitrogen, potash, phosphate) plummeted in 2008 as dealers withdrew and went out the year with very low stockpiles. All grain prices collapsed as the knock on effect of falling oil hit its substitute, ethanol from corn, and then filtered into other crops. Farmers cut back and some took a year or two off from applying fertilizer to their fields.
A global rebound in the economy will stoke higher demand for grains and force farmers to grow aggressively. As farmers reuse the same fields over and over they deplete the soil of its nutrients and minerals. While a field can be neglected for a year or two, yields will fall dramatically if the soil is not replenished. The underlying secular story is based a rising population, not only in size but in affluence. More affluent people eat more meat which requires a significantly greater intake of grains by animals than humans would need to eat themselves for satiation. Add to this very low arable land in some of the fastest growing regions, namely China and India, and there is major room for growth.
The three primary companies that will benefit from these currents are:
| Potash Corp of Saskatchewan | POT | $43B | 32 | 18 |
| Mosaic Co. | MOS | $31B | 31 | 16 |
| Agrium Inc. | AGU | $13B | 24 | 13 |
Brandon R. Rowley
"Chance favors the prepared mind."
*DISCLOSURE: Long POT.