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Potash fails to fertilize the Canadian economy

The Tories’ decision to protect the ‘strategic’ asset in 2010 has backfired on shareholders.


 
Infertile ground

David Stobbe/Reuters

Stock analysts who are bullish on potash have two powerful arguments in their corner: people have to eat, and land is something that nobody’s making any more of. As billions in Asia adopt middle-class habits to go with their rising affluence, their food needs will need to be met by global agriculture—somehow. The Potash Corporation of Saskatchewan (PCS) sees its product, used as a yield-enhancing fertilizer component, as part of the solution; it’s a tale told as often in PCS investor documents as the Christmas story is in December.

“Each year, the global population grows by about 75 million,” says the company’s 2011 online overview. “It is a simple reality that more people mean more food must be produced.” Most of the growth, the slide show adds, is in urban areas—and “urban consumers tend to eat higher-quality diets that include meat, fruits and vegetables.”

But while people have to eat, there’s nothing that says they have to eat the most land-intensive agricultural products—which means, basically, beef. (In Simon Fairlie’s meat-friendly 2010 sustainability book Meat: A Benign Extravagance, he estimates that it takes about 10 lb. of feed grain to produce a pound of beef.) According to the U.S. Census Bureau, beef consumption in an otherwise growing world declined by almost three per cent from 2007 to 2010. In the U.S., the European Union and Canada, the decline was six per cent. In China, it fell by eight per cent. Maybe nobody’s making more land, but when eaters switch from beef to chicken and pork in the face of an uncertain economy, that reduces the pressure to farm existing land more intensely using costly new fertilizer inputs.

That’s one deep reason for the back-to-back nasty surprises that the potash business inflicted on Canada late last month. On April 26, PCS announced that profits were down by one-third for the second quarter of fiscal 2012; it reduced its overall earnings forecast for the year to between $3.20 and $3.60 per share, thus wiping out the $3.64 average expected by analysts, and slashed its estimate of total global potash demand and of its own shipments.

A few days later, Statistics Canada released its gross domestic product estimates for February, and those numbers were not quite what anyone had been anticipating, either. The market had expected Canada’s GDP to grow by 0.2 per cent for the month, but instead it declined by about that amount. A major culprit, the agency said, was potash. In February PCS had temporarily shut down its mines at Rocanville and Lanigan in southeastern Saskatchewan—a move, it said, aimed at “matching supply with market demand.” In other words, PCS couldn’t move enough potash at the price it was asking. The dip stands out in the tables like a sore thumb; potash mining, usually responsible for about $1.2 billion in annual GDP, plunged to just $976 million between January and February.

As recently as the summer of 2010, when Australian mining giant BHP Billiton attempted a hostile takeover of PCS, the pink potassium-bearing mineral was a source of excitement rather than a vector for economic flu. February’s potash downturn is supposedly temporary, and PCS says it foresees no further demand-driven shutdowns in 2012. Spot prices are expected to remain steady as PCS continues to negotiate long-term contracts with China and India—countries with a lot of room for growth in fertilizer use, but where hard-nosed governments use their pull to counteract the pricing power of the Canuck potash oligopoly. Canada is sitting on about half of the world’s proven potash reserves, which while costly to mine are abundant enough to cover hundreds of years of consumption at current rates. (PCS CEO Bill Doyle describes his own company as having “a thousand years of reserves” and adds that it can meet world demand for the next century just from the mine shafts it has already sunk.)

For now, the stock market is not endorsing Doyle’s view that BHP Billiton’s 2010 takeover offer was borderline insulting. BHP wanted to pay $130 a share for PCS, but Doyle sniffed and said PCS was worth $170 if it was worth a dime. The stock, which has split three-to-one, now sits just under $42. If it continues to slide, shareholders may start wondering if the federal government did right in blocking the BHP offer in a federal foreign-investment review on the dubious ground that Canadian potash, being part of the global food-supply chain, is a uniquely “strategic” resource. (BHP, meanwhile, says plans are proceeding for its new Jansen mine, east of Saskatoon, but there are widespread doubts whether the PCS rival will stick to its plan to start extracting in 2015.)

Lawyers for the Canadian law firm Osler, Hoskin & Harcourt recently pointed out in a paper on the country’s “post-Potash” capital markets that the Conservatives have, reassuringly, failed to keep up an aggressive defence of “strategic resources” when it comes to oil and gas. Fossil fuels are part of the food-supply chain too, and farmers can’t avoid them for a crop year or two, as they can with potash. But Sinopec, a state-owned enterprise (SOE) of the Chinese government, was allowed to buy outright control of natural gas exploration firm Daylight Energy last fall for $2.2 billion, and Chinese SOEs have been snapping up minority holdings elsewhere in the Alberta oil patch.

Potash isn’t different because it’s more “strategic” than oil and gas: it’s only different because Canada is the largest supplier, and Canadian firms should thus be able to dictate prices. In theory. But even a monopoly still has to compete with the buyer’s ultimate alternative: going without.


 

Potash fails to fertilize the Canadian economy

  1. Of course, this completely missing the impact of losing the head office jobs in Saskatoon (and despite assurances, they eventually would have left town under BHP ownership).

    As for the stock price, it’s roughly at the price BHP was offering for it, despite the current crisis in Europe. In the meantime, holders of this stock have had many opportunities to sell at prices much higher than what BHP offered.

    And have you seen the BHP chart lately? It’s lost more value than POT: http://www.google.com/finance?cid=676140

    • I think I understand your argument. The market cap for PCS is down about two and a half billion dollars, but hey, at least the executives are still there in Saskatoon buying groceries and Ford Explorers.

      • I thought you were worried about the share price, so why are you throwing around the “market cap”? The stock price is almost at BHP’s offer, despite the current global downturn and a generally negative trend for commodities. The stock price has done better than BHP’s.

        And sneer all you want, but Potash Corp. is Saskatoon’s most significant company by far, in a city that practically sits on the worlds largest potash deposit. The effects on the local economy are immense.

        I’m a capitalist, but every other developed country strategically protects or subsidizes its key industries. Canada thankfully has been relatively restrained in that regard. But there are times when it makes sense to intervene. Only a free market boy scout would believe otherwise.

        • Saskatoon’s most significant company by far, in a city that practically sits on the worlds largest potash deposit. The effects on the local economy are immense.

          Not to mention the big hole that would be left if BHP moved the deposits to Australia. The city would collapse…

        • You know that the share price and the market cap are the same thing stated differently, yeah? They go up and down proportionately. And the split-adjusted price of PCS is now below $120; I suppose the reader can decide for himself whether that qualifies as “almost” $130, though it’s certainly not close to $170.
          If there is one economist who agrees with the characterization of potash as a “strategic” resource, presumably you can name him or her. PCS was at one time owned by the state, which is the policy that follows naturally from this notion; “protection” took the form of running the company at large unrelieved losses to the Saskatchewan taxpayer. With, he said tongue-in-cheek, “immense effects on the local economy”.

          • No kidding! Thanks for the lesson in high finance, Professor Cosh. Next you will tell me “cap” is short for capitalization or something nutty like that.

            Knowing your debating style, I can only assume that you switched your debating point from “the share price” to “the market cap” because you hoped that your readers would be impressed by your Dr. Evil-like invocation of “billions” in losses. Admitting that the share price is a mere 8% below the offer price (after spending much of the year above it) isn’t as impressive, I suppose.

            As for you reference to the fact that PCS was once a Crown corporation, this of course has no relevance to the debate you and I are having, because no one advocated a return to provincial ownership. But hey “red” herrings are fun!

    • Was BHP offering a cash or shares deal for PCS? If cash, then their subsequent share price is irrelevant.

      • dcardno: I offered that fact only to illustrate the fate of other resource producers during the same period of time, and to suggest that there is no evidence that Potash Corp would have been better managed under BHP (to the extent that share prices are any indication).

  2. There are a lot of tricky angles; didn’t even consider chicken pork switch. My post-2008 thesis is investment bankers and traders are smart if all voted, but the (USA tax structure) way only a few are rich/powerful, they basically lurch their resources foolishly from play to play. Here, after the recession started they seemed to exit all resources save gold to hold USA gov assets. This didn’t seem rational as the $500-5000 GDP/person (and me) developing world stably grew, especially Africa and India. The 50% drop in market cap surprised me esp since still corn biofuel subsidies in USA few years ago.
    SK isn’t an individual. I was mildly for their MS trials before patients started dying, now against. And premier is oily (could get Hydro from transfer payment recipient MB). AB doesn’t know how to save in a Trust and invest. Until SK learns how to be Norway or solar Saudis, best not monetizing assets. SK doesn’t need a home, they will have healthcare costs in a decade or two or 3. They basically need to sell the last bull before everyone gets retired and sick unless they want to build a biomedical R+D hub like Wpg and Toronto has, or medical equipment hub like Toronto has.
    It may be better to have sold early in a bull in 2008 than in a recession in 2020; but not without a plan. Corporate tax cuts would yield some more really rich families; that’s about it: a new rich person gated neighbourhood build in Regina and Saskatoon, maybe an NHL team.
    Those cities might need to be bigger; their residents throw garbage on pro-athlete residents for example. I found Hfx a little too small.
    3 different types of fertilizer. Nitrogen-based is always around. I think the other is Potassium?? Also the prospect of fake meat from mushrooom proteins and amino acids. So if they sold Potash (still exposed via labour force), building a fake meat hub is a good hedge. If/when AGW causes massive crop failures, we could have years of wheat/oats stored and use that buffer-time to spend a lot of money opening up the land north of the Yellowhead to farming. Feds could subsidize rail, ports of Churchill, Thunder Bay, BC coast, Potash…assuming enough rain.
    Without the ability to intelligently use the sale money…Ralph bucks don’t work because they don’t clawback welfare and EI beauracracy like GAI does. Very tricky investment issue here.

    • …the industry itself: biggest actors are the play. Are high barriers to entry. I was looking through the MB Mines website years back as a small business idea once I learned Western MB might have potash. I think a single crappy potash core costed $100k to drill and a good one $1M. GMO crops aren’t too much an issue; they are coming online slowly. If manufacturing improvements to the common nitrogen fertilizer happen, that might be the biggest commodity risk. Got my MSM paycheck. Ty C.Black. Ironically imprisoned for consuming laced weed during his trial. Knew the middle finger meant guilty on one of the counts. Missed Earth Day concert. That was $10000 in legal costs. Been to ER twice for laced weed; the roaches I’m left with now were making my pec nerve twitch (thought heart). War on weed is expensive. My life is sad: made sad by CPC and GOP; I’ll get mine on their grandkiddies.
      In Edm, the one job interview I got was a paint guy asking me why no one ever hired me: wanted to say because you are all idiots. Gonna throw a dart, maybe will land on Regina or Saskatoon. I still haven’t found my niche yet.

      • …don’t know how long I would’ve lasted working beside Albertans anyway. The other permanent job interview I had there, she scheduled the interview in the middle of tomorrow’s blizzard. Hiked (little transit service) through a km of 1.5 ft drifts to find an empty office 10 mins late. I’ll get more property damage on the damage deposit thief landlord yet…am reminded of “The Way of the Gun” scene where Del Toro was talking with J.Caan(?) about young thugs bragging about prison (they got caught). Everyone who went to the oil sands wouldn’t STFU about it. They were well paid/laid. They
        cause a future Holocaust in so doing. Fort McMurray, 48/50 employers violated my Charter Rights by only hiring locally (commuting from a nearby town’s hotel room was a good plan, better than signing a lease without employment guranteed ini the Klondike). Dumb dumb. Dumb dumb corporate tax cuts.

        • …the company lost 25% of market cap from Sept 7th to Oct 3rd on no news that I can tell. ???

  3. It continues to amaze me why media types are just so clueless why the takeover of Potash Corp would have been a disaster for the province of Saskatchewan and bad for Canada.

    (BHP made it clear it was going to maximize production, and devastate Saskatchewan’s royalty revenue stream, and force it to renege on the royalty regime it had set and which other companies had been investing in Saskatchewan. BHP was also going to export through Washington state, and not BC. China cannot gain oligopoly control of oil, nor even of the oilsands. BHP was attempting to get oligopoly control of potash, which was have been devastating to world food security for the poor and Canada’s international reputation.)

    Obviously, it is time to take away the foreign ownership restrictions on Rogers, and Colby Cosh would quickly be “re-educated! -).

  4. Brad Wall is a fair weather conservative. He insisted that Potash be protected and now voice reservation on another foreign takeover of Viterra. If you are truly a conservative, you will let the market decide instead of government interfering.

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